An excerpt of the cover of Atari's E.T. The Extra-Terrestrial

Excerpt of the cover of E.T. The Extra-Terrestrial, Atari 1982

The Great Video Game Crash - End Game

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Entire Industry, 1983-1984

Food products such as Purina dog food, Coca-Cola and Kool-Aid are all also being hawked by shoddy video game tie-ins. On the music tie-in front, America’s #1 rock band at the time, Journey, struts onto the video game stage with Journey Escape in 1982. Not only is this the first game based on a Rock ‘n Roll band, it also is the first home game that reverses the common trend and moves from the original VCS cartridge by Data Age into a coin-op version by Bally/Midway the next year.  A collection of five game stages, the arcade version of Journey Escape does contain at least one saving grace: digitized images of each band member’s head on the characters, facilitated by a process created by Ralph Baer, creator of the first home video game system, the Odyssey. Unfortunately for Data Age, it ships 400,000 copies of the home game to retailers but only 25,000 sells. Due to stock balancing policies, the rest get sent back and Data Age, on the hook to buy back the unsold games, succumbs to Chapter 11 bankruptcy in mid-1983.

Custer’s Worst Stand

Slipping a bit in its policy of always being on the vanguard of every new media technology, the porn industry enters the fray with games like Mystique’s Custer’s Revenge in 1983, featuring a perpetually aroused General Custer trying to rape an Indian maiden tied to a stake. Helpful instructions for the game, in addition to pointers on “Foreplay” and “Scoring”, offer this P.S. to gaming parents: “If the kids catch you and should ask, tell them Custer and the maiden are just dancing.” Other delightful offerings from Mystique include Bachelor Party and Beat ‘em and Eat ‘em. Atari spokespeople frantically attempt to distance the company from such games, although this doesn’t prevent organizations such as Women Organized Against Rape from picketing Atari headquarters. The Mystique brand is owned by American Multiple Industries, run by Stuart Keston. While he is in New York City showing off his wares at the Hilton, other groups such as Women Against Pornography show their displeasure by demonstrating outside the hotel, holding signs with messages such as “Custer’s Revenge Says Rape Is Fun”. Several lawsuits over the game fly around: American Multiple Industries sue Suffolk County, N.Y., and Suffolk County Legislator Philip Nolan for $11 million, citing a violation of First Amendment rights over the county’s banning of the game. AMI/Mystique itself is sued by Atari over wrongful association, citing the use of the video game giant’s name on packaging for the game. When Mystique bites the dust as the sun sets on the booming video game industry, its dubious IP is picked up by a company called Game Source, who promptly juggle things around in the game, such as put in an arm movement on the native captive to make her seem more acceptive of Custer’s advances, and change the name to Westward Ho. This and other former Mystique games, along with some new ones, are re-released under the Playaround label, sold on double-ender carts such as the Xonox games.

 

With surplus inventory of all these iffy video games piling up into the millions, prices begin to slide. Over 40% of cartridges sold in 1983 are priced at bargain basements rates of around $5, and some retailers throw cartridges into discount dump bins in their stores for as low as a dollar. Atari finds their main source of income drastically reduced as they are forced to lower prices on even their biggest titles to distributors in order to compete. Rivals such as Mattel and Coleco both have to slash the prices of their systems and games in order to deal with the ever-increasing videogame glut.

Same Old Same Old

Combined with this over saturation is growing consumer indifference fostered by the lack of substantial improvements in product lines. Atari, the de facto market leader in video games, has left behind its daring, engineering past with founder Nolan Bushnell’s departure in 1978. It has instead adopted a marketing focus favoured by the suits like Ray Kassar, content to sell what they have as opposed to continued innovation. This attitude is perhaps most glaringly apparent at the start of 1983, with Atari slating $100 million in advertising dollars for the year.  This is more than the company spent the previous year in making video games. The company lets nine years pass after the release of the VCS before introducing the first real technological update to their system line-up with the 7800, and they fill the gap in between with redesigns of the venerable 2600, which admittedly does have a larger game base than all of the other major systems combined. This culminates in the 2600jr., a super-compact redesign that sells for a paltry $50. As a lackluster sequel to the 2600, technologically just an Atari 8-bit computer repackaged as a video game console, the 5200 fails to set the market on fire in 1982. Mattel themselves are unable to come up with a suitable next-gen replacement for the Intellivision, opting instead to release the Intellivision II, offering no new technology over the old Master Component. With rebates, the “new” system’s price is also drastically reduced, retailing for $50 on average. With the prices of their consoles and games slashed, the big three have trouble financing their attempts at snagging a piece of the home computer market, and their various computer projects drain already dwindling profits.

