The Video Game Crash of 1983 (Atari Shock): Causes, Effects, and the NES Recovery
Why the North American video game market collapsed in 1983, how E.T. and the Atari 2600 Pac-Man became its symbols, how Japan differed, and how the NES and Nintendo's quality controls revived the market.
The American home video game market, which had grown rapidly since the late 1970s, suddenly collapsed around 1983. According to figures compiled on English Wikipedia, US home video game revenue peaked at around $3.2 billion but fell to around $100 million by 1985, a drop of almost 97%. In the United States it is called the "video game crash of 1983," while in Japan and Korea it is commonly known as the "Atari shock."
This article looks at the causes of the collapse in three parts: too many consoles, a flood of low-quality games, and competition from home computers. It then explains why E.T. and the Atari 2600 version of Pac-Man became symbols of failure. After that, it covers the results of the crash, how the Japanese market differed at the same time, how Nintendo revived the market with the NES and its quality control policies, and what lessons remain for the game industry today.
Cause 1: Too Many Consoles and Overproduction
Before the crash, Atari was at the center of the market. The Atari VCS, released in 1977 (renamed the Atari 2600 in late 1982), did not sell especially well in its first few years, but sales quadrupled after Atari released an officially licensed port of Taito's Space Invaders in 1980. Seeing this success, many companies launched consoles of their own. The Magnavox Odyssey², Mattel's Intellivision, Coleco's ColecoVision, Atari's own Atari 5200, and the Vectrex all ended up side by side on store shelves at around the same time. In 1982, the Atari VCS held 58% of the hardware market and the ColecoVision about 17%.
The problem was that production grew much faster than demand. In 1983, an analyst at Goldman Sachs pointed out that demand for video games had risen 100% from the previous year while production had risen 175%, creating a large surplus. As early as 1982, industry analysts warned that retailers were giving too much floor space to too many systems and that there were so many new games that only a few hits would survive. Atari did in fact end up with a large inventory after a significant portion of its 1982 orders were returned.
Cause 2: A Flood of Third Parties and Poor-Quality Games
Before 1979, console makers produced all the games for their own systems. That changed with Activision, founded in 1979 by four former Atari programmers. Atari sued to block its sales but failed, and in 1982 the two settled on terms under which Activision paid royalties to Atari. This effectively legitimized the "third-party" business of other companies making and selling games for a console. Activision's Pitfall! (1982) sold more than four million copies.
Seeing Activision's success, many companies rushed into the market. At the Summer 1982 Consumer Electronics Show (CES), 17 companies announced a combined 90 new Atari games, and the number of Atari games on the market grew from about 100 in June 1982 to more than 400 by December. Film companies such as MCA and 20th Century Fox's game division joined in, and by 1983 an estimated 100 companies were trying to use CES as a foothold to enter the market. The Atari 2600 had no mechanism at all to block other companies' cartridges, so anyone with information about the hardware could make and sell games for it.
The result was a flood of rushed, look-alike games. When stores tried to return unsold games, many of the publishers had already gone out of business, so retailers moved new releases that had sold for $35 into $5 bargain bins. As cheap, low-quality games sold, even well-made games lost sales, and Atari's share of the cartridge market fell from 75% in 1981 to under 40% in 1982.
Cause 3: Home Computers That Could Also Play Games
At the same time, home computers were rapidly getting cheaper. In 1982 Commodore cut the price of the VIC-20 to $199 and the Commodore 64 to $499, and in June 1983 it cut the Commodore 64 to $300. A price war between Commodore and Texas Instruments (TI) brought computers down to roughly the price of game consoles, and TI withdrew from the home computer business in late 1983.
Computers had more memory and faster processors than consoles, so they could run more complex games, and they could also handle other tasks such as word processing and home accounting. Games could be sold on floppy disks or cassette tapes instead of cartridges, which made distribution easier, and players could save their progress. Commodore's advertising directly targeted console owners, asking in effect why anyone would buy just a game machine. The case for a machine that could only play games was getting weaker and weaker.
E.T. and Pac-Man: Two Games That Became Symbols of Failure
Two games come up most often when people talk about the crash.
The Atari 2600 version of Pac-Man was released in March 1982. This port of Namco's arcade hit was developed by Tod Frye over six months, and he had to work out how the game functioned by playing it, without any design documents from the original arcade board. To cut costs it used a 4 KB cartridge, and because it drew all four ghosts by alternating a single graphics object, each ghost appeared on screen only once every four frames. The heavily flickering ghosts, the maze that differed from the original, and the sound drew heavy criticism. It sold more than eight million copies, making it the best-selling Atari 2600 game, but large amounts of unsold stock had already piled up by the summer of 1982. Even though it sold well, it is often cited as a case that damaged trust because it shattered the expectation that players could properly enjoy an arcade hit at home.
E.T. the Extra-Terrestrial was made to cash in on the film's box-office success. Atari was later reported to have paid $20–25 million for the rights. When negotiations concluded on July 27, 1982, developer Howard Scott Warshaw was given the job and told to finish by September 1, leaving just over five weeks of development time. The game, released in December, was panned, and according to Ray Kassar, Atari's CEO at the time, about 3.5 million of the 4 million cartridges produced were returned or went unsold.
