If you asked anyone just before Christmas in 1982 if they thought that within a year, video games would be so worthless that Atari would dump thousands of game cartridges in a landfill in New Mexico because it couldn’t even afford to try to sell them, they’d have thought you were insane. But that is exactly what happened to Atari and countless video game companies in the great Video Game Crash of 1983. By 1985, console gaming in the United States seemed like fool's gold, so few expected much from Nintendo when they arrived in the US that year, bearing their new 8-bit console. Inside the console was their key to avoiding Atari's fate, the 10NES chip, and it gave Nintendo the kind of control over the video game market that would be impossible today but was necessary at the time to make it function at all.
Just five years after the great crash, though, Nintendo released Super Mario Bros. 3 to massive critical and commercial success, reaping the profits that monopoly power over 90% of the video game market can bring you. To everyone's astonishment, the video game industry had been brought back from the brink of death almost overnight.
That success came with a price, however. Game developers turned their fate over to a rigid, dictatorial overseer that whipped developers back into line, enforced discipline, managed the supply of titles on the market, and literally locked out anyone who didn’t obey Nintendo’s explicit instructions. All of this power ultimately came from the 10NES chip that was tucked away in the Nintendo's consoles; the bane of third-party developers everywhere, and the casus belli for a rebellious company called Tengen.
The Great Video Game Collapse of 1983
In 1982, video games had become a multi-billion dollar industry in North America, seemingly out of no where.
Computers like the Apple II and the IBM PC had games on them, for sure, but by 1982, the home video game console ruled them all and Atari was its king. Controlling 80% of that market had seen Atari give its parent company, Warner Communications Inc., half of its $2.9 billion in revenue and a majority of its nearly half-billion dollars in profit in 1982.
Atari seemed well-positioned heading into December of 1982 when warning signs began to emerge. Cartridge cancellations were pouring in from retailers and Atari didn’t notice until it was too late, nor could they make sense of it once they did.
In the middle of 1982, third-party software developers like Activision, Imagic, and Parker Brothers were all starting to produce software for the Atari console, the first time Atari had ever faced competition on the software side of its business. Atari sued nearly all of the third-party developers putting out games on its console, but they couldn’t stop the deluge of games that just kept coming as developers no one ever heard of were putting out games for the Atari 2600 and disappearing after they'd cashed out their profits.
In less than a year, retailers were having to slash prices on games by as much as 85% not even a month after they were released to try to clear out inventory to make room for the next round of games coming in. Parents and kids walking through toy stores across America were bombarded with box art that told them nothing about the quality of the product and store shelves don’t come with five-star customer rating systems we take for granted today.
In short, it seemed everywhere you turned there someone was desperate to sell you a game cartridge for the Atari 2600 at a cut-rate price, and the game was likely to be complete crap—and it might even have been pornographic if you weren't careful.
Many developers didn't care if they put out a good game or not, they just wanted their game on the market so it could cash in on some of that sweet, sweet video-game-craze money. All they cared about was getting you to buy the cartridge, the rest was your problem.
So, customers did the only sensible thing they could do; they stopped buying cartridges all together. Inventories piled up in warehouses that cost money to maintain but housed products that you couldn’t even give away at that point.
Atari did the only sensible thing they could do while it was hemorrhaging cash in the hundreds of millions of dollars: it took its inventories of unsold games in 14 dump trucks and buried them in the desert, covering the whole thing over with cement.
The video game industry in North America had been effectively wiped out.
Nintendo Sees An Opportunity—And Risks To Be Managed
While the cement was curing over still-sealed copies of E.T.—The Extra-Terrestrial, Nintendo released its Family Computer, soon just called the Famicom, in Japan. Sales were slow to start, but by 1984, the Famicom had gained traction and by the end of the year, it was the most popular home video game console in Japan.
But a video game console is not the same as a VCR and video games weren’t the same as video cassettes. There was still a market for those in the US, but Nintendo could see the smoke from the American video game dumpster fire from their front door.
There was a golden opportunity for Nintendo, riding high as it was on its Japanese profits and backed by a solid lineup of games they could localize for the American market. There wasn’t any competition to speak of in the US in 1984, so the market would be theirs for the taking, so long as they didn’t fall into the same trap as Atari.
The 10NES and Nintendo’s Seal of Quality
Nintendo’s solution to the glut of garbage third-party titles that destroyed its predecessor was the 10NES.
The 10NES was a chip embedded in the console that paired with a chip in an authorized Nintendo game cartridge like a key in a lock. When you inserted a Nintendo cartridge into the console and turned it on, the first thing the console did was send a digital signal to the chip in the cartridge. If the chip responded with the correct coded response—as all officially licensed releases did—then the cartridge would unlock the console and the game would boot up.