The Home Computer Bytes

The third member of the deadly troika that lays the videogame industry low is the home computer boom in full swing by 1984, fueled by incredibly low prices and a growing library of engaging new computer games. More than $2.3 billion worth of computer software is sold this year. The Apple II is well-established as a gaming platform in the early 80′s, and Atari themselves are in the computer game with their 400/800 8-bit line, but Commodore head Jack Tramiel’s kept promise of a line of under $300 computers creates an explosion of sales as people wonder why they should spend that much on the latest videogame when they can have a functional computer for the same price. The Commodore VIC-20 is the first colour computer to break the $300 price barrier, and at its prime hits 9000 units produced daily. Its successor, the 64, enjoys unmatched success with 22 million units sold. By 1984, Commodore is selling 300,000 computers a month, and there are 4 million Commodore computers in use around the world. Many people, including me, sell their current videogame system (in my case, the ColecoVision) and move to a computer, never to look back at consoles again. Time magazine heralds the arrival of the computer as a popular consumer device by changing their annual Man of the Year award to Machine of the Year and giving it to The Computer, in a cover story dated Jan. 3, 1983.

Commodore 64, the popular home computer from Commodore 1982

The paradigm-shifting Commodore 64

Atari Stumbles

All this combines to deal a death-blow to the video game industry. The high-profile home game failures by Atari, both conceptually and financially, along with a slumping coin-op division, causes Atari owners Warner Communications to shock market analysts on Wednesday, December 8, 1982, by reporting “disappointing” fourth-quarter earnings for their video game division. Earnings will not reach what they did in the fourth quarter of 1981, which were $75.84 million. They do report a 10-15 percent increase in earnings for the year, but this is far below earlier projections. Trying to keep the popping rivets from the hull of the Titanic from scaring people, editor Steve Bloom would use the editorial pages of his Video Games magazine to spin the troubles at Atari as “blown totally out of proportion”. However, Warner’s net income has shrunk 56% compared to the same quarter the previous year, after years of explosive, triple-digit growth for Atari, whose market share in video games has dropped to 56 percent. Net income in the consumer electronics division, of which Atari is by far the largest part, is down to only $1.2 million, compared to $136.5 million the previous year. This is a disastrous 99% drop in money coming in. On Thursday the NYSE halts trading on Warner stock for most of the day, responding to heavy trading. When the dust settles, the company’s stock price has plummetted from $51 7/8 to $34 1/2 in one day, costing $1.3 billion in market valuation. The Dow Jones industrial average loses nearly 10 points as a whole after the Warner announcement. Fears of a looming video game shakeout, which had been forecasted on and off through 1982, seem to have finally been proven right.

Retail buyers and distributors, believing they are finally seeing the bubble burst after years of such predictions, run fleeing like rats abandoning a sinking ship.

 

Soon comes the inevitable rounds of bloodletting, with Perry Odak being relieved of all duties as head of the home video game division at Atari immediately after the Oct. 8 announcement. 1,700 Atari employees get the axe in the first round of mass layoffs in the early part of 1983, representing a quarter of its California-based workforce. The larger part of the company’s manufacturing is moved off-shore to its Hong Kong and Taiwan facilities, in a bid to lower costs. Even with the loss of this overhead, development costs of new gaming and computer hardware are mounting and Atari’s market share in the video game industry is down to 40%, half of what it was in their heyday. An operating loss of $45.6 million in the first quarter of 1983 is reported by Atari, and the company ultimately loses $532.6 million in the fiscal year 1983, bleeding out $2 million daily. In a desperate turn towards their home computer line, at the 1983 Summer CES in Chicago, Atari announces a 5-year deal to hire M*A*S*H star Alan Alda as computer spokesman. Rumours peg the value of the deal at $10 million. Only a total paring of 3,000 Atari employees by the end of the year can staunch the flow for Warner, who post a modest profit at the end of fiscal 1983. Amid this industry downturn is an insider trading scandal dealing with blocks of tens of thousands of Atari stocks sold by Warner’s head Steve Ross, along with Kassar and other Atari executives just previous to the disastrous earnings announcement. In the face of this turmoil, Ray Kassar steps down as Atari Chairman and CEO in July. On September 6, 1983, he is replaced by 41-year-old James J. Morgan, coming off a 20-year stint at Philip Morris where his most recent position had been executive VP of marketing. While at the company he had managed the Parliament, Virginia Slims and Marlboro cigarette brands.

