Tuesday, May 13, 2014

Alamogordo: E.T. vs Economics

The date is April 27, 2014 and after years of urban myths, rumors, and attempts to prove or disprove them, a mix of video game enthusiasts, archeologist, tech writers, hucksters, filmmakers, and newsmen looking for a story on a slow news day, all descended on a garbage dump outside of Alamogordo, NM for the “dig” of a lifetime. This would be the day that a site within the dump is finally excavated to find out if in 1983 Atari dumped consoles and games here. After a long and arduous day the urban legend would prove to be far more fact then fiction, except for a few things that many choose to overlook. 

You see the urban legend says that the dump was all the result of Atari’s E.T. video game, supposedly the worst video game ever made, and supposedly so bad that “it made the already bad Atari, even worse….and crashed the video game industry” keep in mind I am paraphrasing but this is the legend. Of course if you’ve been looking up the “dig” online you have probably read over and over again about all the copies of E.T. dug up, but you probably aren’t hearing about the fact that many other games including classics like Centipede, and Space Invaders where dug up as well.  I am also sick of ex poste facto video game journalist writing about how awful the Atari 2600 was, these are guys who grew up in the era of the PS1, and N64, and sneer at what came before. 

So with that said I am not going to go into any more details on the “dig”, you can find more fact and fiction on that in other places. I’m here to help make sense of it all in a way no one else has bothered to yet. If you’ve read my blog before you know I’m not afraid to get into the economics, and accounting behind video gaming. The fact of the matter is if you dig deep enough you may find that a system or games success or failure may not necessarily be based on how good or bad a system or game is, but rather on the huge role economics plays.

Like it or not the Atari 2600 was huge success, and carried on a 15 year legacy that would start in 1977 and end in 1992. It may not have been the best system of its era, but it was far more prolific and most Americans living in the years between 1977 and 1992 encountered an Atari 2600 at one time or another, or more than likely owned one. The Atari 2600 and its 2nd generation console counterparts all provided us with a look at the future of video gaming. These where systems that unlike their 1st generation counterparts allowed us to switch out games, and even buy new ones that where ports of arcade games. Now keep in mind that the Atari 2600 wasn’t the first 2nd gen system, but it was the one that had the most advertising dollars which helped to get it in to households quicker especially in Christmas of 1977. 

To say the least it didn’t take long for the 2600 to spread like wild fire, and take hold in American pop culture. After that all Atari had to do is sit back and wait for the money to role in which it did by the millions, and to say the least that caught the eye of many others. Of course we would see some great games from 3rd parties like Activision and Imagic, both companies comprised of old Atari programmers, but there where many other producers that weren’t so awesome. Pretty soon it was perceived that making your own Atari games, or knock off hardware was as good as printing your own money, and this is where the issue’s start.

You see Atari for some reason or another never gave any thought as to whether or not copy cats would reverse engineer their games or systems then do their own things with them. So when Atari executives and programmers left Atari in 1980 to form Activision, Atari itself was blindsided and immediately suedjust to find that their legal position was nowhere near what they assumed it was. This opened the floodgates, and 3rd party games and even hardware entered the market on level that increased almost exponentially until the “Crash of 1983”.  After that the $40-$60 a game price tag on Atari 2600 games suddenly vanished and games began to show up in bargain bins for a $1 or less just about everywhere imaginable. After this some 3rd party developers would disappear for good, while others would expand development into other systems.


Economics 101

The video game industry is an interesting little segment of the economy. It’s almost purely consumer driven, since there aren’t many corporate or government sales going on here. Also even dating back to its early 70’s 1st generation roots it’s still a fairly new industry. With that said these two components give us a great look at an almost text book and simple version of an economic marketplace.

If you didn’t take Economics in high school or college than here is a crash course using our beloved video game industry as an example. You see the root of economics is always comes down to supply and demand, two factors that tend to work diversely of each other. For instance the less that is supplied the higher the demand, or the more that is supplied the lower the demand.

In the case of Atari and the crash of 1983 we are looking at a supply exceeding demand. When that happens it means too much is being produced or that the price point is too high for the products. Between 1977 and 1982 the $40-$60 a game was what is called and equilibrium price point, this was where Atari was able to sell the most games at the biggest profit margin. Atari would only supply x amount of games at a particular price point to keep people buying them. Once third parties got overinvolved in this marketplace it began to change drastically. In the early days of Atari competing with Activision and Imagic we saw an example of Monopolistic Competition where firms selling similar but slightly differentiated products all compete in the same marketplace. If they cooperate and respect each other each competing firm can make some pretty good money, but as third party developers flooded the market consumers had more options than ever and a huge supply of games. Suddenly $40 - $60 for an Atari branded game didn’t seem like such a good deal. Why pay $50 for Pac-Man from Atari, when you can buy Lock N’Chase form M-Network instead for $20. Suddenly the whole pricing model fell apart as the equilibrium price dropped.

This meant that Atari had a huge surplus of gamesand very limited alternatives in those dark days of 1983. This brings us back to the “Alamogordo Dig”, or should I say 31 years forward into the future. Atari choose to dump the games due to very simple economics, and a little accounting too. It had nothing to do with E.T. being a bad game,E.T. was just a victim of circumstance. You see if Atari had sold all those games it would have flooded an already over-saturated marketplace driving down prices even further, and perhaps even destroying the industry. Not only that but Atari had to pay licenses, and other fees on games sold, for Atari the choice came out to deciding between a little red ink or a hell of a lot of it. For Atari they made the best choice even if we disagree in our modern world, as sad as it is or was burying this overstock was a choice that kept Atari alive, and possibly the video game industry as a whole.

There is the question to ask yourself. If Atari and the rest of the video game industry went down in flames because Atari choose to sell rather than bury those games, do you think Nintendo would even have bothered to develop a system or if they did even try selling it in the U.S.? Perhaps before painting Atari with shame as many have tried to after this we should thank Atari for taking one for the team and keeping the ball rolling.

Luckily, Nintendo made the Famicom, and later the beloved NES. But, Nintendo paid attention to the lesson of 1983, and looked at what simple economics had to teach us about it. Nintendo learned from Atari’s mistakes and put lockout chips in their systems. These chips made it necessary for 3rd party developers to get permission and licensing from Nintendo in order to sell games on their system. Although Nintendo claimed this was for “quality” purposes, it also allowed them to control supply and keep the market from over-saturation similar. Competitors to come such as Sega, Sony, and Microsoft would be sure to follow these practices as well.

So before you buy into the stories about the awful Atari 2600, or E.T. being one of the worst games ever made, or before you even think about casting shame on Atari stop to think about the economics of it all. Stop and think about Atari out on the frontier of gaming with no previous industry to guide it and provide do’s and don’ts. And just be thankful for what Atari did for the video gaming industry in those dark hours of 1983.

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