The Video Game Crash of 1983

What caused the great video game crash of 1983 in North America? Was it too many lousy, cheap games? Was it the home computer? Was it E.T.? Or was it more complicated than that?

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Episode Transcript

Speaker 1 (00:04):
Welcome to Tech Stuff, a production from I Heart Radio.
Hey there, and welcome to tech Stuff. I'm your host,
Jonathan Strickland. I'm an executive producer with I Heart Radio.
It all love all things tech, and you know, back
in two, Chris Pallette, my original co host, and I

(00:25):
did a short episode about the video game crash of
nineteen eighty three. But I think we fell into some
traps that a lot of people fall into when they
talk about that, and I figured that we could probably
go back to a deeper dive in this episode and
learn about how that all happened. Now, the super short

(00:45):
version of the story is that here in the United States,
the home video game market went into a recession after
it became oversaturated. It was built on a faulty business model,
really a faulty distribution mode atle which we'll talk about.
Investors lost confidence in the companies involved, and the entire industry,

(01:07):
mostly concentrated in a single company, collapsed under its own weight. Now,
some people given even shorter version, effectively blaming a pair
of Atari cartridges for the whole thing. But as we'll see,
that ends up being a little bit reductive, but seemed
like it would have been a great year for games.

(01:27):
I mean, if you look at the arcades, Dragons Layer
and Space Ace, both video games with full hand drawn
animation from Don Bluth stored on laser disc. They made
a big splash that year. This was despite the fact
that player interaction in those games is just limited to
responding to timed events and pushing on a joystick in

(01:48):
a particular direction or hitting a button. Um, but you're
not controlling animated characters the entire time. It's literally like, oh,
the screen flash to push left. Uh. The Star Wars
Arcade Machine also came out in nineteen eighty three. That
one had vector color graphics and lines from the movie.
By the way, that game remains one of my favorite
arcade games of all time. Likewise, Spy Hunter another game

(02:13):
that I consider a top arcade game of all time.
That one came out in nineteen eighty three. That's the
game where you control a car. You have an overhead
view you're controlling of cars that goes down the highway
and the car's got like all these spy gadgets kidded
out into it, or it can get them by you know,
docking with a a U a semitruck that's also on

(02:33):
the road and you have to shoot bad guys and stuff.
Super cool game. And a lot of other big titles
came out that year, like Discs of Tron, Elevator Action,
Junior pac Man, and Crawl. Okay, so that last one
wasn't exactly a class arcade game, but it was an
arcade die in with a science fiction fantasy film that
I've got a soft spot for. All Right, So we

(02:56):
can't just jump into nine or even nineteen eighty and
expect to have a full understanding of what led to
the industry crash. We really need to understand how this
all got started in the first place. So we're gonna
do a quick overview of the birth and evolution of
video games, both for home consoles and for the arcades,

(03:18):
because they are tied together somewhat um And also, arcades
were a thing too once upon a time, just in
case you weren't aware. I mean, there are some arcades
still in existence, particularly outside the United States, and you've
got your stuff like David Busters and whatever, but it's
not like the old days insert old time and music here. Now.

(03:38):
Before even the old days, there was a physicist named
William Higginbotham uh, and this cat was an interesting fellow.
For one thing, he was a scientist at the Los
Alamos National Laboratory during World War Two and was part
of the group that developed the atomic bomb. He worked
on the electronic side of things, you know, rather than

(04:01):
the stuff what goes boom side of things. But of
course all these groups were working together with a common
goal in mind. Anyway, he was part of the team
that brought upon us the era of nuclear weapons. He
also campaigned hard for the world to you know, not
go ham on nuclear weapons and build them all over
the place. Also, I should point out that it's not

(04:24):
like the United States was the only country working toward
nuclear weapons. And I don't mean to suggest that if
the US hadn't developed the atomic bomb, no one else
would have done it. Uh, that surely would have happened.
It's just that's how history played out, all right. So
let's get back to the video games, though. So Hagin
Botham goes to work for the brook Haveven National Laboratory

(04:44):
after the war, and he worked in a department called Instrumentation,
and this department built various cathode ray tube or CRT
displays intended for radar systems. Well, in ninete fifty eight,
he's told he's gonna create an exhibit to show off
to people whenever they're touring the lab. And he's like,

(05:04):
we use systems to display stuff on screens. It's not
very exciting. I mean, it's radar systems, and unless you've
got something to pick up, it's you're just looking at
a screen. So he gets an idea. See, the team
was using oscilloscopes, and oscilloscopes are used to display wave
forms of various signals. So when a scilloscope can show
stuff like a signal's frequency and amplitude, among other things,

(05:27):
and most importantly for this podcast, it can plot curved lines.
And when paired with an analog computer that Higginbotham's department had,
it gave the physicist a chance to design a very
simple tennis game. A technician named Robert Davorak took Higginbotham's
plans and built the exhibit, and Higginbotham called it Tennis

(05:49):
for two. This was in nineteen fifty eight. That's more
than a decade before we'd see a refined version of
this called Pong. But the game was different from pong
in other ways, as well, so pong uses a top
down view. For the table tennis game, players take control
of bars that act kind of like paddles or rackets.

(06:12):
Typically they're taking control on the left and right sides
of the screen, and it's like you're looking down on
top of a of a table tennis board and you
you move these these bars, these paddles up and down
the screen on your side in order to hit a
ball back and forth. When the ball encounters either the
top or bottom edge of the screen, it bounces off
and heads towards you know, whichever direction it was going.

