The Home Video Game Industry: Atari Pong to the Nintendo Wii

Many people of today remember how video games began the decay of the physical and mental well-being of the world’s youth since the inception of the Atari game Pong in 1974. What Atari creator Nolan Bushnell did not realize back then was that when he invented this wildly successful creation it would leave such a large imprint on society; physically, mentally and emotionally. Many youths of today are more apt to spend a whole weekend hosting a video game marathon of the more popular First Person games like Halo or Call of Duty than they would being outside playing real games like tag football, baseball or basketball with their friends. Video games was the initial segue in to the technological boom but at what cost? Despite experiencing huge financial success, video games have been rotting youthful minds since 1974 and counting.

In the first year of official retail production with Sears, Atari sales topped $450 million in 1975. Following this notable success Atari began struggling with knockoff manufacturers and faced new competition entering the market. While the Atari game console was patented, the concept was not and this allowed a market without barriers to entry for new companies with investors chomping at the bit to get their piece of the action for an obvious money maker in a newly established market. Initially Atari faced competitors like Coleco, Commodore64 and Intellivision who saw some success but were unable to compete with the price point that Atari was able to produce. Feeling that their products were superior to the expanding Atari competitors placed their systems in price points outside of the average consumer and targeted the upper middle class consumers with a price tag averaging $499 compared to the Atari console price of around $199. Game cartridges averaged around $20 for Atari and competitors offered their then superior graphic driven games around $35 per cartridge. By 1983 Atari had saturated the consumer market with more than 20 million units sold.

While Atari was experiencing seemingly exponential growth they would soon experience a devastating blow to their production capabilities. Atari held a non-exclusive agreement with Nintendo, developers of one of the most popular video games to ever hit the market, Donkey Kong, and Nintendo was looking to expand their market exposure by offering their services to Atari’s most aggressive competitor Coleco. Following this blow to Atari’s success the market experienced a blow-out due to over saturation in 1983. Atari’s sales plummeted from over $3 billion to just under $100 million in less than 9 months. A key factor in this devastating loss was an over surplus of game cartridges of approximately 20 million. The retail value of the cartridges exceeded $600 million forcing Atari to sell their surplus at a near loss in 1983 for a mere $4 per cartridge, a $31 per cartridge deficit. It is believed that this loss was not due to a lack of interest from consumers but from bad business practices by Atari.

While Atari was experiencing a loss another home video game company was experiencing a major shift in market share. Nintendo had arrived and it was about to take its place on top of the game cartridge heap. Nintendo wanted to do more than just offer another video game system. They desired to improve upon Atari’s base model and offer it at a lower price point of around $75 for the console and $15 for cartridges. In order to improve on the Atari model they first created a new innovation in video technology. Nintendo began using a 2 chip set board, one for processing the data and one for communicating the video to increase frame rates of video games. The additional chip allowed for consumers to create save-points during their gameplay so that they could return at the same place at a later time, a technology advancement that Atari was not able to accomplish until after Nintendo released it to the market. This innovation created a faster gameplay option for consumers creating a frenzy in the video game market.

Consumers began placing their Atari game systems in a box on the shelf and replacing those systems with the newer faster Nintendo system and a lower cost. Nintendo saw such a huge success that they were able to transition in to an unprecedented market of system and game rentals with then popular video rental mogul Blockbuster Video. Nintendo managed to capture more than just a huge market share, they were able to capture that market share with a great deal of value to not only consumers but to the video game industry as a whole.

As is the fate of all things great Nintendo would soon be challenged by the rapidly penetrating competitor SegaGames. Sega upped the ante by installing more random access memory in to their game systems with a 16-bit processor making their games perform even faster than the existing 8-bit processor Nintendo product line. In addition to offering this new technology Sega realized that a game system can only be as successful as the games it can play. The result of this realization inspired the development and release of the insanely popular video game “Sonic the Hedgehog”. Sonic games were fast paced and allowed players to begin establishing advanced hand-eye coordination. Sega felt a brief level of success until Nintendo released their new and improved Nintendo SNES (Super Nintendo Entertainment System). Nintendo went the extra step by making sure that it had a wide variety of games to accompany their new 16-bit game system. Consumers loyal to Nintendo but impressed with the game play offered by the Sega game system were left conflicted because it was not commonplace for consumers to own more than one gaming system at the time.

