The video game crash of 1983, sometimes called the Atari shock in Japan, was a major decline in the video game industry in the United States between 1983 and 1985. This decline was caused by several problems, such as too many video game consoles and games being available, many of which were not well-made. People also became less interested in console games and started preferring personal computers instead. Video game sales at home reached their highest point in 1983, with about $3.2 billion in revenue (equal to $10.34 billion in 2025), but dropped to about $100 million in 1985 (equal to $299.35 million in 2025), a decrease of nearly 97%. This event ended what is now called the second generation of console video games in North America. The arcade video game market also declined slightly, as the golden age of arcade games came to an end.
Lasting about two years, the crash caused many companies that made home computers and video game consoles to go out of business. Experts at the time questioned whether video game consoles and games could remain popular in the long term.
The North American video game console industry recovered a few years later, largely because of the success of Nintendo’s Nintendo Entertainment System (NES), which was released in October 1985. The NES was created to avoid the mistakes that led to the 1983 crash and to improve the negative reputation of video games at that time.
Causes and factors
The Atari VCS, which was later called the Atari 2600 in 1982, was not the first home system with game cartridges that could be swapped out. However, by 1980, it was the most popular second-generation console. Launched in 1977, the Atari VCS came out just before the market for home Pong console clones collapsed. For its first few years, the system sold only a small number of units. In 1980, Atari released a licensed version of the game Space Invaders from Taito. This game became the console’s most successful title, causing sales of the VCS to more than double. It was also the first game to sell over a million copies. Because of the VCS’s success, other consoles were introduced, including the Odyssey², Intellivision, ColecoVision, Atari 5200, and Vectrex. Coleco even made an add-on that allowed Atari VCS games to be played on the ColecoVision. Coleco also sold the ColecoVision with a licensed version of Donkey Kong, a popular Nintendo arcade game. In 1982, the ColecoVision held about 17% of the hardware market, compared to the VCS’s 58%. This was the first real challenge to Atari’s dominance in the home console market.
Each new console had its own collection of games made only by the company that made the console. The Atari VCS also had many games created by outside developers. In 1982, experts noticed signs of market saturation, saying that too many new games were being made, that stores had too much space for consoles, and that falling prices for home computers could cause big changes in the industry. Atari had a large amount of unsold products after many 1982 orders were returned.
The fast growth of the video game industry led to higher demand, but manufacturers made too many products. In 1983, an analyst from Goldman Sachs said that demand for video games had increased by 100% from the previous year, but production had grown by 175%, creating a large surplus. Atari’s CEO, Raymond Kassar, recognized in 1982 that the industry was nearing a point where demand would no longer grow. Kassar thought this would happen when about half of American households had a video game console. However, the market crash happened when about 15 million consoles were sold, which was far below Kassar’s prediction. Michael Katz, president of Atari’s electronic division, said the market was too crowded, as 30 million consoles were sold by 1982, even though there were only 35 million households with children aged six to sixteen.
Before 1979, no outside companies made games for consoles. Companies like Atari created all the games for their systems. This changed in 1979, when Activision was formed by four former Atari programmers. These programmers left Atari because they wanted to be recognized and paid fairly, like actors or musicians. Activision made their own games and produced cartridges. Atari tried to stop Activision from selling their games but failed. In 1982, they reached a settlement where Activision agreed to pay royalties to Atari. This case helped prove that outside companies could successfully make games for consoles. Activision’s games, such as Pitfall! (released in 1982), were very popular and sold over four million copies.
Before 1982, Activision was one of only a few outside companies making games for the Atari VCS. By 1982, Activision’s success encouraged many other companies to enter the market. However, some of these new companies were backed by investors who wanted to copy Activision’s success. Without Activision’s experience, these companies often made low-quality games. Activision’s co-founder, David Crane, said these games were “the worst games you can imagine.” Activision’s success came from their team’s experience with the Atari VCS, while other companies lacked this advantage.
The growth of the third-party game industry was clear at the Consumer Electronics Show (CES). According to Crane, the number of outside developers at CES increased from 3 to 30 between two events. At the Summer 1982 CES, 17 companies, including MCA Inc. and Fox Video Games, announced 90 new Atari games. By 1983, about 100 companies were trying to use CES to enter the market. AtariAge recorded 158 different companies that made games for the Atari VCS. In June 1982, there were about 100 Atari games on the market, which grew to over 400 by December. Experts predicted that in 1983, only 10% of games would make 75% of sales.
