The Rise and Fall of Atari

By Alex in Bathroom Reader, Toys on May 5, 2008 at 2:03 am

The following is reprinted from Uncle John's Ahh-Inspiring Bathroom Reader

Pong, Atari's most popular game (Image: screenshot of Pong from the Atari Arcade Hits #1, 1972, by Hasbro Interactive [wikipedia]) If you know anything about the pop culture of the 1970s, the name Atari is synonymous with video games. So what happened? Where did Atari go? Here’s the story. THE GAMBLER

In the early 1960s, a University of Utah engineering student named Nolan Bushnell lost his tuition money in a poker game. He immediately took a job at a pinball arcade near Salt Lake City to make back the money and support himself while he was at school. In school, Bushnell majored in engineering and, like everyone else who had access to the university’s supercomputers, was a Spacewar! Addict. But he was different. To his fellow students, Spacewar! Was just a game; to Bushnell, it seemed like a way to make money. If he could put a game like Spacewar! Into a pinball arcade, he figured that people would line up to play it. (Photo: Stibbe.net) FALSE START Bushnell graduated form college in 1968 and moved to California. He wanted to work for Disney but they turned him down, so he took a day job with an engineering company called Ampex. At night he worked on building his arcade video game. He converted his daughter’s bedroom into a workshop (she had to sleep on the couch) and scrounged free parts from Ampex and from friends at other electronics companies. The monitor for his prototype was a black-and-white TV he got at Goodwill; an old paint thinner can was the coinbox.

When he finished building the prototype for the game he called Computer Space, he looked around for a partner to help him manufacture and sell it. On the advice of his dentist, he made a deal with a manufacturer or arcade games, Nutting Associates. Nutting agreed to build and sell the games in exchange for a share of the profits, and in return, Bushnell signed on as an engineer for the firm. If you’ve never heard of Computer Space, you’re not alone. The game was a dud. It sounded simple - the player’s rocket has to destroy two alien flying saucers powered by the computer - but it came with several pages of difficult-to-understand instructions. The fact that it was the world’s first arcade video game only made things worse. Neither players nor arcade owners knew what to think of the strange machine sitting next to the pinball machines. “People would look at you like you had three heads,” Bushnell remembered. “ ’You mean you’re going to put the TV set in a box with a coin slot and play games on it?’ ” (Photo: Flippers [wikipedia]) NUTTING IN COMMON Still, Bushnell was convinced that Nutting Associates, not the game, was to blame for the failure. And he was convinced that he could do a better job running his own company. So he and a friend chipped in $250 a piece to start a company called Syzygy (the name given to the configuration of the sun, the earth, and the moon when they ‘re in a straight line in space).

That’s what Bushnell wanted to name it … but when he filed with the states of California, they told him the name was already taken. Bushnell liked to play Go, a Japanese game of strategy similar to chess. He thought some of the words used in the game would make a good name for a business, and company legend has it he asked the clerk at the California Secretary of State’s office to choose between Sente, Hane, and Atari. She picked Atari. FAKING IT

Bushnell hired an engineer named Al Alcorn to develop games. Meanwhile, Bushnell installed pinball machines in several local businesses, including a bar called Andy Capp’s Tavern. The cash generated by the pinball machines would help fund the company until the video games were ready for market. Alcorn’s first assignment was to build a simple Ping-Pong-style video game. Bushnell told him that Atari had signed a contract to deliver such a game to General Electric and now it needed to get built. According to the official version of events, Bushnell was fibbing - he wanted Alcorn to get used to designing games and wanted to start him out with something simple. Ping-Pong, with one ball and two paddles, was about as simple as a video game can be. In reality, there was no contract with G.E. and Bushnell had no intention of bringing a table tennis game to market. He was convinced that the biggest moneymakers would be complicated games like Computer Space. “He was just going to throw the Ping-Pong game away,” Alcorn remembers. But then Alcorn gave him a reason not to. OUT OF ORDER