If the 10NES didn’t receive the correct response, the 10NES made the console inoperable until you shut off the power and took out the unlicensed cartridge. As long as Nintendo could guard workings of the 10NES chip, they could control what games were played and how many Nintendo games were released every year.
When the Nintendo Entertainment System (NES) launched in 1985, they branded their quality control as the “Nintendo Seal of Quality,” reassuring wary shoppers that they weren’t going to get suckered by unscrupulous game developers peddling junk. The game might be bad, but not bad bad, not like those games in the untouched Atari bargain bins at the toy stores. Nintendo was essentially guaranteeing that there wouldn't be any repeats of 1983.
The American consumer took Nintendo at its word and bought up the new consoles in the millions and Nintendo made sure that games released on the NES would have to meet their exacting quality standards.
Game Developers saw the Seal of Quality and the 10NES somewhat differently: total submission to the will of Nintendo. Painful as it might have been, they had little choice in the matter. Where else were they going to go? Developers up and down the line accepted Nintendo’s terms and got back in the business of making games—but no more than 5 a year, per Nintendo’s new rules.
In exchange for this deference, Nintendo would single-handedly revitalize the North American video game market from the ashes of the 1983 collapse, eventually making its way into 33% of all US households—an unprecedented market penetration for a video game console. Game developers were able to do serious work and become truly professional outfits in a way the Atari simply never encouraged. On the NES, your game had to be good, not just functional. This sea change in game development turned video games from a kids toy into a serious endeavor for programmers and they responded by getting better.
Tengen Tries To Pull a Fast One On The 10NES
Surprisingly, after losing hundreds of millions of dollars, Atari was still in business. Their home console division was struggling to rebound but its game development spinoff, Atari Games, was alive and well, as was its subsidiary, Tengen.
Frustrated with Nintendo’s strict rules on development that kept their creative energies bottled up, Tengen set out, without a hint of irony, to reverse engineer a way to crack open the 10NES so they could free themselves from Nintendo's restrictions.
Atari knew how to make cartridges, so if it could find out how to crack the lock on the 10NES, they could make as many games as they wanted for the booming NES market. After repeated chemical peels of the chip to try to read its inner workings, Tengen, reached a dead end. They needed the source code that ran on the 10NES, that was all there was to it.
In order to get it, they lied to the US Copyright Office to obtain Nintendo’s source code for the 10NES and actually got it. Combining the code with the work they’d done on the chip, they were able to decode the 10NES and reproduce it in a new chip that could unlock the NES. They called the Rabbit and got to work publishing unlicensed games for the NES.
Nintendo wasted no time in suing Atari Games for copyright infringement while Atari Games sued Nintendo for anticompetitive behavior, setting the stage for the two to go to war in the courts.
Reaching the 9th Circuit Court of Appeals in 1990, Atari Games’ shenanigans at the Copyright Office came back to haunt it. The court didn’t look kindly on what looked a lot like criminal fraud in order to obtain the 10NES source code and found in that Atari’s copying the source code to decipher the 10NES was an infringement on Nintendo’s copyright.
Tengen was prohibited from selling unlicensed NES titles and Nintendo was authorized to sue retailers who sold Tengen games that used the Rabbit workaround. Tengen was out of the unlicensed third-party NES cartridge racket for good.
Tengen may have gone down in court, but other developers saw Tengen’s challenge as a necessary act of rebellion and other developers worked out ways to disable Nintendo’s 10NES that didn’t infringe on Nintendo’s copyright and put out their own games free of Nintendo’s rules.
The Tengen lawsuit also drew unwanted attention from the FTC, who didn’t like the look of Nintendo’s licensing terms. Nintendo relaxed its rules and by the time it released its next system, the Super Nintendo Entertainment System, the 1990s’ console wars were in full swing which pressured Nintendo to relax its grip on developers even further.
As restrictive and abuse as it may seem in hindsight, the 10NES chip did serve an essential function from 1985-1990. By imposing some structure and order to a wild mish-mash of game developers of dubious motives, Nintendo ensured the video game market survived the crash that could have killed it for a generation, giving it the time it needed to mature over the rest of the decade.
By the time the Console Wars began in the 1990s, game development was truly ready to be liberated and as a result, the games these developers made in the 1990s are what made the 16-bit era the Golden Age of Gaming—and whether they like it or not, no small part of that renaissance is owed to the discipline that the 10NES imposed on the US video game industry.