(06:35):
But Tennis for two only had two lines in It
had a line along the bottom of the screen which
represented the ground, and halfway across the length of this
line was a short vertical line extending up, so this
represented the net. So it's like you're looking at a
tennis court in profile. Players had a dial which allowed

(06:57):
them to set the angle of the ball, and then
a butt and you would push the button when the
ball entered your side of the court, and you would
use the dial to set the angle of your strike.
There were no paddles or anything like that on the screen.
Higginbotham didn't really do anything else with this idea. It
was just kind of to demonstrate the technology, and even
though it got a lot of attention, he didn't really

(07:18):
see any application for it beyond that. Now you could
argue this was the first video game, but it was
never a commercial product. But flash forward to the nineteen sixties.
An engineer named Ralph Bear was working for a company
called Sanders Associates, Incorporated. He was exploring how the company
might make a companion technology for the television, which had

(07:40):
proven to be quite popular by the nineteen sixties. So
the idea was that most folks already had a TV,
and so creating something that could expand the capabilities of
a TV would tap into a pre existing market, a
market that already was proven to have spent money on
a appliance as expensive as a television. So there and

(08:01):
two bills, Bill Rush and Bill Harrison began developing a
box you could connect to a television that would allow
you to play games on the TV. And the engineers
built a few prototypes, and we typically referred to them
as the brown boxes because they were covered in a
veneer that made them look like they were made out
of wood. They created a version of table tennis that

(08:22):
used controllers with three knobs and a button on them.
The knobs or dials controlled the paddles and the ball
itself in fact, so one dial was to control the
horizontal movement of a paddle. And remember this is a
table tennis that you're looking at either the left side
or the right side of the screen, So by controlling

(08:43):
your horizontal movement, you can move closer to or further
away from the net in the center or the center line.
And then the second dial controlled the vertical movement of
the paddle, so that lets you move up and down
in order to intercept the ball before it would pass
you and go beyond your side. And then the third
dial would actually control the movement of the ball itself,
so once your paddle had hit the ball, you could

(09:06):
use this third dial to put quote unquote English on
the ball after you'd already hit it. So not really realistic,
but you can control the path of the ball by
turning this dial, so you can make it go up
or down, or you can make it go up and
down really fast as you're heading towards the other side,
in an effort to make sure your opponent can't hit it.
So you could actually skew the direction of the ball

(09:27):
as it left your paddle. If your opponent managed to
hit the ball well, then you would no longer be
able to control its movement. You wouldn't want to anyway,
because you would be, you know, focusing too much on
trying to make sure you move your paddle in the
right spot to intercept the returning ball. So Sanders Associates
filed a patent on this design and got it, and
they looked for buyers, and a company called Magnavox, that's

(09:51):
a company I should cover in depth at some point
licensed this design in nine and began working on a
consumer version of the prototype technology. And this would become
the first Magnavox Odyssey console, which essentially played table tennis
without being able to keep score. That you had to
keep score, you know, on your own. Uh. The Magnavox

(10:15):
Odyssey came out in September nineteen seventy two. The console
could accept game cards. These were printed circuit boards that
were kind of like a proto cartridge. UH. The cards
modified how the console would send signals to a television
and how it would interpret inputs, which gave the players
a few different game types that were all mostly based

(10:36):
off of table tennis. Magnavox even created the first video
game console peripheral. For an extra charge, you could buy
a light gun that you could use with some basic
shooting games. Again, um, just like you know, they would
display a white square in your TV and you would
aim the light gun to it, pull the trigger, and
if it had detected that the white square was in

(10:58):
the sight of the gun, then it counted as a hit. Well,
the Odyssey would enjoy some modest success. Some would say
it was actually a failure. It would eventually sell around
three units when all of a sudden done, but early
on it wasn't making that much of an impact, except
it would have a huge impact on the history of
video games, just not necessarily on the consumer market right

(11:21):
off the go, because one person who saw the Magnavox
Odyssey and Action was Nolan Bushnell. Now Bushnell and his
partner Ted Dabney had created the first arcade video game
in nine under a company that was called Scissor G.
And this arcade game was called Computer Space, And in turn,

(11:41):
this was based off a game that had been created
by folks at M I T way back in nineteen
sixty two. Called Space War. Now I emphasized that title
because the actual title has an exclamation point after the
word space War. Anyway, computer Space was largely an adaptation
of Space War, and it would become the first commercial

(12:04):
arcade game, but it wasn't particularly successful. However, Bushnell thought
there's gonna be a big business in video games, and
so he was convinced that they needed to stick with
this kind of this market. So he goes off and
then found the company Atari, specifically with the goal of
creating games that the company would then license to manufacturers.

(12:26):
So the original idea was that Atari would create the
i P and would program a game, but then effectively
sell that design to some established gaming company like Bally
or Williams. Bushnell hired on an engineer named Alan Alcorn. Now,
the video game world is really young at this point,

(12:47):
like pretty much the only people who have made any
games were engineers and programmers who are really just trying
to create fun ways to misuse company or research lab
or university property. Like, they weren't games for the general public.
They were typically making games for themselves and for the
folks who worked closely with them. And Alcorn had no

(13:08):
experience in creating games. So Bushnell decided to give him
the assignment of making a table tennis game similar to
the Magnavox Odyssey home console game, but this time in
arcade format, so not a home console, but like an
arcade cabinet that you would encounter in a place like
a theater or a bar, because this isn't the time

(13:30):
before arcades themselves, so this was kind of like a
programming exercise for Alcorn. So Alcorn pretty much reinvents the
table tennis game we saw with the Magnavox Odyssey, which
again Bushnell had actually had a chance to see in
person before it was released, and Uh and Pong would

