Atari Corp. President Sam Tramiel remembers well the video game crash of 1983.
As sales of the hugely popular Atari 2600 game machine plunged to half of their peak of a year earlier, the Commodore 64--the low-cost home computer sold by his father's company, Commodore Business Machines--was selling in record numbers, largely at Atari's expense. The Tramiels left Commodore to take over the troubled game company the following year, and have been trying to resuscitate it ever since.
A decade later, following the industry's meteoric resurrection--crafted by Nintendo and Sega in the second half of the 1980s--some industry observers say history may be about to repeat itself.
As Americans buy personal computers and CD-ROM drives like never before, sales of Sega and Nintendo's 16-bit video game machines--which together have made their way into 30 million American homes--are expected to be off as much as 15% this Christmas season compared to last. Sales of game cartridges are forecast to be flat.
Several next-generation game machines, which promise to incorporate newer technology and faster microprocessors, have not yet reached the market. And those that have, such as the 3D0 Multiplayer and Philips Electronics' CD-I, are more than double the $130 base price of a Sega Genesis or Super Nintendo Entertainment System. Many consumers are choosing to wait till next year.
Moreover, analysts say the PC market is already siphoning off nearly 15% of video game sales. Equipping a personal computer to play CD-ROM software costs about $250--and by the end of the year over 5 million American households are expected to own multimedia-capable PCs.
"The market is definitely in a transition period between generations of technology," said multimedia analyst Bruce Ryon of Dataquest, a market consulting firm in San Jose. "And it's not clear how deep the trough is going to be."
No one expects the dip this time around to be as dramatic as the infamous Atari bust of 1983. But the break in the industry's relentless climb will likely mean that Sega Enterprises and Nintendo Co. will have to share the market to new competitors like Sony Corp. and 3DO, and perhaps an old competitor like Atari.
It will mean a shakeout among game developers who don't have the financial strength to weather the transition. And it may mean that the video game industry loses a key set of consumers--at least for a time.
The shifting currents in the video game business also come at a time when dozens of new players are trying to get into what has been the lucrative business of publishing games. Every Hollywood studio has made significant investments in game publishing over the last two years--and some of them may soon find that it's not such an easy business.
Fox Interactive's first cartridge title based on the "Pagemaster" movie, for example, is reportedly selling poorly.
"This represents our belief that the video game market is here to stay," said Steve McBeth, chief of the new interactive division the Walt Disney Co. announced earlier this week. "But unfortunately there is this platform war--we know there are going to be a few bumps along the way."
Industry veterans like Tramiel point to the transition from Nintendo's original 8-bit game system to the 16-bit systems prevalent today as proof that consumers are dedicated to upgrading their interactive consumer electronics.
"It's not a crash," says Tramiel, "It's a pause. When the Atari 2600 went down, it wasn't that the industry crashed, it was that a different machine came into play. And that's what's going to happen now."
Tramiel hopes the Atari Jaguar is that machine. Using a 64-bit processor--the fastest on the market--the Jaguar has received positive reviews, but few games are available to play on it.
Other competitors in the market for next-generation machines include Sony's 32-bit Playstation, Nintendo's Ultra-64, and Sega's Saturn, all due sometime next year. This Christmas, Sega is also marketing an adapter to the Genesis called 32-X, which makes for faster game play. And next spring Nintendo plans to release a 32-bit portable game player called "Virtual Boy."
But some game developers and analysts are more wary of the current transition. Sega and Nintendo kept the price of their 16-bit systems below $200, for one thing, while most of the next-generation machines are expected to initially cost $250 and up--beyond what has traditionally been able to garner high-volume sales.
There are more competitors this time, too. "How can you possibly support all those platforms?" asks one game developer. "It's impossible. You can't. You just have to bet on a few."
And analysts say that by the time the advanced technology becomes available on game machines that hook up to the television, young children will have already become accustomed to playing games and using educational software on the PC--and parents may see no reason to switch.
"The younger kids are used to playing PC entertainment and educational titles," said Keith Benjamin, who follows the industry for Robertson Stephens, an investment firm in San Francisco. "We suspect parents may be holding off on video game platforms for them."
Benjamin noted that several video game titles aimed at young kids this season, including the most recent in Sega's hit "Sonic" series, "Sonic and Knuckles," have done poorly.
Microsoft Corp., for one, is making a big push to woo children who may not have been exposed to video games yet. The firm's multimillion-dollar advertising campaign for its new "Microsoft Home" line of CD-ROM software includes, among other things, a 45-foot-long "ExplorasauraBus" currently making a nationwide tour.
Traditional video game developers are plowing more money into development of CD-ROMs for the PC market, too. San Mateo-based Electronic Arts spent nearly $5 million developing "Wing Commander III," a flight-simulation game for the PC with live action video "starring" actor Mark Hamill of "Star Wars" fame.
"CD-ROM games will be 20% to 25% of our total revenue this year, up from 2% last year," said Bing Gordon, EA's executive vice president. "That's a dramatic change."
To be sure, the video game business, even in decline, is not to be sneezed at. Nintendo expects to sell a whopping 2.5 million of its just-released "Donkey Kong Country" game for the Super NES--enhanced by sophisticated computer programming to look far more realistic than other NES games--by the end of the year in the United States alone.
"In my mind, we have to take a cue from the traditional linear media business," said Robert Kotick, chairman of Los Angeles-based Activision, whose main Christmas offering, "Pitfall," is, ironically enough, recycled from its days as a hit on the Atari 2600.
"Our strategy is to do 10 of the biggest-budget, highest production value games, and market the crap out of them," he said. "The key to our future is mass media exploitation of characters and stories that go beyond our medium. Video games have to become the place where new concepts in pop culture start, not end."
Sales of video game hardware and software appear to have peaked, while sales of personal computer CD-ROM games are growing sharply. Sales, in millions of units:
Note: 1994 and 1995 figures are estimates.
Source: Jefferies & Co.