Video Games Go Crunch!

As the Christmas season nears, once thriving makers struggle for survival

The imaginary world of video games has always been a treacherous place, full of alien star cruisers, speeding asteroids, menacing centipedes and ravenous Pac-Men. Such dangers, however, are hardly more fearsome than the real-world disasters now battering the manufacturers of the games. With the crucial Christmas season approaching, the once thriving industry is being zapped by overheated competition, an oversupply of games, relentless price-cutting, plunging profits and a new finickiness among young video fans. For the dozens of companies in the contest, the name of the game has suddenly become Survival. Admits President William Grubb of Imagic, which makes Demon Attack and Cosmic Ark: "Our industry is in chaos."

Warner Communications' Atari, which pioneered home video games with such classics as Space Invaders and Asteroids, has lost $356 million so far this year, dropped 3,000 employees from its payroll of 10,000 and finished moving all its manufacturing facilities to Hong Kong and Taiwan. Plagued partly by sluggish sales of Intellivision games, the electronics division of Mattel has run a $201 million deficit in 1983, while laying off 37% of its 1,800-member work force. Activision estimated that it lost $3 million to $5 million in the past three months despite scoring hits with its new Enduro and Robot Tank games. At Bally, the leading manufacturer of arcade video machines, profits are off 85%.

For the industry leaders the crunch arrived with spaceship speed. Until last year Atari and Mattel were the major competitors. Between 1979 and 1982 their profits surged from less than $80 million to $471 million, and the potential seemed unlimited. But their triumphs attracted a fleet of market invaders, including Coleco, Imagic, CBS, 20th Century-Fox, Parker Bros. Milton Bradley and Avalon Hill. By the end of last year, at least 30 firms were in the battle.

Game sales continued to be brisk, but they were not growing fast enough to match the explosion of supply. Retailers, overestimating demand, ordered far too many games and then watched the cartridges pile up on their shelves. The industry now has an inventory of some 35 mil lion games, or more than half the number sold all last year. "Everybody's expectations were too high," says Frank O'Connell, president of Fox Video Games. To keep the stock moving, stores are slashing prices. Games that sold for $30 last year now go for as little as $5.99. As a result, sales revenues have been flat despite an estimated 33% increase in the number of units sold. Ordinarily, October would be the time for stores to stockpile games for Christmas, but retailers are holding back because they are already overloaded.