The Challenge Of Cartridges

 

Ever since video games were first introduced to the market, the industry has been especially fertile ground for company start-ups. From 1977 to 1981 industry revenues rose from $60 million to $1 billion. Led by Atari Inc., the Sunnyvale, Calif. -- based success story that holds 75% of the market, sales doubled this year, reaching a retail value of $2 billion.

At times it seemed that all you needed to grab a piece of the action was an entrepreneur and a game design. In 1979 four designers left Atari, joining with a veteran of the package goods business to form Activision Inc. In their first year of business, Activision had $6 million in sales; in their second year, $66 million. Industry analysts predict a staggering $200 million in sales for this fiscal year. In 1981 two Atari and two Mattel veterans, with combined experience in marketing and design, set out on their own and formed Imagic. The official estimate for Imagic sales in its first year is more than $50 million, although many industry observers think the revenues could nudge the $100 million mark. In the last year, from 12 to 25 new companies have been founded, all hoping to duplicate the Activision/Imagic success. At next month's consumer electronics show in Las Vegas, more than 50 companies are expected to show video games or cartridges, three times the number at last summer's industry convention.

But even as holiday shoppers pushed the market to stratospheric heights, there was widespread evidence that the industry's growth may have reached its zenith.

The gold-rush mentality is one of the problems the industry faces. While the market is expected to expand 20% to 35% in 1983, according to industry estimates, that strong rate of growth is not enough to sustain all the new entries. And the legion of titles in some eight different noncompatible formats has produced a variety of choices that is beginning to boggle the minds of consumers and strain the financial resources of retailers.

A far more pressing challenge to the industry, however, comes from the falling price of low-end personal computers. Atari, the video game leader, is now discounted at $120; the second-place Intellivision system sells for $160. The price differential for a small computer that will play games -- and more -- is negligible: The Commodore VIC 20 consistently sells for $179.95, and the Texas Instruments TI-99/4a sells for $199, including factory rebate. "A real computer for the price of a toy," Commodore ads proclaim. "All of its games come in a different, more worthwhile package: a full-fledged computer."

In the short run, the survivors of the challenges to the video-game boom will be companies able to tap the as-yet-uncultivated foreign market and companies that can provide blockbuster cartridges for domestic consumption, since video games, like records, are dependent on "hit" items. In the long run, however, survivors will be those that make the transition from products for game machines to products for personal computers. "Right now our power alley is in game design," says William F. X. Crubb, president of Imagic. "But we're an entertainment software company, and we're preparing for the next step."

Cartridge sales are expected to continue to surge through the first quarter of next year, given the insatiable appetite of game players who, after receiving a game as a Christmas gift, want to try new titles. After that, however, as the dud titles begin to pile up in the $3.98 bins and retailers who expected product shortages begin to cancel orders, sales are likely to drop dramatically. According to Jim Barry, editor of Dealerscope magazine, " the hottest game in the market next year will be 'Shakeout,' " with suppliers dropping like Space Invaders from the darkening retail sky.