A History of Video Game Innovations
A word about this history
There has been much discussion of the distinction between "video games" and "computer games." For the purposes of this document, any game program which uses a video screen and a user interface will be considered a "video game" - since 20th century computers, stand-alone arcade machines, and game consoles are all of interest to this writer. Also, as regards the era of "The Golden Age," your mileage may vary; here it is deemed to begin with Space Invaders and end with Marble Madness.
This history has been compiled from disparate sources (cited in [square brackets]) and the author cannot be responsible for errors or omissions. If you can make an addition or correction, however, please feel free to do so.
Summary of pioneering tech breakthroughs in the field
First game played on a computer: Noughts and Crosses (Tic Tac Toe), A.S. Douglas, 1952
First action-based ("arcade style") computer video game: Tennis for Two, 1958
First space-themed, genre-defining computer game - Spacewar!, 1962
First video game played on a television screen - Fox & Hounds, 1966
First video game to accept coins - Galaxy Game, Computer Recreations, Inc, 1971
First video game in arcades - Computer Space, Nutting Associates, 1971
First successful arcade video game - Pong, Atari, 1972
First adventure games - Collossal Cave Adventure and Hunt the Wumpus, 1972
First home video game console - Odyssey, Magnavox, 1972
First racing game with steering wheel and gearshift - Gran Trak 10, Atari, 1974
First cocktail table arcade game - Quadra Pong, Atari, 1974
First arcade videogame with a microprocessor - Gun Fight, 1975
First controversial arcade game - Death Race, Exidy, 1976 (See also Space Invaders , Custer's Revenge , Chiller , and Mortal Kombat .)
First "brick-breaking" ball-and-bat game: Breakout, Atari, 1976
First arcade game based on a computer game: Space Wars, 1977 (Also the first vector graphics arcade game.)
First vertical shoot-em-up: Space Invaders, Taito, 1978
First trackball game/video sports game/scrolling playfield: Atari Football, Atari, 1978
First "cockpit" game/first game to track high scores with initials: Star Fire, Exidy, 1978
First head-to-head fighting game: Warrior, Cinematronics, 1978
First game in true RGB color: Galaxian, 1979
First pseudo-graphical dungeon game: Rogue, 1980
First 1st-person flying sim: Red Baron, Atari, 1980 (See also Tailgunner )
First game with a "bonus round": Carnival, Gremlin/Sega, 1980
First game with a character/first to be very popular with female players: Pac-Man, Namco, 1980
First game with pseudo-3D first-person environment: Battlezone, Atari, 1980
First game with secondary weapon and fully realized "game universe" stretching beyond the screen: Defender, Williams, 1980
First game with "different levels" and "boss enemy": Ozma Wars, 1979 (see also Astro Fighter, Phoenix  and GORF, Scramble )
First game with a female programmer: Astro Blaster, 1981
First color vector game: Space Fury, 1981
First game with speech synthesis: Stratovox, 1981
First game with selectable starting level of difficulty: Tempest, Atari, 1981
First laserdisc game - Astron Belt, Sony, 1982
First game with non-monophonic sound: Sinistar (cockpit version), Williams, 1983
First game with true three-dimensional filled polygons and selectable camera angles - I, Robot, Atari, 1983
First driving game to add shooting and other features: Spy Hunter, 1983
First game with a stereo music soundtrack and an ending: Marble Madness, Atari, 1984
Prehistory: 1949 and before
Bagatelle, a precursor to pinball
1777 - a party was thrown in honor of the King of France and his wife at the Chateau D'Bagatelle, owned by the brother of the king. The highlight of the party was a new table game featuring the slender table and cue sticks, which players used to shoot ivory balls up an inclined playfield. The table game was dubbed Bagatelle by the King's brother and shortly after swept through France. Some French soldiers carried their favorite bagatelle tables with them to America while helping to fight the British in the American Revolutionary War. Bagatelle spread and became so popular in America as well that a political cartoon from 1863 even depicts President Abraham Lincoln playing a tabletop bagatelle game. 
1869 - a British inventor named Montegue Redgrave settled in America and manufactured bagatelle tables out of his factory in Cincinnati, Ohio, USA. In 1871 Redgrave was granted US Patent #115,357 for his "Improvements in Bagatelle" [ipdb], which replaced the cue at the player's end of the table with a coiled spring and a plunger. The player shot balls up the inclined playfield using this plunger, a device that remains in pinball to this day. This innovation made the game friendlier to players. The game also shrunk in size and began to fit on top of a bar or counter. The balls became marbles and the wickets became small "pins". Redgrave's innovations in game design are acknowledged as the birth of pinball in its modern form. [Pinball firsts]
By the 1930s, manufacturers were producing coin-operated versions of bagatelles, now known as "marble games" or "pin games". The table was under glass and used Redgrave's plunger device to propel the ball into the upper playfield. In 1931 David Gottlieb's Baffle Ball became the first overnight hit of the coin-operated era. Selling for $17.50, the game dispensed five balls for a penny. The game struck a chord with a public eager for cheap entertainment in a depression-era economy. Most drugstores and taverns in America operated pinball machines, with many locations making back the cost of the game in a matter of days. Baffle Ball sold over 50,000 units and established Gottlieb as the first major manufacturer of pinball machines.  Before Baffle Ball, coin operated entertainment machines were mostly of the "strength tester" or "peep show" variety. 