Instead of a simple game, Alcorn’s Ping-Pong had a touch of realism: if you hit the ball with the center of the paddle, the ball bounced straight ahead, but if you hit it with the edge of a paddle, it bounced off at an angle. With Alcorn’s enhancements, video Ping-Pong was a lot more fun to play than Bushnell had expected. As long as the game was fun, Bushnell decided to test it commercially by installing Pong, as he decided to call it, at Andy Capp’s Tavern. Two weeks later, the owner of Andy Capp’s called to complain that the game was already broken. Alcorn went out to fix it, and as soon as he opened the machine he realized what was wrong - the game was so full of quarters that they had overflowed the coin tray and jammed the machine. (Photo: ProhibitOnions [wikipedia]) That was only half of the story. The bar’s owner also told Alcorn that on some morning when he arrived to open the bar, people were already waiting outside. But they weren’t waiting for beer. They’d come in, play Pong for a while, and then leave without ordering a drink. He’d never seen anything like it. That was their first indication that Pong was going to be a hit. JUST A COINCIDENCE But did Nolan Bushnell really come up with the idea for Pong … or did he lift it from another video game company? Video game history buffs still debate the issue today.

Here’s what we do know: In the late 1960s, a defense industry engineer named Ralph Baer invented a video game system that could be played at home on a regular television. The system featured 12 different games, including Table Tennis. (Photo: Ralph H. Baer Consultants) Magnavox licensed Baer’s system in 1971 and prepared to market it as Odyssey, the world’s first home video game system. The company planned to sell the system through its own network of dealers and distributors. In May 1972, the company quietly began demonstrating the product around the country … and on May 24 it demonstrated it at a trade show in Burlingame, California. “In later litigation,” Steven Kent writes in The Ultimate History of Video Games, “it was revealed that Bushnell not only attended the Burlingame show but also played the tennis game on Odyssey.” UNANSWERED QUESTIONS Did Bushnell have a revelation when he played the Odyssey game? Did it convince him that simple games like Pong would be more popular than complicated games like Computer Space? Or was it just as he claimed - that he instructed Alcorn to invent a ping-pong game, perhaps inspired by he Magnavox Odyssey, only because it was the simplest one he could think of? We’ll probably never know for sure. As far as the law was concerned, the only thing that really mattered was that, unlike Willy Higginbotham (Tennis for Two) and Steve Russell (Spacewar!), Ralph Baer actually had patented his idea for playing video games on a TV screen and had even won a second patent for video Ping-Pong. His patents predated the founding of Atari by a couple of years. Bushnell never applied for a patent for Pong, and didn’t have a case for proving he’d invented it. And even if he did, he didn’t have a chance fighting a big corporation like Magnavox in court. SMART MOVE So why did Atari become synonymous with video games instead of Magnavox? It was skillful maneuvering by Bushnell. Since he couldn’t win in court, Bushnell paid a flat fee of $700,000 for a license to use Baer’s patents. That meant that Atari bought the rights free and clear and would never have to pay a penny in royalties to Magnavox. And because Magnavox was now the undisputed patent holder, they had to sue Atari’s competitors in court whenever competing game systems infringed the patents. Atari didn’t even have to chip in for the legal fees.