(13:50):
be the result of this. He created an interesting variation
on this table tennis game. For one thing, it could
keep score so you didn't have remember it. For another,
he went so far as to program the little bars
that act like your paddles or your your rackets. They
actually have computationally different angled surfaces along the front of

(14:14):
the bar. So that's just mathematics at this point. So
by that, I mean if you were to look at them,
they would be rectangular, right they don't. They wouldn't look angular.
They're just the rectangles but mathematically there are different sections
of the bar that act like a slightly different angle
of attack of a paddle. So if you hit the

(14:36):
ball smack dab in the middle of your um, your
your paddle, you would have a pretty simple deflection. If
it was coming straight at you and you hit it
right dead in the center, it would go straight back um.
If it was coming at an angle, then it would
bounce off at a ninety degree angle deflection. But if
it hit other parts of the bar, like toward the end,

(14:58):
they would have a more severe deflection, a sharper angle.
So where you hit the ball with your paddle would
change the way the ball flew back towards your opponent.
It was neat that he was able to mathematically do
this anyway. Atari would choose to manufacture pong itself rather
than license it to some other company. There's this whole

(15:19):
story about how Atari had approached a couple of different
companies about the possibility of making pong and then told
each of the companies, Hey, it turns out the other
guys aren't interested in making this for us, which then
discouraged the company. So they backed out that that was
Atri's plan because they wanted to make it themselves, but

(15:39):
they first had to get out of this commitment that
they were going to make it for some other company.
So they did that. They went out and they got
a line of credit in order to produce this. Because
Atari was still a very young company, didn't have a
lot of money, and manufacturing an arcade machine is expensive.
You have to go through the whole manufacturing process, so
this was a big risk, but it paid off. Pong

(16:00):
would become the first commercially successful arcade game. It would
also prompt Magnavox to sue Atari for patent infringement, saying, hey,
we paid for this patent and you clearly have copied it,
so what's up with that. This lawsuit would eventually get
settled out of court. Now, Atari would subsequently make its

(16:22):
own table tennis video game console, which it called, fittingly enough,
Home Pong. They released that console in the original Odyssey
had been on the market for a few years at
that point, and Atari would sell around a hundred fifties
thousand units all told, so, you know, still not a
huge number in the grand scheme of things. Now, Pong

(16:45):
the arcade game was wildly successful, and you can kind
of understand why I mean, the game is simple, so
it's really easy to understand how to play, unlike say
Computer Space, which was notoriously complicated. It only costs to
play Pong for a session, whereas home consoles were upwards
of a hundred dollars, and when we adjust for inflation,

(17:06):
that's around the same as six hundred twenty bucks today.
So while the home consoles were moving okay, the arcade
was doing a little bit better. Between nineteen seventy two
and nineteen seventy seven, pretty much all the video game
home consoles were focused mainly on table tennis, are games
that were very slight variations on table tennis, So in

(17:27):
other words, everything was Pong pretty much like it may
not be called Pong because that was an Atari thing,
but they were all essentially Pong. So there were numerous
copycats out there, and there was a massive oversaturation of
first generation consoles, and they pretty much all played Pong
or some variation of that, and by nineteen seventy seven

(17:47):
that had all played out. Dozens of companies that had
jumped into the market in an effort to cash in
on what was seen as a craze found themselves over
extended and many of them would go out of business,
and it was a tough sell. I mean, a lot
of folks who were interested in video table tennis had
already bought a console, and since all the consoles offered

(18:08):
more or less what wasn't a largely identical experience, there
wasn't much reason to go out and buy another one. Right,
you already have a Pong machine. You don't need another one,
So why would you shell out a hundred dollars or
more to buy something that you essentially already have. So
the arcade game business wasn't in much better shape at
this point. While Pong had been a high point in

(18:29):
the arcade industry, there was a real lag and innovation
in the arcade space, and so the whole industry, consoles
and arcade went into a bit of a recession. In
by in the night a game would come out that
would breathe new life into the arcade industry and later
on into the home video game market. We'll find out

(18:50):
which game that was when we come back from this
short break. Okay. So there was this early glut of
table tennis based video game consoles in the early to
mid seventies, and that market ultimately collapsed By the time

(19:12):
the dust had cleared, only a few companies were still
in that market. Atari was one of them. Atari had
continued making arcade machines as well as some consoles and
handheld devices as well. You probably wouldn't be surprised to
learn that a lot of those still remained kind of
Pong inspired, because that game had been such a big
success for Atari. It was something that the company was

(19:33):
leaning on. Some of the other titles that were uh
the Atari was producing we're racing game titles. They had
a couple of military games, like some games where you
would control a tank or a jet fighter game. Also,
in nineteen seventy six, Bushnell made a deal to sell
Atari to Warner Communications, and he stayed on for a
short while anyway, to continue to lead Atari. But lots

(19:56):
of other companies that tried to cash in on the
video tape old tennis trend. We're not so fortunate. And
once the market was saturated, you know, once pretty much
all the folks who one of one of these things
had one, there was nowhere to go. Plus, the second
generation of consoles were beginning to come out, and that
was the real nail in the coffin, and a big
change with these consoles is that these were predominantly cartridge based.

