In 1985, the video game industry collapsed in spectacular fashion. In the years leading up to it, the arcade and home console industry boomed and grew to be bigger than both the movie and music industries. However, in 1985 the console industry completely collapsed with revenues decreasing a whopping 97%!
The industry has obviously since recovered and is now a magnitude of order bigger than it once was. 2015 in particular has been a banner year for the industry. Once a nerdy, male-dominated hobbyist industry, today 60% of Americans play games and females make up half of all gamers. The industry is $24B in the US alone (movie box office sales are just $10B) and mobile gaming has surpassed the home console market. Globally, the industry is $100B! E-sports is taking off with live streams setting new records weekly and YouTube gaming channels boast billions of views each month. Virtual reality is on the horizon and the future seems bright.
Despite such a vibrant industry, there is a surprising lack of start-ups going after the space (and associated investor appetite). Even with large exits from the likes of Minecraft ($2.5B to Microsoft), Twitch ($1B to Amazon) and Oculus ($2B to Facebook), it's shocking how little interest there is. VCs bemoan the hits driven nature of the business but I find that to be a short sighted view. The industry is huge, diverse, fast growing and has many unsolved problems - a perfect storm for energetic new start-ups. In fact, I would argue that there are many more issues and business opportunities than most realize. Let's take a look at what caused the 1983 industry bust and see if we can draw some interesting parallels:
What Caused the Video Game Crash in 1983?
1) Glut of consoles - Literally dozens of consoles flooded the market trying to capitalize on Atari's huge success, bewildering consumers who were likely to only buy a single console. Today, no one remembers long dead consoles such as Bally Astrocade, Coleco Gemini, Emerson Arcadia, Magnavox Odyssey, Mattel Intellivision, etc.
2) Influx of poor quality games - Developers of all stripes, including non-tech companies like Quaker Oats and Mattel, were putting out tons of games that they expected would sell regardless of quality. They were wrong. Consumers got fed up and didn't know which games to shell out money for.
3) Loss of publishing control - Extending the last point, there was simply a total lack of publishing control. Console makers lost control of their game supply which caused retail stores to be flooded with copy cats and me-too games. There was a huge list of hastily financed start-ups and non-tech companies who should not have been permitted to flood supply.
4) High profile failures - A core cause of the crash was two high profile titles from Atari that massively flopped. Atari rushed development on these games and grossly overestimated sales figures which caused a huge negative reaction in the market. I kid you not, Atari actually BURIED THE GAMES in a landfill.
5) PC competition - The low priced computer market really took off around this time and became significant competition for home consoles.
The overarching theme is that consumers were getting screwed. They eventually got fed up and stopped supporting the house of cards. The collapse was a huge blow to the game industry and some questioned whether it would ever return. Luckily, after a few years, Nintendo single handedly revived the industry by solving many of the above problems.
The game industry today is very different than it was back then. We have a sizable and healthy home console market, a loyal PC gaming market, and a hyper growth mobile gaming market. We also have e-sports and tons of engaging online content. Still, there are some massive pain points similar to 1983. Let's look at each point:
1) Glut of consoles - While not quite as pronounced as in 1983, we still have issues. Sure, Microsoft and Sony dominate the "console wars" with Nintendo as a distance third, but there are still TONS of different platforms. You still have the last generation of consoles in people's homes (Xbox 360, PS3, Wii), portables (3DS, PS Vita, PSP), iOS devices, Android devices, Amazon Fire, the entire PC ecosystem, Steam/Valve, and more. If you think about it in this way, things have clearly gotten incredibly fragmented and disconnected.
2) Influx of poor quality games - On mobile, developers can basically self-publish. As a result, you have hundreds of thousands of freemium games. There are countless clones of games that were once popular which erodes the entire market (how many Flappy Birds or base building clones have there been?). It's also general consensus amongst gamers that MOST mobile games are just plain low quality. Elsewhere, on the PC and consoles, many think that there is an indie gaming bubble. Indie developers (very small studios), have been flooding the market with poor quality games via channels like Steam, Humble Bundle, or even Kickstarter (article).
3) Loss of publishing control - In terms of mobile gaming, this gets back to the point on self-publishing. There is just so much noise and zero quality control. Consumers have NO idea what to play aside from what's on the top charts. The PC has gotten rough as well and there is no shortage of criticism of Steam. The console makers have managed to keep a much tighter control on their game libraries but they are heavily reliant on hit games from large publishers like EA and Activision (so one could argue that they have lost publishing control in a different way).
4) High profile failures - Large publishers like EA and Activision are pouring more and more money into their already working franchises (why innovate when you know you can push out a new version of Call of Duty or FIFA?). As a result, they are hyping up their AAA titles with huge marketing budgets and making promises to consumers that they can't keep. There has been a lot of criticism around promises made by the studios behind Destiny and Watch Dogs, titles which have left many gamers very disappointed. There have also been truly epic debacles such as EA's bizarre SimCity flop. In fact, there has been a general trend of launch day flops and studios releasing partially finished games for full price, promising to update the game over time or charging consumers for add-ons that should have been included with the original purchase. This has been met with significant backlash.
5) PC market - In the 1980s, the PC was a new platform. Today, the corollary is mobile as a platform. The shift towards mobile as the dominant gaming platform in the industry has created a lot of problems for gaming in general (and has really hurt the PC and console segments). Part of the blame here is on the consumers who have engaged with the freemium model. I love the freemium model, and it can work splendidly, but most titles are just pathetic. Still, many developers can be at least moderately successful with low quality freemium titles which simply reinforces developers' decisions to put out crappy game content quickly, monetizing via crude in-app purchasing schemes and/or gimmicks.
I have highlighted just a few of the very troubling issues in today's gaming industry, some very similar to what happened in 1985. I won't even get into other issues such as "GamerGate" and accusations of a corruption in the video game journalism and review industry. There is a lot to like about the gaming industry today but I think many consumers feel like they are getting screwed, just as in 1985.
Rather than see yet another mobile games studio, it would be refreshing to see start-ups attacking these massive problems (and investors funding it). Some investors are turning an eye towards e-sports (still niche and a small subset of the hardcore gaming segment) and virtual reality (largely on the come still), but for those more highly attuned to the game industry, opportunity is abound.