Magnavox Odyssey, signed by Ralph Baer. (Photo: Wgungfu [wikipedia]) Magnavox had Odyssey on the market while Atari was still years away from manufacturing a home version of Pong. But Magnavox wouldn’t capitalize on their exclusive market. Their first mistake was selling the product exclusively through their own network of dealers, when it would have been smarter to sell them in huge chain stores like Sears and Kmart. Their second mistake was implying in their advertising that Odyssey would only work with Magnavox TVs. That wasn’t true, but the company was hoping to increase TV sales. All they ended up doing was hurting sales of Odyssey. In 1975 they discontinued the 12-game system and introduced a table tennis-only home video game to compete against the home version of Pong. Then in 1977 they introduced Odyssey2 to compete against Atari’s 2600 system. Yet in spite of all the effort - and in spite of the fact that they, not Atari, owned the basic video game patents - Magnavox was never more than a me-too product with a marginal market share. Magnavox finally halted production in 1983. KING PONG From the moment it was introduced in 1972, Atari’s arcade game, Pong, was a money maker. Placed in a busy location, a single Pong game could earn more than $300 a week, compared to $50 a week for a typical pinball machine. Atari sold more than 8,000 of the machines at a time when even the most popular pinball machines rarely sold more than 2,500 units. Atari would have sold a lot more machines, too, if competing game manufacturers hadn’t flooded the market with knockoffs. But there was no way that Atari could fight off all the imitators. Instead, Atari founder Nolan Bushnell managed to stay one step ahead of the competition by inventing one new arcade game after another . (One of these games, Breakout, in which you use a paddle and a ball to knock out holes in a brick wall, was created by an Atari programmer named Steve Jobs and his friend Steve Wozniak, an engineer at Hewlett-Packard. Do their names sound familiar? They should - a few years later, they founded Apple Computer.) THE ATARI 2600 In 1975 Atari entered the home video game market by creating a home version of Pong. Selling its games through Sears Roebuck and Co., Atari sold 150,000 games that first season alone. Bushnell was ready to introduce more home versions of arcade games, and he’d decided to do it by copying an idea from a competing video game system, Channel F. The idea: game cartridges. It was a simple concept: a universal game system in which interchangeable game cartridges plugged into a game player, or “console.” There was just one problem: inventing a video game cartridge system from scratch and manufacturing it in great enough volume to beat out his competitors was going to cost a fortune. The only way that he could come up with the money was by selling Atari to Warner Communications (today part of AOL Time Warner) for $28 million in 1976. Bushnell stayed on as Atari’s chairman and continued to work on the cartridge system.

Atari 2600. Photo: joho345 [wikipedia] Introduced in mid-1977, the Atari Video Computer System (VCS) - later renamed the Atari 2600 - struggled for more than a year. Atari’s competitors didn’t do much better, and for a while it seemed that the entire video game industry might be on its last legs - the victim of the public’s burnout from playing too much Pong. ALIEN RESURRECTION Then in early 1979, Atari executives hit on the idea of licensing Space Invaders, an arcade game manufactured by Taito, a Japanese company. The game was so popular in Japan that it actually caused a coin shortage, forcing the national mint to triple its output of 100-yen coins.

Space Invaders on the Atari 2600. Image: Kudla.org Just as it had in Japan, Space Invaders became the most popular arcade game in the United States, and the most popular Atari game cartridge. Atari followed up with other blockbuster cartridges like Defender, Missile Command, and Asteroids; by 1980 it commanded a 75% share of the burgeoning home video game market. Thanks in large part to soaring sales of the VCS system, Atari’s annual sales grew from $75 million in 1977 to more than $2 billion in 1980, making Atari the fastest growing company in U.S. history. But it wouldn’t stay that way for long. THE BEGINNING OF THE END Within months of bringing VCS to market, Bushnell was already pushing Warner to begin work on a next-generation successor to the system, but Warner rejected the idea out of hand. They had invested more than $100 million in the VCS and weren’t about to turn around and build a new product to compete with it. Warner’s determination to rest on their laurels was one of the things that led to Bushnell’s break with the company. By the time Space Invaders revived the fortunes of the VCS, Noland Bushnell was no longer part of the company. Warner Communications had forced him out following a power struggle in November 1978. If Bushnell had been the only person to leave the company, Atari’s problems probably wouldn’t have gotten so bad. But he wasn’t - Warner also managed to alienate nearly all of Atari’s best programmers. While Atari made millions of dollars, Warner paid the programmers less than $30,000 a year, didn’t share the profits the games generated, and wouldn’t even allow them to see sales figures. The programmers didn’t receive any public credit for their work, either. Outside of the company, few people even know who had designed classic games like Asteroids and Missile Command; Warner was afraid that if it made the names public, the programmers would be hired away by other video game companies. BREAKOUT

