Creative Destruction and Industry Crashes in the Early Video Game Industry 1971-19861
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Down Many Times, but Still Playing the Game: Creative Destruction and Industry Crashes in the Early Video Game Industry 1971-19861 Mirko Ernkvist The early, formative years of many industries are often shrouded in mystery, with a paucity of information and highly exaggerated stories providing the basis for historically grounded accounts of industry dynamics. This has been the case with the video game industry as well, where many - often contradic- tory - factors have been suggested as explanations for what many regard as the most extraordinary event in the history of video games, namely the 1983 crash. The event forced a majority of the US video game companies out of business and was accompanied by a subsequent change in industrial leader- ship from the U.S. to Japan. In the U.S. and Europe, the event is usually re- ferred to as “the 1983 video game crash”, or simply “the video game crash”, while in Japan it is referred to as “the Atari shock” (a name that emphasizes the unexpectedness of the event and the downfall of the dominant video game company at that time). In general, seven explanations for the crash have been put forward. Early explanations of the 1983 video game crash suggested that it was the result of: (1) the end of a teenage fad (Friedrich 1983); (2) the mismanagement of a single firm, Atari (Cohen 1984); (3) the public criticism that video games received (Williams 2004); (4) overproduction in terms of the number of games produced together with price competition (Cambell-Kelly 2003); (5) the market failure of some notable major games (Kent 2001); (6) saturation of the market for home console systems (Cambell-Kelly 2003); and (7) the introduction of a new platform for playing games - the home computer (Cambell-Kelly 2003, Herman 2001). Some of these explanations are not mutually exclusive, and they are re- ferred to in the literature without any more detailed discussion and with little empirical research of the events that led to the crash. 1 I am grateful to Jan Jörnmark for his helpful comments on various versions of the manu- script. 161 Despite the familiarity of the 1983 crash, no study has elaborated on the fact that crashes and shake-outs were a recurrent structural phenomenon of the video game industry during its first 15 years, with a number of severe crashes or major firm shakeouts occurring in every game platform after short periods of high growth. Subsequently, from the end of the 1980s and on- wards, the video game industry entered a relatively more stable period with- out the same turbulence on an aggregated level as before. This chapter reassesses existing explanations of the 1983 crash and then provides a coherent structural explanation of the turbulence that character- ized the first 15 years of the video game industry, arguing that all of the early crashes and shake-outs shared similar structural characteristics. Without such an explanation, unrelated and limited explanations of these dynamics (such as the seven mentioned above) will remain nothing more than icing on the cake. Method This chapter presents a long-term historical account of the video game indus- try in which all of the early crashes and shake-outs during the period 1972- 1985 are compared and contrasted, using the entire population of firms ac- tive in the market for various game platforms when possible. Two crashes and two major shake-outs are covered: the arcade shake-out of 1975, the dedicated console crash of 1977, the 1982 shake-out of arcades and the pro- grammable console crash of 1983. In this chapter, the term ‘video games’ refers to all forms of electronic games on various platforms (arcade, console, PC, handheld, etc.), unless oth- erwise stated. The term ‘industry crash’ refers to an event in which the ma- jority of the firms in an industry exit within a short period of time (one or a few years) and the overall market for the industry is greatly reduced or eliminated during that period. The term ‘shake-out’ refers to a less dramatic event than an industry crash in which a large number of firms in an industry exit an industry within a period of a number of years and the decline in the industry (if any) is less rapid and less steep than in a crash. Research Questions This chapter addresses the following main question: Was there a structural dynamic behind the turbulent period of crashes and shake-outs in the video game industry during 1972-1986? This question is then related to two other questions: If so, which factors were the primary driving forces behind this structural dynamic of crashes and shake-outs? Were firm exits a necessary structural adjustment to new market condi- tions and a prerequisite for further growth in the industry? 162 Video game industry and firm failures Firm failures can be depicted in many ways. This chapter will concentrate on a firm exiting an industry, which in the video game industry led in many cases to firms terminating business activities and, in some cases, to insol- vency and/or bankruptcy. It could be argued that firm exit is not a good indi- cator of a failure, since there may be other motives behind firm exits than that of a perceived failure in the market (e.g., ventures into other more prof- itable industries). However, the detrimental and severe effects of the crashes in the video game industry make such claims less relevant in this context. Moreover, it could be argued that in a high-tech industry (such as video games), with highly demanding manufacturing and development practices, the reorientation of a firm towards other types of products would involve such a major transformation that it would be impossible to call it the same firm. Other problems emerge for studies connecting firm failures with other types of measures, such as bankruptcy and insolvency. Each measure repre- sents a different sub-process and is related in different ways in terms of both time and meaning to the concept of firm failure and, thus, varies in explana- tory stringency, depending on what kind of failure related process we are interested in studying (Carroll and Hannan 1995; Hannan and Carroll 1992). One of the benefits of using firm exit statistics as a measure of firm fail- ure is that it is closer in time to the actual process that led to the failure of the firm in a certain industry than, e.g., bankruptcy, which may occur a long time after the firm has actually been involved in the market. By using firm exits statistics rather than bankruptcy statistics, there are better opportunities for studying how the changing structural conditions in a certain industry im- pact the population of firms that are active. This increases the opportunity for studying the impact of industry-wide structural events, such as “creative destruction’, which in some studies have been difficult to relate to the occur- rence of bankruptcies (e.g., Grazer and Sjögren 1999). In the literature that attempts to explain firm failures, two major perspec- tives dominate: firm-internal and firm-external perspectives. Firm-internal perspectives often emphasize the crucial role of management inefficiency, whereas firm-external perspectives point to the role of a number of changes in political, technological, social or economic factors beyond the control of the firm. Both perspectives take opposite positions on the old, but still dis- puted question of the extent to which managers have the capacity to affect the success or failure of a firm in periods of changing market conditions. Organizational ecology and many strands of strategic management are two examples of schools of research that represent opposite poles along this spectrum. However, as has been pointed out (Lindgren 1999), the two per- spectives do not exclude each other, and studies that combine industry-wide dynamics with qualitative studies of the firms involved have the potential of 163 shedding some light on the interaction of selection due to structural factors external to the firm and the ability of a firm to dynamically change its capa- bilities (Dosi et al. 2001). To understand the factors behind industry crashes and firm failures in the video game industry, the specific growth dynamics of industry must first be elaborated on. Entertainment Industries and Video Games Innovations in the form of new experiences are the backbone of most enter- tainment. Entertainment that is more traditional (e.g., music, movies, televi- sion, gambling, comic books, pinball and theme parks) has always been highly dependent on the constant introduction of new experiences (Vogel 2004). Video games as an entertainment form is characterized in particular by this constant urge for new variation in player experiences, where this is more closely connected to the exponential progress in digital technologies than most other entertainment industries. Throughout history, video games have always been able to make use of what new hardware has offered in terms of storage, processing and network capacity and to transform it into new player innovations. This exponential trend in digital technologies had brought with it in- creased complexity of video games and of the development process. Similar to other entertainment, video games compete for the consumer’s free time. This creates opportunities for growth in that every moment of a consumer’s life outside actual work involves a potential market for enter- tainment consumption. However, this free time is highly competitive and, to a certain degree, video games do not only compete with other video games but also with every other type of entertainment that is available. If one enter- tainment form stagnates for any reason, there is a risk that another form of entertainment will step in and take its place among consumers.