Atari XL computer ad, featuring Alan Alda

Alan Alda shills Atari computers, 1984

 

After taking the reins at Atari, Morgan immediately shuts down the XL computer line, as well as postpones the imminent wide release of the 7800 ProSystem video game console, in order to reassess and retool the company’s product lines. The successful 600XL and 800XL computers are eventually allowed to continue to roll off the assembly line, but the pause in production causes a 40% drop in supply of the popular 800XL over the critical 1983 Christmas season. Morgan attempts to refocus Atari, including a push into the educational market via its Atari Learning Systems division with products such as the AtariLab Starter Set with Temperature/Light Module, priced at $89.95.  This computerized science kit offers kids 4 -12 years-old over 100 experiments to engage in. Morgan also curtails rampant spending, encourages better communication between division heads, and insists that Atari not show any new product to the public that is not ready to ship. Despite these efforts, a spectacular rebound eludes the CEO in the eyes of owners Warner Communications, and Atari ends up being split up and sold off in pieces. The home console and computer divisions of Atari are dumped into ex-Commodore CEO Jack Tramiel’s lap on July 2 of 1984 for $240 million in long term notes, a sum greatly under Atari’s peak value, the deal excluding the coin-op division of the company. The new Tramiel-led Atari Corp. limps through the turmoil under the power of its 16-bit ST home computer line, but the payroll is cut to a bare bones 400 people. Tramiel eventually releases the 7800 ProSystem console in 1986, which had been given a limited release under Morgan two years earlier before being frozen for evaluation by the new CEO. Tramiel also retools the 2600 into the minuscule 2600r., retailing for a mere $50. In 1987, an attempt is made to repackage Atari’s 8-bit computer line into the Atari XE Game System, or XEGS. Essentially a repurposed 65XE 8-bit computer, the console apes the then-burgeoning Nintendo Entertainment System by including a light-gun zapper along with a joystick and also features a detachable computer keyboard.

The XEGS, a video game console and computer hybrid by Atari, 1987

1987 brochure shot of the Atari XEGS, with keyboard and joystick

 

In 1996, Tramiel merges Atari Corp. with hard-drive manufacturer JTS Corporation, who are looking to obtain Atari’s American Stock Exchange listing and become a publicly traded company. In early 1998 JTS sell what’s left of the Atari division to giant toy company Hasbro for $5 million in cash. Atari’s contribution to the home game scene lives on under the Hasbro umbrella, and the mother company wastes no time in exploiting the deep well of ground-breaking Atari classic titles, including a drastic 1999 remake of the game that started the whole industry, called Pong: The Next Level.

Game Over

As goes Atari, so goes the rest of the industry. Retail buyers and distributors, believing they are finally seeing the bubble burst after years of such predictions, run fleeing like rats abandoning a sinking ship. 1982 sees Mattel stock shedding 40% of its value when it reports losses of 195 million dollars, with the company eventually losing a total of $361 million due to their electronics division. After discontinuing the Intellivision early in 1984 Mattel Electronics is sold for the paltry sum of $20 million. Coleco themselves are in hot water with a slide of nine points on the NYSE after the Atari announcement, eventually posting a loss of $258.6 million in 1984. This is mainly due to the tremendous flop made by their ADAM computer line. The Adam and ColecoVision lines are dropped in 1985, and Coleco itself succumbs to Chapter 11 in 1988. There is still a demand registered by consumers for video games, but after the market crash of 83-84, the corporate love-affair with video games vanishes, and no North American company will touch the things with a ten meter joystick. In Kyoto, Japan, however, a little 100-year-old playing card company has plans to hit the reset button.  logo_stop

 

Sources (Click to view; inert links kept for historical purposes)