In December 1982, BYTE magazine said, “few games broke new ground in either design or format… If the public likes an idea, it is used until it is exhausted, and many copies of the same game soon fill the shelves.” In January 1983, Bill Kunkel said companies had “licensed everything that moves,” and questioned how games could be tied to movies like Marathon Man. By September 1983, The Phoenix stated that Atari 2600 cartridges were “no longer a growth industry.” Activision, Atari, and Mattel had skilled programmers, but many new companies lacked the talent to make good games. Examples of unsuccessful games included Lost Luggage (similar to Kaboom!), Journey Escape (a rock band tie-in), and Dishaster (a plate-spinning game).
The large number of new games was released into a market that could not support them. Activision’s Jim Levy estimated that the total cartridge market in 1982 would be about 60 million. He thought Activision could sell 12% to 15% of those. However, with at least
Immediate effects
In 1982, many new video games and consoles were released, creating an oversupply. Stores struggled to display all the games and consoles, and many had to return the extra items to publishers. However, the publishers could not refund the stores because they lacked money or new products. Companies like Games by Apollo and U.S. Games went out of business. Unable to return the unsold games to these closed publishers, stores sold the games at lower prices in discount bins and sale tables. Games that originally cost $35 (equivalent to $116 in 2024) were sold for as little as $5 ($16 in 2024).
Third-party companies, which sold games for consoles, gained a large share of the market. Atari’s share of the cartridge-game market dropped from 75% in 1981 to less than 40% in 1982. This hurt Atari’s finances. Poor-quality games sold at low prices attracted buyers who ignored better-quality games from companies like Activision. By June 1983, the market for expensive games had shrunk, and low-budget, rushed games became more common. Crane stated, "Those bad games flooded the market at huge discounts and ruined the video game business."
Many companies faced major challenges. Magnavox left the video game industry entirely. Imagic canceled its planned public stock offering and later collapsed. Activision had to reduce its workforce in 1984 and 1985 due to lost income. To stay competitive, Activision began creating games for personal computers instead of cartridges.
Atari suffered heavily from the crash. Its revenue dropped due to lower sales and high costs from returning unsold items. By mid-1983, Atari had lost $356 million, laid off 30% of its 10,000 employees, and moved manufacturing to Hong Kong and Taiwan. Warehouses filled with unsold games, including Pac-Man and E.T. the Extra-Terrestrial. In September 1983, Atari secretly buried about 728,000 unsold cartridges in a landfill near Alamogordo, New Mexico. This event became the basis for an urban legend that claimed millions of cartridges were buried there. In 2014, a documentary confirmed the actual number of buried cartridges. By the end of 1983, Atari had lost over $536 million, leading Warner Communications to sell its consumer division to Jack Tramiel. Tramiel’s new company, Atari Corporation, focused on personal computers instead of consoles.
Lack of confidence in video games caused many retailers to stop selling consoles or reduce their stock. Stores that specialized in video games closed, which hurt sales of personal computer games.
The full impact of the crash became clear in 1985. Although Atari claimed to have sold 1 million units of its 2600 system that year, recovery was slow. Home video game sales dropped from $3.2 billion in 1982 to $100 million in 1985. Analysts questioned the future of the industry, and retailers were hesitant to carry games due to the stigma of Atari’s collapse.
In late 1985, Nintendo released its Entertainment System in North America, with a full release in 1986. The industry began recovering, and by 1988, sales reached $2.3 billion, with Nintendo controlling 70% of the market. Nintendo president Hiroshi Yamauchi noted that Atari failed because it gave too much freedom to third-party developers, leading to poor-quality games. In response, Nintendo limited the number of games third-party companies could release and introduced a "Seal of Quality" to ensure game quality.
Long-term effects
In 1983, a major event called the "video game crash" had the biggest effect in the United States. This event influenced all parts of the global video game market, but sales in Japan, Europe, and Canada stayed strong even as American companies struggled. It took several years for the U.S. video game industry to recover. The worldwide video game market, which was worth about $42 billion in 1982, dropped to around $14 billion by 1985. During this time, there was a change in the home video game market, with fewer people buying consoles and more people choosing personal computer games instead.
In 1984, some long-term effects of the crash began to hurt the video game console industry. Companies like Magnavox decided to leave the console business. Many people believed that video games were only a short-lived trend. However, outside of North America, the video game industry was doing well. In Japan, home consoles became more popular, while in Europe, home computers grew in use.