(20:20):
So instead of hardwiring games into the console itself, where
the console is limited to which every games were programmed
onto the the actual circuit boards of the console. Programmers
were designing games that a company would print onto a
circuit board that was housed inside a cartridge. You would
plug the cartridge into a console and the console could

(20:42):
run the game. So this was kind of like if
you were actually physically switching out part of a circuit
board in the console every time you were playing a game.
That's effectively what you were doing. The games were all
written in ROM format. ROM stands for read only memory.
That means that a machine can only pull from the
data that's stored on that cartridge. It cannot change or

(21:05):
overwrite that data. RAM memory is non volatile, meaning the
game would always exist on that cartridge unless you were
to actually physically damage the cartridge itself. It's it is
a physical program on a circuit board. Now, this switch
to cartridges allowed companies to make consoles that could run
any number of games. You just had to program it

(21:26):
onto a ROM and have that housed in a cartridge
and have it be compatible with the machine. Then you
were off to the races. And in the beginning, each
company making a console had its own game titles, like
they were producing their own games. So a few of
the big consoles to come out around that time, where
the Callika Vision it was actually one of the later ones,

(21:47):
Mattel's in television, the Magnavox Odyssey to which was a
cartridge based game console, and of course the giant in
the space, the Atari Video Computer System or VCS, better
known to me at least as the Atari twenty hundred.
Now there were other consoles as well. Um. In fact,

(22:08):
sometimes people cite that as one of the reasons for
the video game crash, as we'll learn not so much.
And really these four consoles were the most popular by far,
and the Attori twenty hundred commanded the overwhelming share of
the market. Um depending upon which source you look at,
Atari would ultimately sell between twenty five million and thirty

(22:30):
million at twenty units. So that's a lot, especially when
you look at second place in television, which depending upon
which source you're looking at, sold between two and three
million units, so twenty to thirty million units for they
two to three million for second place, which was in television.

(22:52):
Atari was the home video game market in in many
respects Now, I should also add that the Atari twenty
six it came out a year before The Odyssey to,
two years before in television, and five years before the
Collique of Vision, so it really had a head start
in the market when you compare it to the others. Now,
the sold okay at launch. It didn't. It didn't do

(23:16):
badly when it debuted in ninety seven, but it also
was not a runaway hit. It wasn't like a viral
marketing sensation. It retailed for just under two hundred dollars,
so when you adjust that for inflation, it would be
more than eight hundred bucks today. So when you look
at a console and you see that's like six hundred
dollars and you think, wow, that's expensive, keep in mind

(23:38):
the Atari twenty hundred when it first debuted was sold
for the equivalent of eight hundred dollars today. And I
had one of these things, and I think about how
much my parents must have had to save to give
me that. Now, granted I got mine a little later
in the life cycle, it probably wasn't sold at the
full two d dollars. But still my parents were teachers. Anyway,

(24:00):
I don't mean to turn this into a Jonathan realizes
how many sacrifices as parents made podcast. It was expensive
and despite the cartridge approach providing you know, way more
options than what you would find with first generation consoles,
it was a bit of a slow burn. I mean
you had to remember also that this was this required
a change in consumer thinking, right because consumers before, yeah,

(24:24):
they were limited to whatever games were hardwired on a console,
but they didn't have any other purchases to make once
they bought the console, unless they were getting a peripheral
that everything was in the box. But with this model,
you bought the system, but then you had to buy games.
You know, you had additional purchase costs on top of
the system itself. Now, before the break, I alluded to

(24:45):
an arcade game that would revive the arcade industry and
subsequently really put a spark in the home video game market.
That game came from a Japanese company called Tito, and
it was a little game called Space and eight Ers.
This game came out for the arcades in nineteen seventy eight,
so the year after the VCS or came out and

(25:08):
it was a huge hit. And in the game, you
just you shoot down blocks of aliens that are flying
overhead and they scroll left and right, and they dropped
down a line. Each time they get to the edge
of a screen, they descend towards you. It's pretty simple game,
but it became an instant classic. Now the folks that Attari,
we're paying attention, not Bushnell. At this point he had

(25:31):
actually either been fired or he quit in nine. How
that unfolded really depends upon whom you ask, because different
people have a different explanation for that. And Atari engineers
were working on what was supposed to come after the
Atred because when the company first launched the console in nineteen,

(25:53):
they did it with a plan to replace it with
a newer piece of hardware within three years. So like
when they launched seventy seven, they thought, in eight, we're
going to come out with the next generation of this
hardware and it will be more powerful and have more capabilities.
But things would not work out that way, seeing in

(26:14):
eight Atari published a port of Space Invaders, a pretty
decent port, and it would go on to become the
second most popular AT twenty game in its history. We'll
talk about what was number one a little bit later. Now,
people were eager to have the experience of playing Space
Invaders at home. I mean, this was a game where

(26:37):
typically you would have to go someplace like a theater
or a bar or something in order to play it.
Eventually you would be able to go to arcades and
play it, and this would really see a tight relationship
formed between the arcade and home markets. Console companies began
to see the value in licensing popular arcade titles for
home markets, and arcade developers saw the added value of

(27:02):
bringing in revenue by licensing their intellectual property to the
video game companies. So it became kind of a symbiotic relationship.
At first, it's some foreshadowing. So starting around at sales
start to pick up and the folks at Warner Communications,

(27:24):
remember Warner had purchased Atari in nineteen seventy six. They
were encouraged by this, and it also meant that there
was still life in the at Remember, the plan was
to phase it out in nineteen eighty and to have
a new kind of hardware come on the scene. But
now they were seeing more and more sales, which meant

(27:45):
the company decided to push back plans to introduce new,
more powerful consoles. Why would you spend cash to produce
something new if you can still move units of something
that you're already making, alright, But something else that was
going on around this same time, and it's a big
part of it. This was the birth of the independent developer. Now.

