Once upon a time, Atari was the name in video games. Sure, there was the Colecovision and Intellivision, but Atari was the dominant force in the late ‘70s and early ‘80s. But that all came to an abrupt end in the mid ‘80s with a huge recession in the industry which is known as the Video Game Crash.
In 1979, Activision became the first third-party video game publisher, publishing games to work on Atari’s consoles. This cut Atari out of the sales loop, and they sued Activision, but failed to get an injunction and settled in 1982. This legitimized 3rd party publishing, and dozens of companies jumped into development for video games. Some companies, like Activision, published games that were as good as Atari’s own. But the overall quality of games dipped as supply grew, hurting the reputation of video games in general.
The release of so many games in 1982 completely flooded the market, to the point where stores had to start picking and choosing which games to carry. Publishers started to go bankrupt when stores stopped carrying their products, and their unsold games - previously selling for around $35 - were in bargain bins for $5 or less. This actually spurred the sales of those games, to the detriment of new games by Atari. Prompted by this, Atari started selling cheaper, rushed-to-market games, like the infamously bad game tie-in for the movie E.T. This all had a ripple effect in the whole industry, as investors pulled out of the industry altogether.
The crash was fast and hard. In 1983, revenues in the video game market were up to $3.2 billion. By ‘85, sales had fallen nearly 97 percent to around $100 million. This put the American video game industry on life support, leaving an opening for Japanese companies like Nintendo to come in, with their strict licensing for games on their system so they could control the number and quality of games released.