1940 - George Stibitz implements the first over-the-phone computer communication - the precursor to today's online networking.
"The Iron Age": 1950-1968
1950 - Ben
Laposky creates some of the first "computer art" using oscilloscope images generated with analogue electronics and recording them onto high-speed film. 
1951 - the Whirlwind Computer is introduced, the first to use a video display monitor rather than an oscilloscope.  The monitor was a "vector" type, using beams of light to draw straight lines - rather than rectangular pixels. "Bouncing Ball" was a program designed to show off this new hardware, one of the first "demos"; much later, a bouncing ball demo called "Boing!" would become famous for showing off the capabilities of the Amiga computer (1985).
1952 - A. S. Douglas was working on the EDSAC computer in Cambridge University writing about the interaction between humans and computers. He invented what could be seen as the very first video game, Noughts And Crosses. This Tic-Tac-Toe game displayed a grid of nine boxes on the EDSAC matrix display and players input which box to place their X or O by use of a device somewhat similar to a telephone dial. Unfortunately the EDSAC was necessary in order to play this game and so Noughts And Crosses did not prosper beyond Cambridge. [via computerspacefan.net]
1958 - Willy Higinbotham creates "Tennis for Two" at Brookhaven national labs. Higinbotham said he wanted to create a program that would make people more comfortable with computers and technology in that tense nuclear/cold war era. Tennis for Two is recognized as the first video game, and obviously inspired Pong (1972) and its many subsequent imitators, as well as evolutionary followers such as Breakout (1976).
1961-62 Spacewar! is programmed at MIT by TMRC, the Tech Model Railroad Club, some of the very first hackers.  The first space-themed game, Spacewar was a huge influence on dozens of games to follow, and featured the first implementation of hyperspace, as well as bells and whistles like "expensive planetarium," a subroutine that drew stars in the background in their correct relative astronomical locations (see also Star Castle, Sept. 1980).
1962 - the first commercial modem is manufactured, the Bell 103 by AT&T. The Bell 103 was also the first modem with full-duplex transmission, frequency-shift keying or FSK, and had a speed of 300 bits per second or 300 baud.
1964 - Douglas Englebart invents the computer mouse.
1965 - Nolan Bushnell sees Spacewar! and thinks to himself that a computer game could be successful and profitable if located in a stand-alone enclosure in a public place.
1966 - Ralph Baer begins the "TV game project," which will later become the Odyssey. Fox & Hounds, (also known as "The Chase Game,") is the first program for the "TV Game"; it's the first videogame
ever played on a TV screen. Two players each control a small square, and one player must make his square touch the other's in order to "catch" him and make the other square disappear.
1967 - "Firefighter" is created for the TV Game. It's a simple concept - push the button to turn the screen blue.
"The Bronze Age": 1968-1976
- Sega releases its first game, an electromechanical arcade game called Periscope. A show stopper at the 1969 AMOA, it's a huge submarine
game with a large periscope, mechanical sound effects, and a fiberglass
ocean. This is the first arcade game to cost 25 cents per play. Sea Wolf (1976) is a later video version of this game. [klov.com]
- Ralph Baer's TV Game is now known as "The Brown Box." With only a few changes, this device will evolve to become the Odyssey home videogame in 1972.
- a 90-minute, staged public demonstration of a networked computer system was held at the Augmentation Research Center -- the first public appearance of the mouse, windows, hypermedia with object linking and addressing, and video teleconferencing.
- Nolan Bushnell and Nutting Associates release Computer Space, the first arcade video game, which introduced many of the features that have persisted in arcade games to this day:
a wooden cabinet, printed circuit board(s), monitor, control panel, audio speaker, power supply, and lighted marquee.
Computer Space is inspired by TMRC's Spacewar!. Also this year, Ralph Baer patents the "Television gaming apparatus" (the Odyssey prototype).
- Galaxy Game, another port of Spacewar, is also released this year. In 1971 the idea of "war" is not a popular one on campus, so the intrepid creators change the name to Galaxy Game. It runs on a PDP-11 minicomputer with a coin mech attached. It is claimed that Galaxy Game was the first commercially released video game - it was installed in Tressider Union, Stanford University, in September 1971 and cost 10 cents to play (or three plays for a quarter.) A later version "drove four to eight consoles" but it is unknown if all players were interacting; more likely, the minicomputer was simply running four to eight terminals, each with two players only. So while Galaxy Game may have beaten Computer Space to market in September of 1971, Computer Space still established the concept of a dedicated computing device which only played one game (rather than using the minicomputer paradigm of a CPU connected to various terminals.)
- Also in 1971, Ray Tomlinson invents email.
- Collossal Cave Adventure (later known as "Adventure," or even just ADVENT due to file name limitations), and Hunt the Wumpus, the first text adventure games, are written. (NOTE - for the purposes of this document, Adventure will be referred to by its full original name, to avoid confusion with Warren Robinett's Atari 2600 Adventure.)