(28:06):
I mentioned earlier that at first, each console company was
responsible for putting out games on its system, So the
Atari cartridges came from Atari. Atari was the company that
both made the console and made the games. But then
things changed, and they changed largely because of how Atari
was conducting business under Warner Communications. For one thing, Atari

(28:30):
wasn't paying out bonuses or royalties. You were paid a
salary and it didn't matter if the game you made
flopped or if it was a huge hit. You made
the same amount. So you could make a game that
would make the company millions of dollars, but you wouldn't
see any of that cash. Also, if you worked for Atari,
the only name that was associated with any game they'll

(28:53):
name that was on the cartridge would be the company
Atari's name. It didn't matter if you came up with
the game idea. It didn't even matter if you coded
the whole darned thing yourself. The name of the cartridge
was just Atari. There was no credit to you. You
weren't acknowledged at all, partly because at least the belief
was that Atari didn't want to run the risk of

(29:14):
losing talent to some other company. Like if they said, oh,
this game was created by so and so, then some
other company might approach so and so and say, hey,
I see you like to make games. How would you
like to make way more money doing it? Well, game
creators weren't totally cool with this. Allot of them wanted
to have more credit, or at least any credit, and
Atari just wasn't keen on doing that. Plus, the folks

(29:36):
at war Our Communications were really cost focused, and they
didn't trust video game developers. They didn't think of them
as creatives. So in nineteen seventy nine, a group of
Atari game developers, four of them left the company to
found a new one called Activision. Yeah, Activision, as in
the company that's now known as part of Activision Blizzard.

(29:57):
It all started off because a bunch of Atari game
developers were fed up with how Atari was running things.
They originally planned to create a company that would develop
its own console, but ultimately they would develop games that
would run on the Atari twenty hundred, but they would
not be made by Atari. This would eventually spawn a
lawsuit in which Attari tried to make Activision stop. They

(30:18):
were claiming the Activision was infringing upon proprietary intellectual property,
but eventually the two companies reached a settlement and Activision
would pay a licensing fee to Atari, but otherwise would
be able to continue developing games for the Atari twenty
six hundred. The talent that moved from Attari to Activision

(30:40):
represented some of the strongest developers who had been at Atari,
so now Atari was forced back a step when it
came to developing games. Plus, Atari's games would compete against
Activision's games, and Activision would be just the first third
party game developer to create a hundred cartridges. Others would follow.

(31:01):
One of those would be a Magic, another company that
had some x Atari talent, create their own developer company,
and the Magic would launch in one So now Atari
was going to have to compete with other companies that
were making Atari games, when before Atari was the one
and only source of Atari games. This will be an

(31:23):
important component as we move forward. Now we need to
talk a bit about distribution and retail because this would
also play an enormous part in the collapse of the
market in So let's talk about how retail typically works. Okay,
So a retail outlet deals with either wholesalers or distributors,

(31:46):
buying either from a wholesaler or directly from a distributor,
or maybe directly from a source itself. But the point is,
the real retail organization orders a certain number of units
of whatever it is we're dealing with, in this case,
video games, and that then becomes the stock that the
retail establishment has to sell. Then the retail company marks

(32:09):
up the price of this stuff and sells it on
to the consumer. The retail store is the point of
sale for the customer, right And of course the retail
store has to mark up the price or else it
would make no money. So it has to sell the
thing for more money than it costs for it to
purchase it to put it into its stock. That all

(32:31):
makes sense now, Typically a retailer is on the hook
for the units that they order. So if a consumer,
you know, if the consumers don't buy enough of whatever
it is we're talking about, then typically the retailer has
to eat that cost. So if video games had worked
this way in the nineteen eighties, it would have been

(32:52):
a very different story. It would have looked something like this.
Let's say, um, Jimmy Bob's video game emporium purchases twenty
copies of Activision's River Rate, and let's just say, for
the sake of this this example, that that costs ten
dollars a pop. So each copy is ten dollars for
Jimmy Bob to purchase at this this arrangement. But then

(33:16):
Jimmy Bob marks up those copies to thirty dollars each,
So Jimmy Bob spent a total of two hundred dollars
buying these twenty copies of River Raiate to have in stock.
That means that Jimmy Bob needs to sell at least
seven copies to start making money in this drastically oversimplified example.
So seven copies at thirty bucks a pop, that means

(33:38):
he would net two. But for some reason, this here town,
the Jimmy Bob's in it don't have video games with
sophisticated tastes and they don't appreciate the hard work the
Activision put in for River Raid. So Jimmy Bob only
sells three copies, that means he brings in ninety dollars,
but he spent two hundred on the games he bought

(33:59):
straight for Activision. That means Jimmy Bob has going to
bed poorer but wiser. At least you would if that's
how video game distribution actually worked in the old days.
It didn't. See in that case, the retailer would have
to come up with other strategies, maybe trying to position
games in a more inviting spot to get more people

(34:20):
to buy them, maybe marking down the price a little
bit so that they can at least break even, if
not make a little bit of profit. But that's not
how video game distribution worked in the early eighties. See,
retailers were not super keen to carry video games that much,
so companies had to make deals with these retailers in
order to get their products onto store shelves, and it

(34:44):
put a lot more of the risk on the game
developers instead of the retailers. It was the cost of
doing business. This was the way to convince retailers, hey,
give our game systems and our cartridges shelf space in
your store. Shelf space that could go to something else
that you know, has a proven track record. So the
deal that a lot of companies agreed to was that

