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The bad news about Atari arrived with other grim tidings for the industry. Mattel said that it expected to lose money during the fourth quarter, even though it was shipping more of its heavily advertised Intellivision games than it did a year ago. The company blamed a softening retail market and higher marketing costs that resulted from increased competition. After Mattel's shares began dropping, trading was suspended for more than 1½ days.
Even the up-and-comers among video games were not spared. The stock of Coleco Industries Inc., which has a hit cartridge called Donkey Kong and a new console, ColecoVision, fell almost nine points in two days. Declared President Arnold Greenberg: "This is an inevitable initial reaction when the largest company in the industry says it has had disappointments. Some of the newer companies like us have really taken a large share away from Atari and Mattel." Coleco, based in Hartford, Conn., expects its sales to jump 180% this year, to $500 million.
Another fast-growing youngster that has stolen business from the leaders is Imagic, which was incorporated just 18 months ago. Its popular cartridge, Demon Attack, was chosen the "game of the year" by an industry magazine, and the company's revenues are expected to reach $50 million this year. The firm had planned to cash in on its popularity and go public this month, but when the other shares got zapped, Imagic's stock offering was postponed.
Such small companies need fresh capital if they are going to keep up in a business where supply has finally caught up with demand. For instance, Imagic has budgeted $10 million—about 20% of its estimated 1982 sales—for six months of television commercials. That is still only a fraction of the $100 million that Atari spent on advertising in 1982. Money alone, however, is not enough; in the latest ranking of the bestselling video games, Atari's top entry, Berzerk, ranks only fourth.
Despite the financial community's reaction to individual stocks, sales for the industry are still robust. Video games have been among the bestselling items this season in the face of generally flabby retail sales. Says Leisure Industries Analyst David Londoner of Wall Street's Wertheim & Co.: "We don't think the market for cartridges will peak until 1984 or 1985." But Londoner adds, "I don't think the stock market will continue to be enraptured by video games." While millions of Americans will still be looking for a Donkey Kong or Frogger game under their trees this Christmas, investors have already started the search for other hot stocks.
—By Alexander L. Taylor III. Reported by Dick Thompson/San Francisco and Susanne Washburn/New York