- March - the Odyssey home videogame console is presented by Magnavox to the press.
- November - Pong, Atari's first game, is released. It's the first successful and mass-marketed arcade videogame - so successful that people line up outside the bar where the first unit is located, waiting for the establishment to open. The game soon malfunctions because it is overflowing with quarters. The lesson learned from Computer Space and its simpler successor, Pong, is that it is not enough for a game to be innovative and technically ingeniuous - it must above all be fun!
- Williams Electronics, a well-known pinball company, releases its first video arcade game, Paddle Ball. The game did not do especially well, but of course the company would rocket to fame and fortune in 1980, with Defender.
- Atari produces Gran Trak 10, the first racing game w/steering wheel and gear shift, (some say the first driving game period?) as well as Tank, the first game with ROM chips for graphics. Later, Atari would bundle the Combat game cartridge, a successor to Tank, with their 2600 home console.
- Xerox develops the Alto at their Palo Alto Research Center (PARC). It's the first computer with a GUI (Graphic User Interface) and is widely credited with inspiring the Apple Macintosh and indeed any modern computer that uses a mouse to click and drag icons and other on-screen elements.
- Quadra Pong - The first "cocktail table" videogame and the first four-player arcade videogame, followed by such worthies as Warlords, Eliminator, and Gauntlet.
- November - Atari releases Qwak!, perhaps the first arcade game to use a light pen (in this case, as a tool for duck hunting.) Not to be confused with the similarly named "Qwak," a 1982 prototype at the same company, that used a touch screen.
- Gun Fight is the first videogame with a microprocessor - and the first Japanese game licenced in America, followed by games like Space Invaders and Pac-Man. It is the first game ever to have two on-screen humans battling against each
other at the same time, and as such it's the grandfather of the fighting games
that later up most of the floorspace in arcades. It also introduced the
idea of having separate controls for aiming and moving.  Gun Fight is designed by Taito, adapted by Dave Nutting and manufactured by Midway in the US - it's the first Midway-produced game.
- Shark JAWS - Perhaps the first movie/videogame tie-in, the cabinet had the "JAWS" part of the name in huge letters. It was actually made by Atari but labeled as a "Horror Games" machine, in case Spielberg and company came calling.
- Steeplechase - The first horse racing game.
- April - Kee Games/Atari release Indy 800, the first 8-player game, a top-down racing game in a huge cabinet. This game could be considered the predecessor to the networked racing games of today. The game appears to have had a color CRT and was Atari's first color game.
- April - Breakout was designed by Nolan Bushnell and obstensibly programmed by Atari's 40th employee, Steve Jobs, but in reality, Jobs got his friend Steve Wozniak to do most of the work, in exchange for $350, while Jobs cleared $5000 for Woz' work. Woz' engineering was brilliant but impossible to reproduce, so yet another engineer was brought in to create a less elegant design that could be mass-produced. Woz and Jobs, of course, revolutionize the home computer market the next year with another Woz feat of engineering, the Apple II. Almost 30 years old as of this writing, Breakout obviously inspired Arkanoid (Taito, 1986) and all the variants that have followed since and are still played today... Crystal Hammer, Megaball, DX-Ball, Z-Ball, Break Quest, and so on; Breakout also inspired Warlords
(Atari, 1981) and numerous "adult" breakout games such as Block Gal , Play Girls , Peek-a-Boo! .
- In 1976, Bushnell sells the home console division of Atari to Warner Communications for an estimated $28 - $32 million. Bushnell later leaves the company in 1978. "While part of Warner, Atari achieved its greatest success, selling millions of Atari 2600 consoles, and at its peak, it accounted for one third of Warner's annual income and became the fastest-growing company in history in the United States (at the time)." .
- Zork is written on a mainframe computer. It will go on to become the first successful commercial text game when released by Infocom in 1980. A kindred spirit to the Zork adventures is Scott Adams'
Adventureland. Adams founds Adventure International in 1978.
- Exidy releases Death Race, the first controversial videogame, which is condemmed as violent according to the standards of the time. It's inspired by Death Race 2000, a 1975 B-movie starring David Carradine and Sly Stallone. The game consists of a small car chasing stick figures around the screen, and operators could adjust the sound effect played when the "gremlins" were hit, to sound more like an animal squeal... or a human scream. A decade later, Exidy's game Chiller (1986), a game with blatant horror themes, did not so much as raise an eyebrow in the watchdog community... and thus probably did not do as much business.
- Owen Rubin creates Cannonball for Atari - the first "trajectory" type game. This is ported to the Atari 2600 in 1982 ("Human Cannonball") and more than likely inspires the tank artillery games that become common on home computers in the early 80s, the most famous example being Scorched Earth.
- Heavyweight Champ, by Sega, is the first commerical arcade game designed in Japan.
- Trivia, a trivia question and answer game from Ramtek, is the first trivia game in arcades. The 2000 trivia questions were stored on a 8-track tape cartridge. This game antedates Triv-Quiz [Status, 1982] and Fax [Exidy, 1983].