(35:07):
the video game developer would provide copies to retailers. Retailers
would say, here's how many copies I think I need.
The video game developer would send those copies to the retailer.
The video game developer would be financially on the hook.
If the retailer found it impossible to move the games,
they would have to take all unsold inventory back. So

(35:29):
now the retailers didn't carry a risk, right they would
make money if they the games sold, but they would
essentially get their money back if they didn't sell all
the titles, because they would return the titles to the
video game developer and recapture costs, and so the developer
would take on the burden of games unsold. So yeah,

(35:51):
the retailers weren't on the hook for those unsold games.
This would be a key component for why the market
would crash, and it put a ton of power in
the hands of the retailers. And because of that, and
because there was this perception that video games were the
license to print money, some retailers went a bit hog wild.
They drastically overestimated how many copies they would need for

(36:16):
their titles, thinking like, everyone wants video games, so we're
gonna order, you know, one copies of this thing. But
then you can understand why retailers would do this too,
because there was no risk, right. I mean, retailer could
order a hundred copies of a game and if they
only sold ten of them, well, they could still return
the other ninety to the video game company and recapture

(36:38):
those costs, so they would not be in a in
a really bad position as long as everything held steady.
So even really good popular games were a bit of
a risk for game developers, Like if a retailer like
Sears put in a really large order, you'd have to
pay to manufacture that many units of car artridges and

(37:00):
then ship them to the retailer. And then if it
turned out that Sears had drastically overestimated how many units
they would actually sell, you would have to take all
the excess back and figure out what to do with it.
So for bigger companies like Atari and to a lesser extent, Activision,
this was something that they could potentially weather on a
case by case basis. But for other companies it would

(37:22):
be a different story. While we saw a ton of
third party developers pop up in the Atari era, most
of them wouldn't stick around for very long. The agreements
with retailers would prove to be too expensive for many
of those companies to navigate, and they would go bankrupt
as a result. In fact, sometimes they would go bankrupt
before they could take back any copies of games. We'll

(37:43):
get to that too. But the really, really big thing
that would cause the dominoes to fall happen in the
winter of two. I'll explain more after we come back
from this break. So in December nineteen eighty two, one

(38:04):
or Communications holds a stockholder call. So this is when
companies have to report on performance to their shareholders in
order to keep them up to pace with what's going
on and also to lay out projections for the following year. Well,
in nineteen eighty two, video games were a huge business.
We're talking a multibillion dollar industry that was dominated by Atari.

(38:27):
And yeah, video games are a multibillion dollar industry today,
but you got to remember they were very young in
the nineteen eighties, right. Plus when you just for inflation,
when you talk about just a few billion dollars in
the early nineteen eighties, that's many, many billions of dollars today.
So Atari had been pretty darn busy. In nineteen eighty two,

(38:48):
it released the Atari fifty two hundred, which was an
upgrade from the VCS Slash D so it boasted better
graphics than the twenty s hundred. However, it also wasn't
compatible with the games Ford, at least not initially, and
it also didn't have very many games of its own
to speak of, because Atari had actually directed most of

(39:08):
its game development towards the DRED because that installed base
for the console was still so large, but it meant
that they didn't really have games to help sell the
unred to the public. Meanwhile, Calliko had launched the Callico Vision,
which ironically could pay play at twenty games on it,
so if you bought a Callico Vision you could play

(39:30):
old Atari twenty six hundred titles on it, like if
you bought you couldn't. And then in Television launched the
in Television two, which was pretty much just in Television
one with a new case and just didn't sell anywhere
close to as many units as the twenty hundred had
And here's where we get to some of the big
issues that Warner Communications was going to have to address.

(39:53):
One is that by two the Atari undred was really
showing its age. The Colliko vision was more technically advanced.
And of course, Attari itself had initially planned to phase
out the twenty six hundred in nineteen eighty, but then
changed course once the console sales started to pick up,
but the market was pretty well saturated. Most of the

(40:15):
folks who wanted an atarid already owned one, didn't grab
hold in the market the same way, and so that
was a disappointment to Atari. Meanwhile, Atari was also seeing
these other developers out there, these third party developers putting
out games that were competing with Atari's own titles. So
while Atari would make licensing fees from these other third

(40:39):
party developers, it wasn't profiting off of big sales. So
if Act Division were to put out a real banger,
and they put out a lot of bangers, ATRII wouldn't
see any of those profits. It would get the licensing fee,
but you know, if River Raids sold millions of copies,
none of that money was really going to Atari. So

(41:00):
while video games in general were doing well. Atari, the
company wasn't performing quite where it wanted to be, and
because Atari dominated the market, this meant that the industry
as a whole was on shaky ground, like it was
all kind of dependent upon Attari to some extent, like
Activision as a company could be doing great, but if

(41:21):
Atari were to suffer, while Activision would as well, because
you've got to be able to play the games on something, right.
So in this shareholder meeting, one or Communications reps revealed
that they had determined the profit increase for Atari would
be around ten to fift percent. That's great, right, You're
seeing a profit increase. Well, the problem was that Wall

(41:46):
Street analysts had predicted that this would be closer to
a fifty percent increase in profits, So being adjusted down
to ten to fifteen percent was a big drop. The
video game market seemed like it was a gold mine.
But you know too, investors, this seemed like it was
an indication that the industry had already peaked and was

(42:08):
now petering out. Like they were seeing this as a warning.
So a lot of people, discouraged by this news decided
to dump their stock in Warner Communications. That depreciated the
value of Warner's stock, and Warner's Communications saw its stock
dropped from fifty one dollar a share to thirty five

