Video game crash of 1983

The video game crash of 1983 (often referred to as the Atari shock in Japan) was a large-scale recession in the video game industry that occurred from 1983 to 1985 in the United States. The crash was attributed to several factors, including market saturation in the number of video game consoles and available games, many of which were of poor quality. Waning interest in console games in favor of personal computers also played a role. Home video game revenue peaked at around $3.2 billion in 1983 (equivalent to $10.34 billion in 2025), then fell to around $100 million (equivalent to $299.35 million in 2025), a drop of almost 97%. The crash abruptly ended what is retrospectively considered the second generation of console video gaming in North America. To a lesser extent, the arcade video game market also weakened as the golden age of arcade video games came to an end.

Lasting about two years, the crash shook a then-booming video game industry and led to the bankruptcy of several companies producing home computers and video game consoles. Analysts of the time expressed doubts about the long-term viability of video game consoles and software.

The North American video game console industry recovered a few years later, mostly due to the widespread success of Nintendo's Western branding for its Famicom console, the Nintendo Entertainment System (NES), released in October 1985. The NES was designed to avoid the missteps that caused the 1983 crash and the stigma associated with video games at that time.

Causes and factors

Flooded console market

The Atari VCS (renamed the Atari 2600 in late 1982) was not the first home system with swappable game cartridges, but by 1980 it was the most popular second-generation console by a wide margin. Launched in 1977 just ahead of the collapse of the market for home Pong console clones, the Atari VCS experienced modest sales for its first few years. In 1980, Atari's licensed version of Space Invaders from Taito became the console's killer application; sales of the VCS quadrupled, and the game was the first title to sell more than a million copies. Spurred by the success of the Atari VCS, other consoles were introduced, both from Atari and other companies: Odyssey², Intellivision, ColecoVision, Atari 5200, and Vectrex. Notably, Coleco sold an add-on allowing Atari VCS games to be played on the ColecoVision, as well as bundling the console with a licensed home version of Nintendo's arcade hit Donkey Kong. In 1982, the ColecoVision held roughly 17% of the hardware market, compared to the VCS's 58%. This was the first real threat to Atari's dominance of the home console market.

Each new console had its own library of games produced exclusively by the console maker, while the Atari VCS also had a large selection of titles produced by third-party developers. In 1982, analysts marked trends of saturation, mentioning that the amount of new software coming in would only allow a few big hits, that retailers had devoted too much floor space to systems, and that price drops for home computers could result in an industry shakeup. Atari had a large inventory after significant portions of the 1982 orders were returned.

In addition, the rapid growth of the video game industry led to an increased demand, which the manufacturers over-projected. In 1983, an analyst for Goldman Sachs stated the demand for video games was up 100% from the previous year, but the manufacturing output had increased by 175%, creating a significant surplus. Atari CEO Raymond Kassar recognized in 1982 that the industry's saturation point was imminent. However, Kassar expected this to occur when about half of American households had a video game console. The crash occurred when about 15 million machines had been sold, which soundly under-shot Kassar's estimate. Michael Katz, the president of Atari's electronic division, stated that the console market was too saturated as 30 million consoles were sold by 1982, out of the 35 million households with children between the ages of six and sixteen.

Loss of publishing control

Prior to 1979, there were no third-party developers, with console manufacturers like Atari publishing all the games for their respective platforms. This changed in 1979, when Activision was founded by four former Atari video game programmers who left the company because they felt that Atari's developers should receive the same recognition and accolades (specifically in the form of sales-based royalties and public-facing credits) as the actors, directors, and musicians working for other subsidiaries of Warner Communications (Atari's parent company at the time). Already being quite familiar with the Atari VCS, the four programmers developed their own games and cartridge manufacturing processes. Atari quickly sued to block sales of Activision's products but failed to secure a restraining order, and they ultimately settled the case in 1982. While the settlement stipulated that Activision pay royalties to Atari, this case ultimately legitimized the viability of third-party game developers. Activision's games were as popular as Atari's, with Pitfall! (released in 1982) selling over four million units.

Prior to 1982, Activision was one of only a handful of third parties publishing games for the Atari VCS. By 1982, Activision's success emboldened numerous other competitors to penetrate the market. However, Activision co-founder David Crane observed that several of these companies were supported by venture capitalists attempting to emulate the success of Activision. Without the experience and skill of Activision's team, these inexperienced competitors mostly created games of poor quality, which Crane notably described as "the worst games you can imagine". While Activision's success could be attributed to the team's existing familiarity with the Atari VCS, other publishers had no such advantage.

The rapid growth of the third-party game industry was easily illustrated by the number of vendors present at the semi-annual Consumer Electronics Show (CES). According to Crane, the number of third-party developers jumped from 3 to 30 between two consecutive events. At the Summer 1982 CES, there were 17 companies, including MCA Inc. and Fox Video Games, announcing a combined 90 new Atari games. By 1983, an estimated 100 companies were attempting to leverage the CES into a foothold in the market. AtariAge documented 158 different vendors that had developed for the Atari VCS. In June 1982, the Atari games on the market numbered just 100, which grew to over 400 by December. Experts predicted a glut in 1983, with only 10% of games producing 75% of sales.

BYTE stated in December, "in 1982 few games broke new ground in either design or format ... If the public really likes an idea, it is milked for all its worth, and numerous clones of a different color soon crowd the shelves. That is, until the public stops buying or something better comes along. Companies who believe that microcomputer games are the hula hoop of the 1980s only want to play Quick Profit." Bill Kunkel said in January 1983 that companies had "licensed everything that moves, walks, crawls, or tunnels beneath the earth. You have to wonder how tenuous the connection will be between the game and the movie Marathon Man. What are you going to do, present a video game root canal?" By September 1983, the Phoenix stated that 2600 cartridges were "no longer a growth industry". Activision, Atari, and Mattel all had experienced programmers, but many of the new companies rushing to join the market did not have the expertise or talent to create quality games. Titles such as the Kaboom!-like Lost Luggage, rock band tie-in Journey Escape, and plate-spinning game Dishaster, were examples of titles made in the hopes of taking advantage of the video-game boom, but later proved unsuccessful with retailers and potential customers.

The flood of new games was released into a limited competitive space. According to Activision's Jim Levy, they had projected that the total cartridge market in 1982 would be around 60 million, anticipating Activision would be able to secure between 12% and 15% of that market for their production numbers. However, with at least 50 different companies in the new marketspace, and each having produced between one and two million cartridges, along with Atari's own estimated 60 million cartridges in 1982, there was over 200% production of the actual demand for cartridges in 1982, which contributed to the stockpiling of unsold inventory during the crash.

Competition from home computers

Inexpensive home computers had been first introduced in 1977. By 1979, Atari unveiled the 400 and 800 computers, built around a chipset originally meant for use in a game console, and which retailed for the same price as their respective names. In 1981, IBM introduced the first IBM Personal Computer with a $1,565 base price (equivalent to $5,542 in 2025). By 1982, new desktop computer designs were commonly providing better color graphics and sound than game consoles and personal computer sales were booming. The TI-99/4A and the Atari 400 were both at $349 (equivalent to $1,164 in 2025), the TRS-80 Color Computer sold at $379 (equivalent to $1,264 in 2025), and Commodore International had just reduced the price of the VIC-20 to $199 (equivalent to $664 in 2025) and the Commodore 64 to $499 (equivalent to $1,665 in 2025).