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B5, Sep 9 1983. “Atari Inc. will lay off 380 employees next week and shift its El Paso manufacturing and assembling operations to plants in Taiwan and elsewhere in the Far East, company officials said Thursday.” “[Bruce] Entin said some of the El Paso plant functions already had been transferred, with some manufacturing of video game cartridges being done in facilities in Puerto Rico.” Retrieved from Google News, Sep 18 2015.  Atari Coin Connection, “James J. Morgan Joins the ‘A’ Team”, edited by Laura Burgess, pg.1, Oct 1983. “Mr. Morgan comes to Atari after a 20-year career with Philip Morris U.S.A….” “He served in a series of marketing positions which culminated in 1978 with his appointment as Executive Vice President of Marketing. As of September 6, he succeeds Raymond E. Kassar…” Retrieved from Pinball Pirate, Atari Coin Connection archive, Sep 17 2015. Video Games Player, “Lights! Camera! Action! Roll ‘em!” by Tony Cohen, pgs. 18-23, Aug/Sep 1983. “A Western, such as 20th Century Fox’s Butch Cassidy and the Sundance Kid, is seemingly tailored for adaptation as a video shoot-’em-up. (Fox Video Games, of course, is doing it.)”. Retrieved from the Internet Archive, Video Games Player collection, Sep 11, 2015. Mace, Scott. “Can Atari Bounce Back?” InfoWorld 27 Feb. 1984: 100. Print. Image of James Morgan with Atari wares. …the company can’t build its new 800XL computer fast enough. Morgan told analysts that Atari could have shipped 40% more computers to waiting retailers, if it had been able to produce them. The 600XL computer also sold well over the Christmas holidays. His [Morgan] first major decision…was not to show any product the company didn’t have ready for shipment. Image of Stan Lee playing Spider-Man with the Green Goblin and Spider-Man from Electronic Fun with Computers and Games, “E.F.G. Times: Spiderman Arrives from Parker”, Feb 1983. 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Rozek, Michael. “The Making of a High-Tech Ad.” Atari Age (Reprinted from Technology Illustrated, 1983) July & aug. 1983: 20-22. Print. Two of the Bel statters behind the Atari commercial were designer-director Clark Anderson and codirector and technical expert John Hughes. And we have the E&S (ebans and Sutherland) machine. Next the Abel team constructed an animatic… so the computer is instructed to display a thicket of tightly packed parallel lines that, at a distance, resembles a solid shape. “…we simply placed color filters between the video screen and our thirty-five-millimeter movie cameras. “It coordinated eighty lighting events in two minues.” For cues, the actor watched the animatic on a hidden video monitor.
Racing the Beam: The Atari Video Computer System, by Nick Montfort and Ian Bogost, pg. 66, The MIT Press 2009 Videogaming Illustrated, “Eye On: Back at the Ranch”, pg. 10, Feb 1983. “Parker Brothers certainly has had a phenomenal start with The Empire Strikes Back videogame: released in June, it has achieved over thirty million dollars in retail sales.” Retrieved from the Internet Archive, Videogaming Illustrated collection, Sep 14 2015. Crawford, Chris. “Old Fart Stories.” Chris Crawford on Game Design. Indianapolis, IN: New Riders, 2007. 438. Print. After the introductions, Howard began his presentation by declaring, This is the game that will make the movie famous.” Electronic Games, “Q&A” by The Game Doctor, pg. 117, Jan 1984. 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Image of dump truck procession at Alamogordo landfill, as well as other information, from Softline, “Infomania, In Memoriam”, pgs. 50-51, Nov/Dec 1983. “Last September 27, fourteen dump trucks moved in solemn procession to the Alamogordo municipal landfill, bearing surplus game cartridges and computer bric-a-brac.” Retrieved from the Internet Archive, Softline collection, Nov 2 2015. 1987 Atari XEGS brochure shot from the JohnClaudi Tumblr Page: http://johnclaudielectronics.tumblr.com/page/10 . Retrieved Aug 15, 2016 Billboard, “Games Help Boost Thanksgiving Sales, by John Sippel, pgs. 1, 68, Dec 11 1982 Image of Tod Frye at the Portland Retro Gaming Expo (PRGE) by Joe Grand “Tradetalk.” Softtalk Dec. 1983: 165-66. Softalk V4n04 Dec 1983. Internet Archive. Web. 25 Feb. 2016. Sirius Software has filed a $20 million suit against Fox Video Games….alleging breach of contract, fraud, and breach of covenant of good faith. 