(42:29):
dollars a share. The company lost hundreds of millions of
dollars in value overnight. Now, at this point, Atari contributed
more to Warner Communications revenue than the film division did.
In fact, according to some sources, Atari was generating five
times the amount of revenue then Warner Brothers movies were

(42:52):
at that point. Now, obviously this had a huge impact
on Atari, and because Atari was almost synonymous with the
home video game market, it also had a huge impact
everywhere else as well. But this was still just one
really big factor in the crash. Now, I should add
there were other ones that also played a part, and

(43:13):
one was that Atari was spending a lot of money
getting licenses for really popular I p like pac Man,
and Atari made a pretty mediocre home version of pac Man.
It was in some ways technically impressive because Atari was
only powerful enough to show two sprites at a time. Well,
pac Man is your character of pac Man plus four ghosts,

(43:36):
So how do you make sure that you can show
you know, five sprites at one time. The solution was
to make the ghosts flash. They were doing so at
a very very fast rate, so they looked kind of
of spectral, but they were flashing so that technically each
of the four ghosts was only appearing for like a
quarter of a second, and then collectively, you you know,

(43:59):
through the persist and sub vision, it looked like they
were just there. Emulators make this problem way worse. So
if you ever see an emulator version of the pac
Man game, the ghosts are flashing on and off in
a very dramatic way. That wasn't the case with the
actual game when it first came out. Still it's not great. However,

(44:19):
it sold really well. You remember when I said Space
Invaders was Atari's second most popular cartridge. Guess what number
one was. Yep, it was pac Man. The game was
not a flop, it was a success. No other Atari
cartridge for the Atari sold more copies than pac Man. However,

(44:40):
retailers ordered more copies than they sold. So retailers ordered
way more copies of pac Man because it was such
a huge hit of the arcade. You know, Pacman was
the arcade game of the early nine It spawned a
crazy amount of merchandise. There was a cartoon series like

(45:03):
it was in popular culture. It was beyond just an
arcade game. This was something that was seen as like
a lifestyle thing. So retailers were sure that the copies
were just gonna sell out all over the place. They
ended up ordering way more than they needed. This meant
that Attori had to take back the unsold stock. And

(45:24):
the same is true for another title that is frequently
mentioned whenever you talk about the video game crash, the
infamous E T. The Extraterrestrial. It's frequently mentioned in conversations
about the as you know, the worst game of all time.
It's it's often in that mix. In fact, Tex Stuff
famously once called it that too, largely because of public perception. Um,

(45:48):
here's the thing. It's not a very good game, but
it's definitely not the worst game of all time. I mean,
for one thing, there are games that have shopped that
people bought that are literally unplayable, that they are so
broken you cannot play them. E T. Was not that
ET was playable, It's just it was also a little confusing,

(46:11):
so it was kind of hard to figure out what
you were supposed to do. It also wasn't very much
fun even when you knew what you were supposed to do.
But it did work now I owned a copy of it.
In fact, well, ET also didn't sell as many units
as Atari produced. It sold like a million and a
half units, but Atari made more than that. And also

(46:33):
the licensing fee the Atari paid in order to be
able to make ET in the first place was pretty
darn steep, so that was a big expense. So Atari
spent a lot of money making E t and then
had to spend more money to take back unsold stock.
And famously Atari would toss thousands of cartridges into a landfill,

(46:53):
which would become the subject of a documentary film many
decades later. So Pacman and ET cost Atari money. Definitely,
they really they took you know, you took a hit
on both of those. However, ET and Pacman did not
spontaneously cause the entire video game industry to crumble. There

(47:15):
was no shortage of lousy games out there for the
A and I'm sure that was part of the reason
that folks weren't eager to buy more consoles. But that's
just one piece of the puzzle as well. I have
a little bit more I want to say about this,
but before I get to that, let's take one last break. Okay,

(47:40):
so we've established that pac Man and et. While certainly
you know, a black mark on Atari's reputation and a
hit to their revenue, we're not responsible for the entire
industry crashing in. On a similar note, we can also
mention home computers. People frequently cite home computers as being

(48:00):
the reason why video game consoles died. That is being
a little too simplistic as well. The home PC market
had started in the late nineteen seventies. Like the Apple,
the original Apple computer was really just for hobbyists. The
Apple two was the first one aimed at beyond just
the hobbyist market, but it was fairly modest. Early on.

(48:21):
Some folks point to computers as being the reason that
consoles were dying because parents were switching to computers because
the computer could do way more stuff than just play games.
They could potentially help a kid do homework and stuff,
so they were looked at as being, you know, useful
and not just a diversion. And I'm sure there's an

(48:42):
element of truth to that for at least some households,
But computers were typically much more expensive than home video
game consoles, and even by the mid nineteen eighties they
were still kind of a niche market, Like, yeah, you
could buy a computer instead of a home video game
console system, but you'd be spending five hundred to seven

(49:03):
dollars more in nineteen eighties dollars. That's a significant expense.
So I think they contributed to the problem that video
game consoles were going through, but they were not the
smoking gun. It was not that as a whole, Americans
decided that video game consoles were off and now computers

(49:24):
were the thing. I do think that the lousy games
had a little bit more of an impact than computer consoles.
I mean, I was a kid in the early eighties.
I asked my parents to buy a game for me,
like I said, this was what I wanted for my
birthday or for Christmas or something. And then I get
the game and it's just playing awful. Well, that's likely

(49:45):
to discourage my parents from buying me another game in
the future, right, Like, If I'm like, this is terrible
and I don't even want to play it and it
costs thirty bucks, probably not going to get another one
anytime soon. Now, there were some awesome games out there,
don't get me wrong, some truly amazing games. For the
Atari twenty six hundred when you take into account what