U.S. video game sales dropped from $3 billion to about $100 million in 1985. During the holiday season of 1985, Hiroshi Yamauchi, a leader at Nintendo, visited small markets in New York to encourage stores to sell Nintendo products. Minoru Arakawa, another leader at Nintendo, promised stores they could return unsold products for a refund. Nintendo sold 50,000 units in the United States, which was about half of the units they sent there.
The U.S. video game crash had two long-lasting effects. First, the leading role in the home console market shifted from the United States to Japan. Although the crash did not directly harm the financial health of Japan’s video game market, it still caused unexpected changes there, which became known as the "Atari shock."
Before the crash, Jonathan Greenberg of Forbes predicted in 1981 that Japanese companies would eventually take over the North American video game industry. This was because American companies were increasingly working with Japanese companies, who were also opening offices in North America. By 1982–1983, Japanese companies had taken a large share of the North American arcade game market. Gene Lipkin of Data East USA said this happened partly because Japanese companies had more money to invest in new ideas.
As the crash happened in the United States, Japan’s game industry began focusing more on home consoles instead of arcade games. On July 15, 1983, two new home consoles were released in Japan: the Nintendo Family Computer (Famicom) and Sega’s SG-1000 (which was later replaced by the Master System). These consoles marked the start of the third generation of home consoles. They became very popular in Japan during an economic boom. These consoles sold more units than Atari and Mattel’s systems, and because Atari and Mattel were focused on fixing their own sales problems, Japanese consoles had little competition. By 1986, 6.5 million Japanese homes, or 19% of the population, owned a Famicom. Nintendo then began sending the Famicom to the United States, where the home console market was just starting to recover from the crash.
The biggest challenge Nintendo faced when trying to sell the Famicom in the United States was the impact of the crash on the retail sector. A planned deal with Atari to sell the Famicom in North America failed after the crash. This forced Nintendo to handle the Famicom’s international release on its own two years later. Retailers were also hesitant to sell video games, which led Nintendo to rename its product the "Nintendo Entertainment System" (NES) instead of calling it a "video game system." Nintendo used terms like "control deck" and "Game Pak" and created a toy robot called R.O.B. to convince toy stores to carry the NES. The NES also had a front-loading cartridge slot, similar to how video cassette recorders were used, to make it look more like a toy than a video game console.
By the late 1980s, the U.S. video game market had recovered, and the NES became the most popular console in the United States, leaving only a small part of the market for Atari. By 1989, home video game sales in the United States reached $5 billion, which was higher than the $3 billion peak from the previous generation. Nintendo controlled most of the market, selling more than 35 million units in the United States. New Japanese companies, like NEC with the TurboGrafx-16 and Sega with the Genesis, entered the U.S. market in 1989. While the TurboGrafx-16 did not do well, the Genesis’ release started a major competition between Sega and Nintendo in the early 1990s.
A second major result of the crash was the introduction of rules to control the development of video game software by companies outside of Nintendo. Earlier efforts to keep secrets failed because rival companies copied the designs of Mattel and Atari systems and hired their programmers. Mattel and Coleco tried to stop this by using special security measures, but the Atari 2600 had no protection, and once its design was known, anyone could make games for it. Nintendo responded by creating a strict licensing system for the NES, which included special chips in the console and game cartridges to prevent unlicensed games from working. These chips also helped stop software piracy, which was a bigger problem in East Asia than in North America or Europe. Similar security systems are still used today, but instead of chips, modern consoles use special optical discs that are hard to copy. Some companies, like Accolade, challenged these rules in court, but they eventually agreed to follow Nintendo’s licensing requirements. Other companies, such as Tengen (Atari Games), Color Dreams, and Camerica, also tried to make unlicensed games for the NES during the 8-bit era.
At first, Nintendo was the only company that made games for the Famicom. However, under pressure from companies like Namco and Hudson Soft, Nintendo allowed other companies to develop games for the Famicom. These companies had to pay a 30% fee for each game they made, a system still used by console makers today. Nintendo also required companies to pay for all games before they were made and did not allow returned cartridges, which made companies take full financial responsibility for their sales. Nintendo limited most third-party companies to making only five games per year on its systems, though some companies tried to get around this by using different labels. Nintendo later removed this rule in 1993 after releasing the Super Nintendo Entertainment System. Nintendo’s strict control over Famicom game production led to the creation of illegal copies of games in Asia. To help customers identify official games, Nintendo added a "Nintendo Seal of Quality" to licensed games outside of Japan. However, this did not significantly reduce the sale of fake games.