- October - Night Driver, the first 1st-person driving game, is released by Atari. This appears to have been the earliest example of any first-person game, that is, the screen does not show a player-character, but rather shows a "player's-eye view" of the game environment. Also in October, Gremlin releases Blockade, the first "Snakes/Surround/Light Cycles" type game, where players control a lengthening line and attempt to avoid colliding with their own line or another player's line. This was Gremlin's first video game and was very widely copied (see Barricade, Brickyard). It
provided Gremlin with a big hit, winning the 'Best of Show' award at
the 1976 MOA convention.
- Fairchild Channel F - The first full-color cartridge-based programmable
home videogame console.
- Collossal Cave Adventure becomes the earliest game to be continued by another programmer, a la the "open source" movement of today. Original
programmer Will Crother (helped build the ARPAnet in '69; wrote Collossal Cave in 1972) passed the mantle to Don
Woods, who made many enhancements to the game source code in 1976.
- The Apple II is introduced, the first home computer with color graphics. Also this year, Commodore releases the PET and Radio Shack the TRS-80.
- Missile Attack, the first handheld game using LEDs (Light Emitting Diodes), is released by Mattel.
- October - Space Wars, the first vector game, is released in two versions - by Cinematronics and Vectorbeam. Based upon the computer game Spacewar! (1962) it also introduces the concept of "fuel for money" - where players can buy in for more time by adding more quarters before or during a game (this idea is used later in games such as Gauntlet). Rosenthal began working on Space Wars in 1973. He realized he had a
commercially viable product on his hands in December of 1976 when he
put the game in a friend's arcade before leaving on a trip to Boston.
When he returned, he found that the game had made $500 in six days and
he began looking for a company to license his game. He hit the streets
carrying a demonstration unit (along with a "Lunar Lander" game he'd created) but was rejected by most companies until he struck a deal with Cinematronics, who had been around since 1975 but had produced only three games, none of them hits. Space Wars was the hit of the 1977 AMOA show and went on to sell at least 10,000 units (some sources put the figure at three times that).
Atari reportely offered Cinematronics $5 million to license the game but the offer was refused (though Cinematronics would launch an unsuccessful lawsuit against Atari for patent violation after the release of "Asteroids"). 
The Golden Age: 1978-1984
- Space Invaders launches the "vertical space shooter" craze that later informs such games as Galaga and others. It was the first video game to inspire real mania and "addiction" - young gamers commited crimes to get enough money to play, and the game caused a coin shortage in Japan. Conservative communities rallied against the game - Residents of Mesquite, Texas, pushed the issue all the way to the
Supreme Court in their efforts to ban the illicit machines from their
Bible-belt community. Space Invaders was the first arcade game to become ubitquitous - the first to be found outside of arcades, in venues such as pizza parlors and ice cream shops. It also features the first attract mode with a sense of humor - it would display 'INSERT CCOIN' and an invader would come along and bomb the offending extra 'C'.
- Atari Football (aka "Xs and Os" football) is the first arcade game to use trackball controllers. According to one of the designers who posted in the arcade collecting USENET group, they had
to fight tooth and nail to get the trackball controller approved since
nobody in management thought it would fly ("it's just too strange; the
players won't know what to do with it").  Atari Football was first created in 1974 by Steve Bristow and
originally called 'X's and O's'. It was shelved when Bristow started on "Tank", then was resurrected three years later. This game was the first true video sports game and also the first with a scrolling playfield.
- Microvision, by Milton Bradley, is the first portable home console with cartridges.
- Pizza Time Theatre - Nolan Bushnell founds the first family-oriented arcade.
- March - Atari Sky Raider was the first continuous vertically scrolling arcade video game.
- June - Fire Truck is the first cooperative game. One player sits in the seat and drives, the other stands behind and steers the back (and rings the bell).
- December - Exidy's Star Fire is the first game in a "cockpit" cabinet, (though not the first "sit-down" game; several driving games had sit-down cabinets in the mid-70s) and the first to allow high-scoring players to enter their initials. Also may be the first to put the company "in the game" - (players can destroy the "Exidy Pirate Ship") - and had what might be considered the first "easter egg" - At least three different messages would display if certain initials were entered, such as "HI SUSAN" for SKO (The programmer's fiancee, Susan Owen, who worked on the graphics.) This game was only built in a cockpit cabinet, but a mockup of a standup cabinet was fabricated for the movie "Midnight Madness" (1980). The title graphics of Star Fire are not unlike the logo of a certain sci-fi movie of the day, and the ships in the game are derivative as well! (Many games of this era featured a "trench" and/or "TIE fighter" looking ships, eg, Space Encounters, Star Hawk, etc)
- Warrior is the first head-to-head combat fighting game, before Karate Champ, Yie Ar Kung Fu, Street Fighter and the rest. However, Warrior is an "overhead view" game; Karate Champ (Sept. 1984) set the standard for all the side-view fighting games to follow.
- 2600 Adventure contains the first in-game "easter egg"; in this case, a message from the programmer, Warren Robinett.
- 2600 Space Invaders was the first home game to be licensed from arcade title, and the very first "killer app" videogame (that is, it was a game people wanted to play so badly, they would buy an Atari 2600 so that they could play the game). 
