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Video game crash of 1983
The video game crash of 1983 (known in Japan as the Atari shock) (ADDED CITATION) was a large-scale recession in the video game industry that occurred from 1983 to 1985, primarily 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. This along with waning interest in console games in favor of personal computers. Home video game revenues peaked at around $3.2 billion in 1983, then fell to around $100 million by 1985 (a drop of almost 97 percent). 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.

Flooded console market
The Atari Video Computer System (renamed the Atari 2600 in late 1982) was not the first home system with swappable game cartridges. By the early 1980s, 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 its 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 Atari 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 videogame 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, 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.

Lack of consumer confidence
Prior to 1982, Atari was considered the dominant company in the home video game industry, but as described above, new players in the hardware market and the loss of publishing control caused the company to slip from its dominant position. During 1982, Atari took several missteps in trying to regain its dominance that caused the market and consumers to lose confidence in the company and in turn the video game industry as a whole. One factor was around certain games Atari chose to publish, as by this point, with the company owned by Warner Communication, it was more focused on business opportunities rather than innovation. Many of its executives were MBAs, and looked for any business opportunity that would give them an edge over other third-party game publishers. Coleco's deal with Nintendo for Donkey Kong was a major threat to Atari. Atari had had past success with its own licenses of arcade hits ported to the Atari VCS, but also had begun to look for other lucrative licensing opportunities that they could differentiate themselves from other companies. Two games released in 1982, often cited retrospectively as major contributors to the crash, contributed to weakening Atari's consumer confidence: Pac-Man, and E.T. the Extra-Terrestrial. The Atari VCS port of the arcade hit Pac-Man was released in March 1982 and was critically panned, with its graphics cited as particularly poor. While some vendors canceled orders, most of the large retailers continued to sell the game, and Atari sold seven million units in 1982. Still, the quality issues hurt the Atari brand and led some consumers to ask for refunds. E.T. the Extra-Terrestrial was developed by Howard Scott Warshaw in only six weeks under rush orders at Atari's direction to meet the sales for the 1982 Christmas season after Atari had secured the rights to the film for about US$20 to 25 million. ADDED CITATION E.T. was a top-selling video game in late 1982 and early 1983 according to Billboard, selling 2.6 million copies by 1983, but also was met with lackluster reviews across the industry, with "primitive" graphics and "dull" gameplay. In 1983 returns outstripped sales by 660,000 units.

The combined impact of the underperforming sales and poor quality of Pac-Man and E.T. reflected on Atari as it caused consumers to become wary of the company's future products, leading to a slowdown in sales entering 1983. Atari attempted to improve future arcade and licensed game ports to draw back consumers, such as the Ms. Pac-Man port which was more positively received by critics. However, they were unable to capture similar sales numbers as prior to 1982.

Immediate effects
With the release of so many new games in 1982 that flooded the market, most stores had insufficient space to carry new games and consoles. As stores tried to return the surplus games to the new publishers, the publishers had neither new products nor cash to issue refunds to the retailers. Many publishers, including Games by Apollo and U.S. Games, quickly folded. Unable to return the unsold games to defunct publishers, stores marked down the titles and placed them in discount bins and sale tables. Recently released games which initially sold for US$35 (equivalent to $99 in 2021) were in bins for $5 ($14 in 2021).

The presence of third-party sales drew the market share that the console manufacturers had. Atari's share of the cartridge-game market fell from 75% in 1981 to less than 40% in 1982, which negatively affected their finances. The bargain sales of poor-quality titles further drew sales away from the more successful third-party companies like Activision due to poorly informed consumers being drawn by price to purchase the bargain titles rather than quality. By June 1983, the market for the more expensive games had shrunk dramatically and was replaced by a new market of rushed-to-market, low-budget games. Crane said that "those awful games flooded the market at huge discounts, and ruined the video game business".

A massive industry shakeout resulted. Magnavox abandoned the video game business entirely. Imagic withdrew its IPO the day before its stock was to go public; the company later collapsed. Activision had to downsize across 1984 and 1985 due to loss of revenue, and to stay competitive and maintain financial security, began development of games for the personal computer. Within a few years, Activision no longer produced cartridge-based games and focused solely on personal computer games. Atari was one of those companies most affected by the crash. As a company, its revenues dropped significantly due to dramatically lower sales and cost of returned stock. By mid-1983, the company had lost US$356 million and was forced to lay off 3,000 of its 10,000 worker staff. Atari also laid off 30 percent of its ten thousand employees, and moved all manufacturing to Hong Kong and Taiwan. Unsold Pac-Man, E.T. the Extra-Terrestrial, and other 1982 and 1983 games and consoles started to fill their warehouses. In September 1983, Atari discreetly buried much of this excess stock in a landfill near Alamogordo, New Mexico, though Atari did not comment about their activity at the time. Misinformation related to sales of Pac-Man and E.T. led to an urban legend of the Atari video game burial that millions of unsold cartridges were buried there. Gaming historians received permission to dig up the landfill as part of a documentary in 2014, during which former Atari executive James Heller, who had overseen the original burial clarified that only about 728,000 cartridges had been buried in 1982, backed by estimates made during the excavation, and disproving the scale of the urban legend. Atari's burial remains an iconic representation of the 1983 video game crash. By the end of 1983, Atari had over US$536 million in losses, leading to Warner Communication to sell Atari's consumer products division in July 1984 to Jack Tramiel, who had recently departed Commodore International. Tramiel's new company took the name Atari Corporation, and the directed their efforts into developing their new personal computer line, the Atari ST, over the console business.

Lack of confidence in the video game sector caused many retailers to stop selling video game consoles or reduced their stock significantly, reserving floor or shelf space for other products. Retailers established to exclusively sell video games folded, which impacted sales of personal computer games.

The crash also affected video game arcades, which had had several years of a golden age since the introduction of Space Invaders in 1978 but was waning by 1983 due to the expansion of home consoles, the lack of novel games, and undue attention to teenage delinquency around video game arcades. While the number of arcades in the United States had doubled to 10,000 from 1980 to 1982, the crash led to a closure of around 1,500 arcades, and revenues of those that remained open had fallen by 40%.

The full effects of the industry crash were not felt until 1985. Despite Atari's claim of 1 million in worldwide sales of its 2600 game system that year, recovery was slow. The sales of home video games had dropped from $3.2 billion in 1982 to $100 million in 1985. Analysts doubted the long-term viability of the video game industry, and, according to Electronic Arts' Trip Hawkins, it had been very difficult to convince retailers to carry video games due to the stigma carried by the fall of Atari until 1985.

Two major events of 1985 helped to revitalize the video game industry. One factor came from increased sales of personal computers from Commodore and Tandy, which helped to maintain revenue for game developers like Activision and Electronic Arts, keeping the video game market alive. The other was the initial limited release of the Nintendo Entertainment System in North America in autumn 1985, followed by the full national release the following spring. Following 1986, the industry began recovering, and by 1988, annual sales in the industry exceeding $2.3 billion with 70% of the market dominated by Nintendo. In 1986, Nintendo president Hiroshi Yamauchi noted that "Atari collapsed because they gave too much freedom to third-party developers and the market was swamped with rubbish games". In response, Nintendo limited the number of titles that third-party developers could release for their system each year, and promoted its "Seal of Quality", which it allowed to be used on games and peripherals by publishers that met Nintendo's quality standards.

The end of the crash allowed Commodore to raise the price of the C64 for the first time upon the June 1986 introduction of the Commodore 64c—a Commodore 64 redesigned for lower cost of manufacture—which Compute! cited as the end of the home-computer price war, one of the causes of the crash