The History and Structure of the Video Game Industry – Beginnings, Boom & Bust - Part 1

Posted by Dmitri Williams

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Jan 17, 2014 4:27:00 PM

This is part-1 of a 5-part series on the history and structure of the video game industry.

Beginnings (1951-1973)

Like many media industries, the home video game industry began with hobbyists and enthusiasts. The first known video game dates back to 1951, when a Cambridge University computer science graduate student named A.S. Douglas created a “naughts and crosses” (more popularly known in America as Tic-Tac-Toe) game. The next, slightly better-known video game, Tennis for Two, was developed in 1958 in a lab by a government nuclear research scientist with the fabulously improbable name of Wally Higginbotham. Higginbotham, tired of
seeing bored visitors at his lab’s open house, decided to create a game of tennis on an oscilloscope screen (Herman 1997). 1Higginbotham never patented the game, and this kept the U.S. government from owning the initial patent for the industry.


In 1962, MIT engineering graduate student Steve Russell programmed Spacewar on the school’s PDP-1 computer (you can play that original code right here), and the game spread quickly to other universities where students adapted the programming language and began to grasp the entertainment and commercial possibilities behind electronic gaming (Poole 2000). As the early developers sought capital and support for their tinkerings, a series of negotiations between Ralph Baer, consumer products manager for the military electronics firm Sanders Associates, and giant RCA began (including an initial attempt to use cable systems to operate the games). Baer is generally considered the father of video gaming as a result of his work on early consoles. One of the RCA negotiators left the firm and joined Magnavox who, in 1972 produced the Odyssey, the first mass marketed home game machine. The Odyssey also introduced the concept of removable media components – games in the form of pre-programmed instruction sets could be inserted into a larger base machine, and so could play multiple games on one box.

In that same year Nolan Bushnell, one of the graduate student enthusiasts of Spacewar, founded Atari and had the first coin-operated success with Pong, an advanced version of Higginbotham’s original tennis concept (Cohen 1984).

The Boom, Bust and Re-Boom (1974-2003)

From this early stage of development, the industry stumbled with poorly-performing home products but began to innovate steadily. It wasn’t until the Atari Pong home game was released in 1974 through Sears that the industry began to generate real profits. The popular Atari VCS (Video Computer System) was released in 1977 and initiated the crucial idea that other companies –later called ‘third parties’ – could create games for a proprietary system. Over the next seven years Atari remained dominant, but sales suffered through mismanagement, and a sequence of highly advertised, but poorly designed games (notably ‘E.T.’ and ‘Pac-Man’) (Kent 2000). Figure 1 visually demonstrates the rise, fall and rebirth of the industry (standardized to 1983 dollars).

US Home Games Sales 1977 - 2000 (Standardized to 1983 Dpllars)

The data show what game historians have already presented through narratives (Herman, 1997; Herz, 1997; Kent, 2000; Sheff, 1999): a slow adoption during the 1970s lead to a massive spike in popularity during the Atari heyday of the early 1980s, followed by the collapse of that company and the industry’s eventual revival in the late 1980s by Nintendo. The late 1980s also saw the beginning of play moving from public to private spaces.

Atari’s spectacular failure appeared to be the death knell of the entire industry until the upstart Nintendo company revived it by gambling on home systems again in the mid 1980s (Kent). A host of newer, more advanced and attractive machines flooded the marketplace over the ensuing ten years and new entrants Sega and Sony propelled the home console industry to large sales growths in the 1990s. Sega briefly grabbed the industry share lead in 1995 (Chronis 1996), but quickly lost it back to Nintendo. The Nintendo revival of the late 1980s proved that demand had in fact not magically disappeared (it had continued to flourish in Japan). Still, Nintendo’s marketing and distribution solidified games as the province of children for the next 10 years. The rise of next-generation consoles from what have become the three dominant players in the market (Sony, Microsoft and Nintendo) drove sales for the next 10 years, until the twin forces of Internet connectivity and ubiquitous mobile devices began to disrupt the basic business model.

Look for part-2 of this 5-part series next week.



The material is excerpted, compiled and condensed from several longer published works:

Williams, D. & Kahn, A. (2013). Games, Online and Off. In Dutton, B. The Oxford Handbook of Internet Studies. Oxford, England: Oxford University Press.

Williams, D. (2006). A (Brief) Social History of Video Games. In Vorderer, P & Bryant, J. (Eds.) Playing Computer Games: Motives, Responses, and Consequences. Mahwah , NJ : Lawrence Erlbaum.

Williams, D. (2002). A Structural Analysis of Market Competition in the U.S. Home Video Game Industry. International Journal on Media Management, 4(1), p. 41-54.

1Fun fact. He chose tennis because all of his algorithms and code were for missile ballistics, which function a lot like tennis volleys.

Chronis, G. (1996). ‘Sega Claims a 1 Percent Lead in 1995 Combined Video Game Market Share’, Video Store, 21 Jan. p. 12.

Herman, L. (1997). Phoenix: The Fall and Rise of Videogames. Union, NJ: Rolenta Press.

Herz, J. C. (1997). Joystick Nation. Boston, MA: Little, Brown and Company.

Kent, S. (2000). The First Quarter: A 25-year History of Video Games. Bothell, WA: BWD Press.

Poole, S. (2000). Trigger Happy: Videogames and the Entertainment Revolution, Arcade Publishing, New York.

Sheff, D. (1999). Game Over, Press Start to Continue: The Maturing of Mario. Wilton, CT: GamePress


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Topics: Video Games, History and Structure of Video Game Industry

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