Following the release of the Nintendo SNES a competitive war began with Sega inspiring the release of the Sega Genesis Game System followed by the release of the Nintendo64 gaming system. By the beginning of 1993 analysts estimate that Genesis held approximately 60% of the market share while Nintendo held the remaining 40% share leaving no room for an easy market entry for prospective developers of new gaming system.

Even though the barriers to entry were limited where there is a will there is a way. Up and coming game producer 3DO Systems, founded by creator of the successful EA games Trip Hawkins, discovered that the next level of game system production was to place games on CD’s and dispose of the antiquated cartridge based systems. Hawkins matched Bushnell’s advancement and had paved the way for a new way to play video games. Compact discs held the capacity of holding a much greater deal of memory of approximately 700Mb versus the limited 10Mb capacity of cartridges. As memory size expanded video games became more complex and detailed. True video games had finally
found their way in to the hands of computer manufacturers.

This newly innovative advancement had its drawbacks. Eager to develop the next level of gaming 3DO had to be sure that it would have a huge success in the launch of its first product. The research and development of its first game exceeded a price tag of $2million and took as long as 24 months to develop. This movement forever altered the economic dynamics of the video gaming system. In the mid 1990’s still active competitor Sega released its first CD-ROM based system Sega Saturn but not until after the first 3DO system had come to market for a hefty price point of $700. Sega had beaten 3DO to market with their gaming system by offering a CD-ROM add on to the Sega Genesis for approximately $300 for the upgrade until it could successfully launch the Sega Saturn in 1995. Because gamers wanted to wait for the real deal product the add-on saw little success. The unsuccessful launch was contributed primarily due to the fact that in Sega’s rush to market they failed to apply the most basic practice of providing games that consumers actually wanted to play versus pushing less complex games compared to that of 3DO.

By the fall of 1995 Sony entered the video gaming market by introducing the first of its successful gaming system products the Sony Playstation. The Playstation offered a 32-bit RISC microprocessor with a 2x speed CD-ROM player and a 33 MHz processor. At its time the Playstation was all the craze because of the availability of titles and the speed at which they could be played and all at affordable prices. To ensure that Sony’s market penetration would continue growing Sony did the unthinkable by permanently reducing the prices of their gaming systems from its launch price of $350 to $199 per system and reducing games to $29.99 per title. The impact was significant as consumers rushed to their local retailer to take advantage of the price cuts as soon as the cuts were announced. Sales surged by more than 1000% overnight. In order to continue competing with the Sega Saturn system Sony cut its prices even further to $149 per gaming system. This tactic allowed Sony to secure more than 60% of the market share above all other competitors. Believing that they held the superior product gaming system manufacturer 3DO failed to apply the most common theory in economics where lower price levels drive demand and as a result would cause the ultimate demise of the briefly lived success of 3DO in the gaming system market. Following the discontinuation of the 3DO gaming system, 3DO would resume their place in the market from a programmer and distribution level as opposed to a manufacturer position.

Not long after the release of the Sony Playstation and in response to the release of the Nintendo64 gaming system, Sega upped their game by producing one of the first 128-bit gaming systems in the Sega Dreamcast. By mid-2000 Sony responded to the Dreamcast by introducing the Playstation2. In order to compete with the release of the PS2 Sega responded by announcing price cuts from $199 to $149. This move would ultimately cause the company to announce a major loss of more than $200million in 2001. The PS2 was launched for a reasonable price of just $299 and boasted a 300 MHz graphics microprocessor and a 16x CD-ROM player. In addition to these upgrades the PS2 also included a network port allowing consumers to start a popular trend amongst PC gamers known as network gaming. Through the use of networking hubs, PS2 owners could link a large number of PS2 game systems together in a room and conduct countless hours of network tournament playing.

These tournament events could result in hundreds of gamers in a large auditorium competing against each other for more than 72 hours at a time. This form of network gameplay was the predecessor to today’s popular internet competitions. While the internet was a viable option for gamers to compete against each other many gamers were still using their lethargic 56k modems to connect to the internet. Cable internet was just coming on to the market at the time and was not available in all areas.