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[From summary of Activision president Jim Levy's speech] 1982…Fifteen million hardware units and 65 million software units were sold.New York Magazine, “Can Atari Stay Ahead of the Game?” by Bernice Kanner, pgs.15-17, Aug 16, 1982 Billboard, “Parker Brothers Releasing 16 New Game Cartridges”, pg. 8, Dec 11 1982 The Sydney Morning Herald (NY Times News Service), “The terrible software wars are only just starting”, by Aljean Harmetz, pg. 8, Jan. 19, 1983 Billboard, “Vid Game Firm Apollo Files Chapter XI”, pg. 66, Dec 4 1982 Image of E.T. touching an Atari joystick was originally referenced from Atari Club Magazin (German), Issue #1 1983, eventual posted ad from Billboard, Oct 16 1982 Lakeland Ledger (Knight News Service), “Solving the mystery maze of video games”, by Jonathan Takiff, pg. 2C, Dec. 9, 1982 Billboard, “Atari Sales Hit Snag; Warner Stock Nosedives”, by Irv Lichtman, pg. 3, Dec 18 1982 MicroTimes, “Free Fall: The Thinker’s Computer Games” by Mary Eisenhart and Bennett Falk, pgs. 12-13, May 1984. 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Cohen, retrieved Jul 28 2014Image of Fox Video Games’ M*A*S*H tent at 1983 Winter CES from Billboard, “CES Photo News”, pg. 64, Jan 22 1983 Billboard, “Movie, Video Giants Join Game Supremacy Battle”, by Jim McCullaugh, pg.4, 68, Jun 19 1982 Videogaming Illustrated, “Eye On: The Force is With Them”, pgs. 10, 60-61, Aug, 1982. “He [Richard Stearns, Director of Marketing at Parker Bros.] admits that Parker Brothers had gone to Intellivision in 1981, offering to make cartridges to complement their system, in exchange for technical information which would have helped get the games out last year. But Intellivision turned them down…” Retrieved from the Internet Archive, Videogaming Illustrated collection, Sept 14, 2015. Antic, “E.T. Game for Computers”, by Robert DeWitt, pgs. 20-21, July 1983 InfoWorld, “An unTimely award”, by David Needle, pg.38, Jan. 31, 1983 Antic, “It’s Official! Atari joins the U.S. Olympic Team” by David F. Barry, pgs. 13-14, Feb 1984 The Sydney Morning Herald (NY Times News Service), “Atari video games take plunge into concrete”, pg. 7, Oct. 3, 1983 Image of the AtariLab from Compute!, “The Promise of Things to Come: Atari’s New Lease On Life” by Fred D’Ignazio and Selby Bateman”, pgs. 44-48, July 1984 Atari Connection, “Home Computer News/ Atari Youth Advisory Board”, by Jim Carr, pgs. 17-18, Summer 1983 Images of the Atari booth at the Jan 1984 CES courtesy of Steven Szymanski Uston, Ken. “Reflections on CES.” Creative Computng Sept. 1983: 224-31. Creative Computing Magazine (September 1983) Volume 09 Number 09. Internet Archive. Web. 25 Feb. 2016. At a “special” press conference, Atari announced that Alan Alda has been signed as Atari’s spokesperson for five years…I was told by the same reliable source…that it’s a $10 million deal. Atari Age, “The Making of a High-Tech Ad”, by Michael Rozek, pgs. 20-22, Vol. 2 Num. 2, Jul./Aug. 1983 Schenectady Gazette (AP), “Smile! Pac-Man Moving Into Millions of Homes”, pg. 30, Mar. 17, 1982 InfoWorld, “Horror films’ themes reappear in video games” by Tom Shea, pg. 67, Feb 28 1983 Billboard, “Dealers Await Formal Video Games Return Policy”, by Earl Paige, pgs. 1, 21, Jan 8 1983 Videogaming Illustrated, “Eye On: Atari Finds the Lost Ark”, pgs. 10, 60-61, Aug, 1982. “This November, Atari will be releasing a new home videogame based on the hit motion picture Raiders of the Lost Ark.” Retrieved from the Internet Archive, Videogaming Illustrated collection, Sep 14, 2015.  “Atari Relieves Executive of Duties.” The New York Times. N.p., n.d. Web. 21 July 2017. Perry D. Odak, the president of the home video game division of Atari Inc., has been relieved of all his duties, the company announced yesterday.

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Comments >>

  1. avatarSawdust

    Enjoying reading your video game history. What is the “one special exception” mentioned in the shutdown of Atari game development?

    Reply
  2. avatarThomas

    Hello, I’m currently writing a paper on the topic of the Atari video game crash. I was wondering if you wouldn’t mind emailing me some of your sources/information regarding this topic? I definitely enjoy researching this idea, but there does not seem to be enough information online for me to write an effective paper.

    Thank you.

    Reply
    1. avatarWilliam

      You can find all the sources at the bottom of the final page of the article, by clicking the Sources tab. Glad you find the site useful, and I wouldn’t mind reading your paper when it’s finished.

      Reply

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