- Lord British (Richard Garriott) writes his first game, Akalabeth, for his own amusement. A computer store proprietor suggests that he sell the game. Bitmapped graphics are added and the game is released the next year as Ultima I. 
- A university student, Roy Trubshaw, creates the first MUD (Multi User Dungeon) (Kent, 2001). Though text-based adventures, and hardly "massive," MUDs were the "Massively Multiplayer On-line Role Playing Games" of their day.
- May - Atari Subs was the first multi-monitor game. Players stood on opposite sites
of each other and used radar to find the others hidden sub and blow it
away. In addition to the dual monitor, this was the first game with an
operator optional add-a-coin or regular credit coinage mode. In
add-a-coin mode, the game can be set on eight different time spans per coin.
- August - Atari releases their first vector graphics game, Lunar Lander, the first game to re-create a complex real life scenario. Perhaps the first game to use the button configuration rotate left/rotate right/thrust, which was further refined in Asteroids.
- September - Taito releases Space Invaders Part II, the first sequel to a video game. It is licensed to Midway two months later as "Space Invaders Deluxe." The game contains what could be considered the first arcade "easter egg" - an undocumented "rainbow bonus" that can be achieved if a player shoots a bottom-level invader last in a wave. Also the first "intermission," a brief interlude between waves.
- October - Galaxian, the first true (RGB) color game is released.
- November - Atari's Asteroids takes the gaming world by storm, building on the ideas of Spacewar and adding the familiar left, right, thrust, fire button controls and realistic Newtonian physics (thrust, momentum, etc). Many later games adopted the left/right/thrust/fire control scheme. Asteroids introduced real-world physics to the arcade for the first
time, with speed and inertia all adding to the player's problems. As
well as the inertia of the player's ship - forcing the player to allow
for the ship slowing down and speeding up whenever the Thrust button
was utilised - shot asteroids would often send fragments flying in
seemingly random directions, and at varying and unpredictable speeds. Asteroids is Atari's most successful arcade game of all time.  Also this month, Cinematronics releases Tailgunner, the first game with pseudo-3D "wireframe" graphics. Tailgunner is also the first vector game with a 1st-person perspective and arguably the first 1st-person flying game (see Red Baron .)
- December - Ozma Wars, the first game by SNK (Shin Nihon Kikaku, or "New Japan Project") is relatively unknown today, but was a trendsetter of its time. It had multiple levels, a "boss" and a docking phase, before more famous games like Astro Blaster, Scramble, Phoenix and Gorf.
- Rogue, the first "dungeon crawl" type computer game, is created by Michael Toy, Glenn Wichman, and Ken Arnold. Inspired by "static" adventures such as Collosal Cave, Dungeon (1975) and dnd (1975), they are motivated to make a dungeon game they themselves can play and enjoy over and over, that is "new" every time because the dungeon and its contents are randomly generated every time. It's said to be the first adventure game to feature graphics (although these are made up of textual characters). Rogue inspires a vast array of similar games, known as "Roguelikes", variants of which are still popular today. Even Rogue itself is still played today!
- Two Atari programmers, disgruntled by the lack of recognition and remuneration for their efforts, leave the company and found Activision, the first "3rd party" game developer. Activision games are innovative and iconic, and give full credit to their creators. Activision is still a profitable game distributor today.
- April - Atari's Warlords (upright model) is the last black-and-white raster game. The cocktail table version is in color and supports four players. The 4-player version is still enjoyed by classic gamers today. Cinematronics releases Rip Off, regarded as one of the all-time great 2-player simultaneous games (and along with Fire Truck, an example of an early cooperative game).
- May - Red Baron (Atari) is credited as the first 1st-person flying (flight simulation) game, but it did poorly in arcades. Actually Tailgunner (Cinematronics, 11/1979) was the first flying game with a first-person perspective, but was "backwards" - you are looking out the "back" of the craft. Red Baron actually allows the player to control the steering of the plane.
- Carnival is the first game to feature a "bonus" round where the player tests his skill and accuracy in a contest different from the main gameplay. This concept is implemented in future games like Galaga. Carnival was possibly the first with its particular scoring bonuses as well, such as targets decreasing in value, and a pinball-like "shoot the letters in order" scheme. On 17 June 1980, Atari's "Asteroids" and "Lunar Lander" were the first two video games to ever be registered in the Copyright Office.
- September - Cinematronics' Star Castle featured one of the first enemy AIs, an artificial intelligence which could track the player; as well as a background starfield inspired by a centerfold in "Oui" magazine.
- Pac-Man is the first game to be as popular with women as it is with men. This of course makes the game hugely profitable, since at this time arcade games are hugely popular. The game and its first sequel, Ms. Pac-Man, remain among the most monetarily successful arcade games of all time; there was once again a shortage of 100-yen coins in Japan as there had been in the Space Invaders era. Pac-Man was the first game to feature a character, paving the way for the zillion-dollar Mario and Lara Croft franchises. The game was the first to spawn an animated TV show. Pac-Man was remarkable for the impact it made on our cultural consciousness, as well as its unmatched profitability (in addition to the game itself being the most monetarily successful ever, it spawned a tidal wave of unrelated products - everything from cereal to toilet seats!) Pac-Man continued the trend started by Space Invaders of making arcade games ubitquitous - Pac-Man (and then other games) could be found in all sorts of places, not just arcades and pizza joints, but movie theatres, convenience stores, grocery stores, and even (according to Steven Kent) the basement of at least one funeral parlor.