Nintendo attempted to respond to the 128-bit market by releasing its Nintendo GameCube but had failed to penetrate the market fast enough as Sony maintained too much market penetration at the time. Nintendo also faced another major obstacle in competing against a new major player to the market, the Microsoft Xbox. As a result Nintendo would have to go back to the drawing board and bide its time until they could release the next level of consumer gaming.

In the meanwhile Microsoft introduced the Xbox which introduced a whole new level of gaming opportunities to gamers that elected to pay the hefty price tag for this advancement in technology. While still using the existing 128-bit technology the Xbox included other improvements that made all the difference in the world to true gamers. Instead of using CD drives Xbox transitioned to DVD drives as well as a Pentium III 733Mhz processor and 64Mb of RAM dedicated to increasing the graphic processing of the limited number of titles that Xbox initially offered. Microsoft chose to enter the video gaming system market primarily because it had already established a great deal of experience in the gaming industry which gained the trust of consumers before their first system was already released. Another advantage that Microsoft held was the availability of funds for R&D. The software giant already knew what games would fly off the shelves because they had already gathered consumer data long before their first launch.

Having this information was of a great advantage for Microsoft but there was speculation of another reason for their entry in to the lucrative gaming market. As the PS2 introduced internet gaming capabilities Microsoft grew more and more concerned about the stability of its web-browsing functionalities. Microsoft claims it felt obligated to consumers to keep other system providers like Sony, which does not use any Microsoft programming for its web-browsing capabilities, in check. This position was intended to be communicated more as the reason for entry to the market was to protect internet users from other gaming system virus problems, when in truth the same threats that can arise from using a PS2 can also occur in using an Xbox. Neither system offers any protection from viruses nor can a virus protection software package be installed on them.

When the Nintendo Wii was introduced to the market it created a buzz unlike any other with their wireless motion sensor controllers. Nintendo found it difficult to keep up with demand and was trickling what product they had slowly to market to continue demand and price points at a higher level. After Nintendo felt they could no longer maintain the consumer market and the impending release of the Sony PS3 and Xbox360, Nintendo released enough
product to meet demand while maintaining a higher price point. Within one year following the release of Nintendo Wii, both Microsoft and Sony responded with their own versions of the wireless motion sensor controllers causing demand for the Wii to essentially drop out of the market completely. Many Nintendo Wii’s can currently be found to sell for approximately $40 used and $60 new.

In their rush to be first to market with the PS3 and Xbox360 both Sony and Microsoft elected to release their products prematurely despite being aware of system problems. The decision to release the products before they were completely ready came at a major cost to both manufacturers. The Xbox360 systems experienced what was known as the “Red Ring of Death” where the power supply would burn out prematurely as a result of over-heating rendering the system useless. Microsoft found itself honoring its product warranties on the majority of its first generation systems costing the company tens of millions to repair at no cost to the consumer. Their irresponsibility to their consumers also led many to file negligence and failure to perform a class action lawsuits. Sony didn’t do much better by their consumers by introducing the PS3 system prematurely before resolving a major problem with their Blu-Ray DVD drives. The drives would fail resulting in gamers unable to load their DVD driven games. While the system was not rendered completely useless it was incapacitated from its intended purpose. Sony found itself in a similar position to that of Microsoft and had to surrender the majority of its initial profits to resolve warranty related repairs. Sony also felt the wrath of consumer when it was slapped with a class-action lawsuit.

In summary the video gaming industry has seen a vast improvement in its technological advancements since “Pong” was released by Atari in 1972 and along with it a great deal of competition. As the technology has advanced so has the level of competition which has taken a once ‘no barrier to entry’ market to a near impossible entry to market for potential newcomers. The impact that the video gaming industry has taken another direction for many gamers in the latest developments of cellular phones. Many programmers have found their own loopholes to enter the market by developing Android or Apple driven games. More reasons for children to develop their hand eye coordination but not the leg and arm motor skills. The gaming industry has witnessed a significant amount of revenue over the years but it despite all of this it begs the question in the back of everyone’s mind. What’s next?

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