In the history of computer and video games, the third generation (sometimes referred to as the 8-bit era) began on July 15, 1983, with the Japanese release of two systems: the Nintendo Family Computer (commonly abbreviated to Famicom) and the Sega SG-1000. When the Famicom was released outside of Japan it was remodelled and marketed as the Nintendo Entertainment System (NES). This generation marked the end of the North American video game crash, and a shift in the dominance of home video game manufacturers from the United States to Japan. Handheld consoles were not a major part of this generation, although the Game & Watch line from Nintendo had started in 1980 and the Milton Bradley Microvision came out in 1979 though both are considered second generation hardware.
Improvements in technology gave consoles of this generation improved graphical and sound capabilities. The number of simultaneous colors on screen and the palette size both increased which, coupled with larger resolutions and more sprites on screen, meant that developers could create scenes with more detail. Five channel audio became common giving consoles the ability to produce a greater variation and range of sound. A notable innovation of this generation was the inclusion of cartridges with on-board memory and batteries to allow users to save their progress in a game, with Nintendo's The Legend of Zelda introducing the technology to the market. This innovation allowed for much more expansive gaming worlds and in-depth story telling, since users could now save their progress rather than having to start each gaming session at the beginning. By the next generation, the capability to save games became ubiquitous—at first saving on the game cartridge itself and, later, when the industry changed to read-only optical disks, on memory cards, hard disk drives, and eventually cloud storage.
The best-selling console of this generation was the NES/Famicom from Nintendo, followed by the Sega Master System (the improved successor to the SG-1000), and the Atari 7800. Although the previous generation of consoles had also used 8-bit processors, it was at the end of the third generation that home consoles were first labeled and marketed by their "bits". This also came into fashion as fourth generation 16-bit game systems like the Sega Genesis were marketed in order to differentiate between the generations. In Japan and North America, this generation was primarily dominated by the Famicom/NES, while the Master System dominated the Brazilian market, with the combined markets of Europe being more balanced in overall sales between the two main systems. The end of the third generation was marked by the emergence of 16-bit game systems of the fourth generation and with the discontinuation of the Famicom on September 25, 2003.
The generation began when Japanese companies, Sega and Nintendo, decided to enter the console gaming market. Sega released two consoles, SG-1000 and Mark III, and its competitor Nintendo released a Famicom home console. The companies were expected to have all of them only for the Japanese market. However, the Famicom became very popular in Japan, and Nintendo decided to enter the worldwide market. With this in mind, the company approached the Atari company, which had the majority of the video game market in the rest of the world, with a proposal for Atari to license the Famicom and distribute it. An agreement was concluded, which was to be signed at the Consumer Electronics Show in July 1983.
At the same CES, however, Coleco exhibited its Coleco Adam home computer, which featured a Nintendo-designed game called Donkey Kong. At that time, Atari had exclusive rights to distribute Nintendo games on home computers, and Coleco had exclusive rights to distribute the game on consoles. However, since Atari understood that Adam was a home computer, they postponed signing the agreement with Nintendo and asked the company to resolve the issue with rights. The problem was resolved, but during this time, the video game crash of 1983 had occurred and Atari began to lose influence in the market. With this, Nintendo had no competitor left and the company decided to enter the market on its own.