Hey! I don't wanna go to work today. Wanna stay home and play on my video games.

I've decided that it's high time for another post in which I make video games boring. In this case, I'd like to do so by combining my love of history with my love of games.

There is something about the orthodox history of electronic games that has nagged at me for a long time. As you know, Bob, one of the most significant events in video game history was the Great Crash of 1982. At the end of 1981 video games were a huge business, the next big entertainment medium, soon to surpass television, film, and music both in terms of sales and cultural relevance. At the dawn of 1983 video games were a joke, a fad, a novelty. In between those two points was the Great Crash of '82. Video game stocks crashed, a lot of companies went out of business, and video games became a profoundly unprofitable business to be in. Something about the story, though, doesn't smell right to me.

I don't dispute that the Crash happened; clearly there was a big change in the perceived profitability of video games over the course of 1982. What I question is the orthodox explanation of the crash.

The standard story is something like this: Once there was just Atari. They made the first arcade games, they made the first (profitable) home video game consoles. There were some competing consoles, like the Odyssey, but they never sold close to as many units as the Atari VCS. And for a long time the only people who made games for the VCS was Atari. And they were good games, which made consumers happy and made Atari very successful.

Then a gang of disgruntled Atari employees left the company and formed their own business, Activision, which developed its own games for the VCS. Activision became the first third-party developer. Since Activision consisted of some of Atari's best employees, this meant a slight drop in the quality of Atari's product, but Activision made some darn good games so consumers were still happy and all was still well.

But Pandora's Box had been opened. Now the knowledge of how to program for the VCS was not wholely contained within the Atari corporation. Soon other video game companies appeared, hundreds of them, spurred on by reports of the astronomical profits Atari was receiving. And they made shitty games. Even Atari began producing dreck. Consumers grew more and more concerned.

According to this story, the straw that broke the dromedary was E.T. Atari rushed the production of the game (It went from blackboard to finished product in 6 days) then manufactured a stupid number of them (they made more copies of the game than there were VCSs sold in the US at the time; they anticipated that everyone with a VCS would buy one, plus new users would buy VCSs just to play it). And, as anyone who has played E.T. knows, it was garbage. Angry customers returned the game in droves for refunds, Atari (allegedly) buried several million copies of the game under a mountain of cement somewhere in Nevada, and Atari's stock crashed. Consumers lost faith in video games; they'd put up with crappy games from third-party developers, but now Atari itself was producing crappy games. By the millions, consumers who had been interested in video games were interested no longer. They took their money and bought bicycles and happy meals instead.

This last bit is the part I don't buy. Yes, there were a lot of bad games for the VCS. Yes, E.T. sucked. And quite probably there was a certain degree of burn-out among consumers. But does it really make sense that a glut of bad games caused everyone to turn their backs on video games entirely? Might I direct you to the shelves of your nearest Electronics Boutique, where you will observe five unplayable turds for every one game you might consider purchasing (and that's if you have pretty undiscerning taste in games). Hollywood cranks out dozens of terrible re-treads for every decent movie it releases, but consumers don't suddenly decide that they're sick of films and stop buying movie tickets.

It strikes me that a far more plausible story focuses on the supply side of the market rather than the demand side. There were lots of articles hyping the immense profitability of video games in 1981 and early 1982. A lot of companies sprung up from nowhere to make games that year. Wall Street and the video game industry had high expectations for the profitability of video games. Then they failed to meet those expectations. The market got saturated, far more games were supplied than consumers demanded, and a bunch of companies went under. Simultaneously, Atari, the market leader, had a number of high-profile flops and found itself in severe financial difficulty.

All of this would create the impression that the bottom had fallen out of the market, when in fact the problem was one of over-supply rather than under-demand. Now the whole thing looks a lot more like the internet crash of the late-90s; a hot new technology inspired a bunch of companies to get into the business without really knowing what they were doing, the stock market went crazy as a result of the hype for these new companies, and then the whole thing came crashing down when people realized that these businesses couldn't pay their bills.

What's interesting is that the video game industry has largely internalized the conventional wisdom explanation for the Video Game Crash and acted accordingly. When Nintendo cautiously entered the home video game market in the US in 1986, it heeded the claims that Americans were utterly uninterested in video games. Thus, they called their home console the Nintendo Entertainment System, packaged it with a light gun and a robot, and designed it so that you couldn't see the cartridges while they were loaded in the system (introducing a design flaw that systematically caused systems to stop working over long periods of use, but that's another boring story). Nintendo's entire marketing effort in the US, in the early years of the NES, was designed to convey the message, "This is NOT a video game system." Along similar lines, Nintendo was fearful of the prospect of a glut similar to that experienced by Atari in 1982. Thus, anyone who wanted to produce games for the NES had to be licensed by Nintendo and all games to be published had to be strictly vetted (hence the Nintendo Seal of Quality). Moreover, Nintendo limited the number of games published for the system by establishing a hard-and-fast quota: No company could published more than 5 games per year for the NES (so you'd better make them good).

It seems funny, in retrospect, because the whole demand-side explanation of the Crash of '82 seems so implausible. Nonetheless, Nintendo's licensing system has become the model for game publisher-console manufacturer relations, and was a necessary prerequisite to Sony's loss-leader razor-and-blades business model. If I were an economist, I would love to dig into the market data of the time and see if it confirms my supply-side suspicions or if the conventional wisdom demand-side story is borne out. Since I'm not, I'll just have to content myself with looking askance every time some video game columnist casually mentions the Crash of '82 that was caused when consumers got sick of too many shitty games.

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This page contains a single entry by Zach published on January 31, 2007 3:08 AM.

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