(50:06):
the twenty six hundred was capable of. I'm not gonna
say they would stand up toe to toe with Call
of Duty or something, but sometimes you would just end
up with rotten games because maybe you thought the name
of the game sounded cool, or the cover art on
the box was interesting. Because I remember, there was no
Worldwide Web back in those days, so you were probably

(50:27):
just buying something based upon how it looked in the store.
Maybe if you were living in certain markets, you might
have access to things like a trade magazine that was
covering stuff like home video games. I grew up in
rural Georgia. I was lucky to see magazines at all,
so so that was not the case for me. Anyway.
Atari went into a bit of a spiral, not just

(50:49):
because of the recession brought on by this uh this,
this change in investor expectations, but also due to just
mismanagement within the company itself. Atari also had a true
successor to the twenty six hundred planned This was the
seventy eight hundred. This would have been the truly more

(51:10):
powerful console. It technically would have been a third generation
video game console. It would have been closer to being
on par with the Nintendo Entertainment system that wouldn't come
out in the U S till But before Atari could
go into full production on the seventy eight hundred, Warner
Communications sold off the Atari home video game division to

(51:32):
Jack Trammel, who had previously founded Commodore and had subsequently
entered into a bitter feud with Commodore. Now, I've covered
the story of Atari elsewhere. I've also covered the story
of Commodore elsewhere, so I'm not going to go into
all of that except to say that the seventy eight
hundred was a casualty as a result of Atari changing

(51:54):
hands from Warner Communications to Jack Trammel. But the recession
reached beyond Atari itself. Kaliko decided to develop a home
computer expansion for the Clico Vision. This one was called Adam,
and they were attempting to get into the home computer
market while keeping a toe in the video game industry.
But Adam turned into a flop, really expensive flop, and

(52:17):
then Calico got out of the business entirely. Mattel, after
the failure of the in television, to decide to extricate
itself from the home video game market as well eventually
sold those assets off to other companies, and meanwhile, video
game developers were going out a business left and right.
A lot of companies that made super cheap games were
gone first because they were a victim of that retail

(52:39):
arrangement I mentioned earlier. The Magic had to change its plans.
It had been heading for an initial public offering or
i p O. That's when a company goes from being
a private company to a publicly traded company on the
on a stock market. But after the Warner Communications stock
took a dive, a Magic put those plans on hold,

(53:00):
and eventually the company folded, largely also because of that
retail issue. While that shareholder call could be pointed to
as the inciting incident for the video game crash, it
wasn't as if the market collapsed entirely overnight. It actually
was drawn out over a couple of years. But the
writing was on the wall. Retailers became skeptical of video

(53:22):
games in general. After many of the questionable developers went
out of business. It meant that a lot of retail
companies were left holding onto stock that they couldn't send
back because there was no back right. The companies that
had made those games didn't exist anymore. So that's when
you started seeing retailers create these enormous bargain bins where

(53:42):
they were selling cartridges at like a dollar each or something.
And these were a lot of these were like just
the worst games, the lowest quality stuff, because again, the
companies that had made them no longer existed. Uh not
not a great ad for you to go out by them.
And meanwhile the retailers are just trying to get rid
of them, to get them out of the stores. Uh.

(54:05):
This was this, This created just like a bad feeling
for everybody, the consumers and the retailers. And I would
say that the video game crash really happened for a
lot of these reasons. A big one was that retailer agreement,
the fact that retailers fell into the same traps that
investors did. They overestimated the profit that they would make
coming from these games, so overestimating the market was a

(54:28):
big part of it. And that the retailers, as a
result of getting burned by this, were less interested in
carrying and promoting home video game consoles. And meanwhile the
consumers were thinking, well, really, the problem here is that
I want something that looks a little better. The arcades
had been getting better and better. The arcade games have

(54:48):
been getting better and better. The arcades themselves would have
their own massive recession, but the home market wasn't getting
better because you were still using the same old console hardware.
If Atari had introduced the hundred a year or two
earlier than it did, then things probably would have been
a lot different, or at least they potentially could have

(55:10):
been a lot different. Instead, it took Nintendo coming over
and introducing the Nintendo Entertainment System to revitalize the video
game market here in the United States. Uh And famously,
when Nintendo did that, they would pair the NES with
a robot in order to try and sell it as
a toy in toy stores because toy stores were not

(55:34):
super eager to hold video game consoles because of the
issues I just said, a lot of the problems that
led to this crash were kind of self fulfilling. It
was this vicious cycle of of issues that collectively created
this market collapse. So, yeah, it's a little too simplistic
to say et killed video games in America. That's not accurate.

(55:59):
It was one aspect of lots of different things that
collectively lead to the dissolution of video games for a
good two years in the United States. In other parts
of the world, by the way, this was not the
case like in Europe and Japan, the video game industry
didn't have this massive recession the way it did here

(56:21):
in the States. But yeah, that is a story about
the three video game crash. Hope you enjoyed it. If
you have suggestions for topics that I should cover in
future episodes of tech Stuff, please reach out to me
and let me know. The best way to do that
is on Twitter. The handle for the show is text
Stuff H s W and I'll talk to you again

(56:44):
really soon. I gotta go over to Jimmy Bob's video
game Emporium first return this broken copy of Pitfall. Text
Stuff is an I Heart Radio production. For more podcasts
from I Heart Radio, visit the i Heart Radio app,

(57:05):
Apple Podcasts, or wherever you listen to your favorite shows.