In September 1983, Atari buried unsold cartridges and hardware in a landfill in Alamogordo, New Mexico. For years this was told as an urban legend that "millions of E.T. cartridges were buried," but during a 2014 excavation for a documentary, James Heller, who had been in charge of the burial, said it was about 728,000 cartridges across many different games. About 1,300 cartridges were recovered in the dig.
What Happened After the Crash
When Atari announced in December 1982 that it had missed its holiday sales target, game-related stocks fell sharply, and the entire industry went through a rapid shakeout afterward.
| Company / Sector | After the crash |
|---|---|
| Atari | Lost $356 million by mid-1983 and laid off 30% of its 10,000 employees. In July 1984, Warner Communications sold the consumer division to Jack Tramiel |
| Mattel | Sold its entire video game division, including the Intellivision |
| North American Philips | Shut down its video game business, including the Odyssey² |
| Activision | Downsized in 1984–1985 and shifted from cartridges to computer games |
| Imagic, Games by Apollo, U.S. Games | Closed down or left the business |
| Retailers | Stopped selling consoles or sharply reduced their stock |
The size of the market also shrank dramatically. The worldwide market, including arcade, console, and computer games, is recorded as falling from about $42 billion in 1982 to about $14 billion in 1985. The longer-lasting damage was the perception that video games were just a passing fad. Trip Hawkins of Electronic Arts recalled that until 1985 it was very difficult to convince retailers to carry games. Meanwhile, as the US console market shrank, the computer game market overtook the console market in 1983–1984.
Why the Japanese Market Was Different
The crash was mainly an American event. Japan was not directly hurt financially, but the sudden collapse of the US market left the industry there shocked and wary, and this came to be called the "Atari shock." In Europe, home computers were already the center of the market, so the impact was relatively small.
Japanese companies had already captured a large share of the North American arcade market by 1982–1983, and while the US market was faltering they turned their attention to home consoles. On July 15, 1983, Nintendo's Family Computer (Famicom) and Sega's SG-1000 were released in Japan on the same day. While Atari and Mattel struggled to recover in the US, Japanese consoles grew without real competition, and by 1986, 6.5 million Japanese households owned a Famicom.
The Japanese market did not have today's structure from the start, either. At first only Nintendo released games for the Famicom, but at the request of Namco and Hudson Soft it opened the system to third parties. In return, it charged a license fee on every cartridge and kept direct control of manufacturing. In that sense, it started from a very different place than the Atari 2600, for which anyone could release any game.
The NES and Nintendo's Quality Control Policies
Nintendo originally planned to sell the Famicom in North America through Atari, but the deal fell apart amid the crash, so Nintendo entered the market on its own. The biggest obstacle was retailers who shied away from the very words "video game." So Nintendo named the product the Nintendo Entertainment System (NES), called the console a "Control Deck" and the cartridges "Game Paks." With a front-loading design resembling a video cassette recorder, and with the R.O.B. toy robot and the Zapper light gun out front, it got into toy stores.
The NES began test sales in New York on October 18, 1985, expanded to Los Angeles in February 1986, and launched across North America on September 27, 1986. At the same time, Nintendo put the following measures in place to prevent the problems Atari had suffered.
- 10NES lockout chip: Cartridges without Nintendo's chip would not run on the NES.
- Seal of Quality: Games and peripherals that met Nintendo's standards carried the "Official Nintendo Seal of Quality."
- Release limits: Third parties could generally release only five games per year. Konami creating a separate label called Ultra Games was a response to this limit.
- Control of manufacturing and inventory: Nintendo manufactured the cartridges, and publishers had to order at least 10,000 units, pay in advance, and could not return them.
The effect was large. By 1988 annual industry sales exceeded $2.3 billion, with Nintendo holding 70% of the market. In 1989 US home video game sales reached $5 billion, surpassing the pre-crash peak. But the strict control also drew criticism as monopolistic. Companies such as Tengen challenged the policy with unlicensed games, and some Western publishers, including Electronic Arts, moved to competing systems such as the Sega Genesis. The release limit was dropped by around 1993.
Lessons the Industry Still Carries Today
The 1983 crash is still frequently revisited in the game industry. In summary, it left the following lessons.
- Quality is a platform's credibility. After a few bad games, consumers stop trusting not just those games but the whole system or genre. The practice of console makers requiring certification and review before release began with Nintendo's policies, and Sega, Sony, and Microsoft adopted most of it, though to varying degrees.
- Demand forecasts should be cautious rather than optimistic. E.T. and Pac-Man were mass-produced on the expectation that they would sell in huge numbers, and ended up as inventory.
- A license does not replace fun. The names of a famous film and a hit game could not cover up a tight schedule and technical limits.
- Control comes at a cost. Excessive control provoked pushback from developers and accusations of monopoly. The balance between an open market and quality control remains an ongoing concern in today's app stores and digital storefronts.
Now that games are distributed digitally, there are no problems with shelf space or cartridge inventory, but with countless games coming out every day, the question of how to help players find good games remains. The 1983 crash showed that as a market grows, protecting trust matters more than sheer volume.