The North American Video Game Crash of 1983

The North American video game crash of 1983 (sometimes known as the video game crash of 1984 because it was in that year that the full effects of the crash became apparent to consumers) brought an abrupt end to what is considered the second generation of console video gaming in the English-speaking world. It almost destroyed the then-fledgling industry and led to the bankruptcy of several companies producing home computers and video game consoles in North America. It lasted about two years, and many business analysts of the time expressed doubts about the long-term viability of video game consoles. The video-game industry was revitalized a few years later, mostly due to the widespread success of the Nintendo Entertainment System (NES), which was released in North America in 1985 and became extremely popular by 1987.

There were several reasons for the crash, but the main cause was supersaturation of the market with dozens of consoles and hundreds of mostly low-quality games. Hundreds of games were in development for the 1983 release alone, and this overproduction resulted in a saturated market without the consumer interest it needed.

The American video game crash had two long-lasting results. The first result was that dominance in the home console market shifted from the United States to Japan. When the video game market recovered by 1987, the leading player was Nintendo’s NES, with a resurgent Atari battling Sega for the number two spot. Atari, never truly recovering, could not manage to match the success of its 2600 console and finally stopped producing game systems in 1996 after the failure of the Atari Jaguar. Japanese control of the North American market continued for most of the next two decades.

A second, highly visible result of the crash was the institution of measures to control third-party development of software. Using secrecy to combat industrial espionage had failed to stop rival companies from reverse engineering the Mattel and Atari systems and hiring away their trained game programmers. Nintendo, and all the manufacturers who followed, controlled game distribution by implementing licensing restrictions and a security lockout system. Would-be renegade publishers could not publish for each others’ lines, as Atari, Coleco and Mattel had done, because in order for the cartridge to work in the console, the cartridge had to contain the appropriate key chip for the lock inside the console, and the publisher had to also acknowledge its license to Nintendo in the copyright notices. If no key chip was present or if the key chip did not match the lock inside the console, the game would not work. Although Accolade achieved a technical victory in one court case against Sega, challenging this control, even it ultimately yielded and signed the Sega licensing agreement. Several publishers, notably Tengen (Atari), Color Dreams, and Camerica, challenged Nintendo’s control system during the 8-bit era. The concepts of such a control system remain in use on every major video game console produced today, even with fewer “cartridge-based” consoles on the market than in the 8/16-bit era. Replacing the security chips in most modern consoles are specially-encoded optical discs that cannot be copied by most users and can only be read by a particular console under normal circumstances.

Nintendo reserved the lion’s share of NES game revenue for itself by limiting most third-party publishers to only five games per year on its systems. It also required all cartridges to be manufactured by Nintendo, and to be paid for in full before they were manufactured. Cartridges could not be returned to Nintendo, so publishers assumed all the risk. As a result, some publishers lost more money due to distress sales of remaining inventory at the end of the NES era than they ever earned in profits from sales of the games. Nintendo portrayed these measures as intended to protect the public against poor-quality games, and placed a golden seal of approval on all games released for the system. Most of the Nintendo platform-control measures were adopted by later manufacturers such as Sega, Sony, and Microsoft.