- Rally-X seems to be the first game to scroll in 4 directions. Like Defender, the game world is larger than the screen, and thus a radar device is provided so the player can see the locations of game elements outside of the visible area. Rally-X, Defender and Pac-Man were all displayed at an industry show in 1980 and rumor has it that the buzz at the time was that Rally-X would be the big game and the other two would not do well. Defender, of course, presents a huge challenge with its many controls and daunting enemies, and is the first "player's game." Though difficult, the game was extremely popular, and is said to be second only to Pac-Man in lifetime earnings. 
- Crazy Climber, by Nichibutsu, is the first dual-joystick game.
- Battlezone is the first "3-D environmental landscape game" - the first game with a
three-dimensional world a player can move through at will with a first-person perspective. Battlezone is also famous for the interest it got from the U.S. Army, who hired Atari to create a separate version for training soldiers for doing targeting in the Bradley combat vehicle. Two cabinets of this version are made, much to the dismay of the programmer, a pacifist.
- Also unveiled this month is Space Panic, the first platform/climbing game - leading the way for Donkey Kong and many others.
- Defender, by Williams Electronics, blasts onto the scene. Defender featured, among many other innovations, the smart bomb - perhaps the arcade world's first mega-powerful secondary weapon. Defender was the first game to feature a "game world" larger than the screen, in which important and urgent things were happening outside of the player's view; and so provided a radar like "Scanner" to show the player what was happening elsewhere on the planet. Defender is the first sideways-scrolling shoot 'em up arcade game. Until 1980, games could be mostly divided into two categories: Asteroids-style games and Space Invaders-style games. Pac-Man and Defender changed all that by defining two more genres that would become hugely popular.
- Amstar releases Phoenix, the first smash-hit multi-level space shooter to include "boss" enemies.  The game builds on the concept of Space Invaders/Galaxian, adding innovations such as multi-part enemies and a shield that can be activated by the player, recharging every seven seconds. The game is licenced to Centuri for US manufacture and distribution in March of 1981.
1981 is the peak year for arcade video games. Gamers drop 20 billion quarters into machines this year, for a total combined play time of 75 years. 
- Ms. Pac Man is released.  It updates its "spouse" with changing maze configurations, "tunnels" that wrap around the screen, and bonus items that move through the maze. It is the first arcade sequel to match or exceed its predecessor in popularity (Galaga would be the other great example of this; although it reportedly did not sell as many cabinets as Galaxian,  the game is still played today. As of 2004, both games were still so popular that Namco released Class of 1981, an arcade cabinet combining Ms. Pac Man and Galaga).
- GORF is the first game released in the US to feature multiple "screens" or "waves" - different game scenes that offer different challenges to the player.
- Konami's Scramble is another trend setter in this regard, also released in February, though it comes to the US in May (distributed by Stern). Scramble defines a new genre of sideways-scrolling shooting/bombing games that will continue through games such as R-Type (1987) and many others. GORF and Scramble, along with Phoenix, are the first games to have an ultimate goal - a "final" game wave where a "boss" alien ship or other target must be destroyed. Some sources cite Cosmic Avenger as the first continuous sideways-scrolling shoot-em-up game, but it was released in July of this year, which makes Scramble the first. It was also the first of its kind to give the player a means to re-fuel during play.
- Sega/Gremlin releases Astro Blaster, the first game co-programmed by a woman.
Barbara Michaelec also apparently did "Roger Rabbit in Hare Raising Havoc" much later, according to this wiki. Astro Blaster was the first game to offer "Secret Bonuses" - these were reportedly program bugs that were made into a feature!  Astro Blaster also offers a huge number of enemy waves, the innovative "warp" feature that slowed down the enemies, a meteor shower, and a docking manuver where the player would refuel.
- Centipede, by Atari, was obstensibly the first game designed by a woman, but some insiders have stated that this was mostly PR.  Bailey designed the graphics and invented the original concept (in which the mushrooms were indestructable and the game was more like Space Invaders), but the game was actually programmed by Ed Logg (Asteroids). Astro Blaster (Feb 1981) seems to be the first arcade videogame with a female programmer on board. Centipede was the 1st UL (Underwriter's Laboratories) approved game.
- Midway's Omega Race was their only vector game, and the last black-and-white vector game made by anyone.
One item of note is that the high score table will not display the initials FUK or FUC (early censorship at its best). 
- Vanguard is released by SNK corp in Japan - the very first game with a "Continue" feature. This would become common on games in the late 1980s and 1990s. The game makes it to American shores in October, distributed by Centuri.
- Donkey Kong provides breakthrough success for Nintendo in the US, spearheading the creation of Nintendo of America, which will later ressurect the home gaming industry with the introduction of the Nintendo Entertainment System. Donkey Kong is not the first climbing game, but is the first multi-level climbing (platform) game and spawns many similar games. Although GORF and Ms. Pac-Man had previously offered different game "waves", Donkey Kong is unique in the different challenges it offers the player. Its characters are still seen in popular games today.
- August '81 saw the release of Space Fury, the first color vector game, as well as Stratovox, first arcade videogame with synthetic speech (before Berzerk). This was apparently perceived as such a selling point that some versions of the game are titled "Speak and Rescue."
- Tempest is the first game to feature what Atari called "Skill Step," which let players choose their starting level, with a corresponding point bonus for starting on higher levels; as well as Berzerk, the first game with robots as enemies, followed by Robotron and others. Both of these games were inspired by nightmares their programmers had had. Berzerk holds the sad distinction of being the first video game to claim a player's life - a 19-year-old gamer suffered a fatal heart attack after playing a game in 1982; a healthy 18-year-old met the same fate the next year. On a lighter note, it seems that Berzerk is the first misspelled game title (although it's based on The Berzerker Stories, so it's true to its source material.)
- Namco releases the seminal shoot-em-up Galaga, a superior sequel to Galaxian, featuring improvements such as the bonus "challenging stages" and
enemy ships with tractor beams that can capture a player's ship (and the player can shoot the kidnapper when it attacks, freeing the stolen ship and docking with it for double firepower).
- Williams releases the sequel to Defender, Stargate. The game plays similarly to Defender, but with one additional control button and eight additional enemy ships, the game achieves a level of complexity that is arguably unmatched among all the classic arcade games. Stargate was the first game designed by Vid kidz, the design firm
founded by Jarvis and DeMar when they decided to go independent.
Williams became desperate for a game after the designers left, so they
took Vidkidz under contract. Stargate took four months to complete. All
Vidkidz games were designed on a dual 8" floppy, 1 MHz 6809 Motorola Exorcisor system that cost $30,000 in those days. The name was changed to 'Defender II' right after the game had stopped being manufactured, because Williams wanted to make sure they could own the trademark on the title. 
- Eliminator is the first and only 4-player vector game. The 4-player version is a cocktail cabinet with a control panel on each of the four sides.
Also in 1981: 
- Mahjong, the first in a huge genre of mahjong games, is released by Taito.
- Qix is released, begining the genre of "capture area by drawing a line" games. Most subsequent games of this type are the "adult" sort found mostly in bars; players' goal was to capture screen area to reveal images of nudity (see Gals Panic, Lady Killer).
- DECO (Data East Corp) releases Cassette, the first standardized arcade platform, for which many games were made. Given how much arcade machines weigh, a standarized interchangable system is a good idea, and other companies follow suit, with formats such as JAMMA and Atari's System I.
- Mystery House, by Ken and Roberta Williams is the first text adventure game to add graphics. The couple later found Sierra Online and release such games as King's Quest and its many sequels and followers.
- VIC-20: first home computer to cost less than $300.
- Sega releases Astron Belt, the first laserdisc game, in Japan. It sees release in the US in late1983 via Bally/Midway, who previously distributed Space Invaders and Pac-Man there.
- January - Dig Dug is the first game advertised in movie theatres.
- February - Zaxxon is the first game to offer a pseudo-3D three-quarters perspective. Space Duel is the first vector cooperative
game (And Atari's only simultaneous multi-player vector game). Based on Space War and Asteroids, the game features multiple game modes (such as two ships tied together), and real
- March - Robotron: 2084, by Williams, was unique at the time in that the controls were two 8-way
joysticks (one for running, one for shooting) rather than the more
typical single joystick and fire button. This unique dual-joystick
control was created because of two occurences : Eugene Jarvis (who had previously created Defender) liked the game "Berzerk", but hated the joystick-and-button run-and-stop-and-shoot configuration; and the fact that Jarvis's right hand had been broken in a car accident shortly after he finished creating "Stargate". Robotron is one of the first games to feature a story behind the game, a sort of plot, (see also Major Havoc, 1983) and follows Defender in providing unique names and personalities for all of the on-screen characters (and once again, you are defending the humans and battling against those who would turn your friends against you.)
- May - Moon Patrol, developed by Irem and distributed by Williams in the US, is the first game to feature parallax scrolling. That is, to have two parts of the background (In this case,
the green and aqua mountains) and have them move at different rates to create a sense of
depth while moving along the terrain. Also this month, Bally Midway releases Tron, based on the movie of the same name. Tron was the first game to have a championship tournament with over a million entries; to promote the game, Bally/Midway and Aladdin's Castle sponsored a
seven-week-long tournament at over 400 locations throughout the
country, as well as a celebrity tournament. The winner was Richard Ross with a combined score of 3,958,901 for three games!
- July - Gottlieb releases Reactor, the first game to credit its programmer. Before this game, creators, programmers
and almost anyone involved with creating a game were not allowed to
have their name displayed anywhere in the game. It wasn't until Tim Skelly changed jobs from Cinematronics to Gottlieb that this changed. His contract with Gottlieb specified he would be allowed full recognition for his creations. 
- September - Joust is released by Williams. The first and only game to have both cooperative and combative modes of play in the course of the same game, this platform/combat game was (and is) unique.
- December - Xevious is the first game to feature pre-rendered graphics.
- Games like Custers Revenge (The first attempt at an "adult" video game, unfortunately programmed for the Atari 2600, a console popular with children) and Texas Chainsaw Massacre revive the sort of moral outrage that had erupted over Death Race. 
- Journey - the first game to use digitized sprites in the game, using digital camera techology invented in 1980 by Ralph Baer (who also pioneered home video games in 1966). Rumor has it the game originally used a digital camera to allow palyers to take pictures of their own faces to be elements in the game, but this did not last, for players abused the camera by taking pictures of themselves... inappropriately. In fact, it was an earlier prototype called "Clone" that was played with in this way, the wrong parts of the body being photographed. "Clone" was dropped when Baer heard about Journey;
he saw a new opportunity to use his digitizing camera technology. The faces of the members of Journey were used in the game instead.
- Dragon's Lair, though not the first laserdisc game, was the first (and probably only) really successful one, and made a big splash in 1983.
- Spy Hunter offers a combination of driving and shooting, as well as other accessories such as oil slick, missile launcher, etc. It's the first, perhaps the only driving game to offer this kind of complexity.
- February - The sit-down cockpit version of Sinistar featured two sound boards for a stereo reverb sound effect; it was the first to offer stereo sound, though the speakers seem to have been mounted front and back, not left and right. Sinistar may be the first game to scroll in "all" directions (actually 48 directions). In addition to the "panning" sound feature, the cockpit version of the game only allows single player games.
- October - Exidy releases Crossbow, the first of their many great light gun games. Crossbow was also the first video game in history to use 100% digitized sound and music (as opposed to synthesized or cassette player produced sounds).
- November - Atari releases Major Havoc, by Owen Rubin. Along with Robotron, this was one of the first games with a true story behind it, (rather than, for example, "shoot enemy ships for points")
and the first to explain, as one game magazine noted, why you have so many
lives...they are clones. Major Havoc is a brilliant game, but does not sell well, due to operators distrusting vector games (previous releases have been technologically unreliable.)
- December - Tapper is the first game to be made in multiple versions to be "kid-friendly". Root Beer Tapper exists obstensibly to provide children with a non-alcholic gaming alternative. (Budweiser and Suntory are the beverages dispensed in the other versions.)
- Marble Madness is created by expert player Eric Ginner, who won a high-score contest and thus won the chance to design a game for Atari. Marble Madness features such innovations as gorgeous, surreal psuedo-3D isometric graphics, the first stereo music videogame soundtrack, and an ending that makes it possible to properly complete the game.
- Bally Sente releases Trivial Pursuit, perhaps the first arcade game based on a board game.
- September - Data East introduces Karate Champ, a seminal one-on-one fighting game set over the course of a karate
tournament, Karate Champ was the first game of its type and would
influence every game of the fighting genre that followed. Karate
Champ's control system utilised a somewhat awkward dual joystick
control system, with simulataneous joystick manipulation required to
execute even the simplest of kicks. 
"The Plastic Age"
- Infocom releases the interactive fiction version of The Hitchhiker's Guide to the Galaxy, the first program which intentionally lies to the player and one of the first games to use humor effectively.
- July - Hang-On is touted as the first "simulation" game (seemingly meaning, the first to use a physical construct to simulate an activity, in this case riding a "motorcycle." However, games like Sea Wolf, Battlezone and countless gun games might take issue with this, as they also use sim apparati).
- Exidy releases Chiller, the first truly gory video game, featuring horror themes such as torture. (Howell Ivy, designer of Death Race, worked on the hardware for Chiller, and he also contributed to Trivia and Barricade, both originators in their respective genres in 1976.)
- Bally Sente releases a motion simulator arcade game called
Shrike Avenger. This was apparently the first game to put you in a moving
- April - Nintendo releases Super Mario Bros., a spectacularly successful sideways scrolling run and jump game that spawns innumerable sequels and imitators.
- Also in April, Bally Sente releases Name That Tune, the first arcade game based on a TV show - an almost exact translation of the 1980s incarnation of the game show.
It was all colors and text, and the only animation in it was a little
hand that played notes on a piano. The interface had to be simple, as
they used up all the ROM space on the different songs. 
- Leisure Suit Larry was possibly the first "dating simulation" type game, though there were possibly earlier, and dirtier, games like this in Japan.
- July - R-Type reinvigorates the shoot-em-up genre with innovations in level design, graphics and weapon choices. 
- Exterminator, the first game with fully digitized graphics, is released. It will have the highest quality digitized graphics until the release of Mortal Kombat 2. 
- July - Midway releases Mortal Kombat, renowned as the first fighting game to use digitized
characters and blood (as opposed to the hand-animated, more
cartoon-like graphics of competing games). Mortal Kombat was developed
as a reaction to the popular Capcom game "Street Fighter II - The World Warrior", with simpler controls and digitized graphics. Some say the game's graphic violence was gratuitous, and was only included in order to generate a public outcry and controversy that would increase publicity for the game. 
- Killer Instinct is released, the first arcade game with a hard disk; up to that point the game with the highest quality graphics pre-rendered by a rendering program, featuring to this day the highest quality use of the movie background technique.
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