So Atari’s top programmers quit and formed their own video game company, called Activision, then turned around and began selling VCS-compatible games that competed directly against Atari’s own titles. Activision dealt a huge blow to Atari, and not just because Activision’s games were better. Atari’s entire marketing strategy was based around pricing the VCS console as cheaply as possible - $199 - then reaping huge profits from sales of its high-priced game cartridges. Now the best games were being made by Activision. Atari sued Activision several times to try to block it from making games for the VCS but lost every time, and Activision kept cranking out hit after hit. By 1982 Activision was selling $150 million worth of cartridges a year and had replaced Atari as the fastest growing company in the United States. THE ATARI GLUT Activision’s spectacular success encouraged other Atari programmers to defect and form their own video game companies, and it also prompted dozens of other companies - even Quaker Oats - to begin making games for the VCS. Many of these games were terrible, and most of the companies that made them soon went out of business. But that only made things worse for Atari, because when the bad companies went out of business, their game cartridges were dumped on the market for as little as $9.99 apiece. If people wanted good games, they bought them from Activision. If they wanted cheap games, they pulled them out of the discount bin. Not many people bought Atari’s games, and when the cheap games proved disappointing, consumer blamed Atari.

Meanwhile, just as Bushnell had feared, over the next few years, new game systems like Mattel’s Intellivision and Coleco’s ColecoVision came on the market and began chiseling away at Atari’s market share. With state-of-the-art hardware and computer chips, these game systems had higher-resolution graphics and offered animation and sound that were nearly as good as arcade video games … and vastly superior to the VCS. Adding insult to injury, both ColecoVision and Intellivision offered adapters that would let buyers play the entire library of VCS games, which meant that if consumers wanted to jump ship to Atari’s competitors, they could take their old games with them. (Photo: Fritz Saalfeld [Wikipedia]) EATEN BY PAC-MAN

But what really finished Atari off was Pac-Man. In April 1982, Atari released the home version of Pac-Man in what was probably the most anticipated video game release in history. At the time, there were about 10 million VCS systems on the market, but Atari manufactured 12 million cartridges, assuming that new consumers would buy the VCS just to play Pac-Man. Big mistake - Atari’s Pac-Man didn’t live up to its hype. It was a flickering piece of junk that didn’t look or sound anything like the arcade version. It wasn’t worth the wait. Atari ended up selling only 7 million cartridges, and many of these were returned by outraged customers demanding refunds. ATARI PHONE HOME Then Atari followed its big bomb with an even bigger bomb: E.T., The Extra-Terrestrial. Atari guaranteed Steve Spielberg a $25 million royalty for the game, then rushed it out in only six weeks so that it would be in stores in time for Christmas (video games typically took at least six months to develop). Then they manufacture five million cartridge without knowing if consumers would take any interest in the game.

[YouTube Link] They didn’t. The slap-dash E.T. was probably the worst product Atari had ever made, worse even than Pac-Man. Nearly all of the cartridges were returned by consumers and retailers. Atari ended up dumping millions of Pac-Man and E.T. game cartridges in a New Mexico landfill and then having them crushed with steamrollers and buried under tons of cement. TOO LITTLE, TOO LATE That same year Atari finally got around to doing what Noland Bushnell had wanted to do since 1978: they released a new game system, the Atari 5200. But in the face of stiff competition from ColecoVision, which came out with Donkey Kong (the 5200 didn’t) and had better graphics and animation, it bombed. Staggering from the failures of Pac-Man, E.T., and the 5200, Atari went on to lose more than $536 million in 1983. THE LAST BIG MISTAKE In 1983 Atari had what in retrospect might have been a chance to revive its sagging fortunes … but it blew that opportunity, too. Nintendo, creators of Donkey Kong, decided to bring its popular Famicom (short for Family Computer) game system to the United States. The Famicom was Nintendo’s first attempt to enter the American home video game market, and rather than go it alone, the company wanted help. It offered Atari a license not just to sell the Famicom in every country in the world except Nintendo’s home market of Japan, but also to sell it under the Atari brand name. Consumers would never know that the game was a Nintendo. In return, Nintendo would receive a royalty for each unit sold and would have unrestricted rights to create games for the system. Atari and Nintendo negotiated for three days, but nothing ever came of it. Nintendo decided to go it alone - and it was good choice.

The article above is reprinted with permission from Uncle John's Ahh-Inspiring Bathroom Reader. Where else but in a Bathroom Reader could you learn how the banana peel changed history, how to predict the future by rolling the dice, how the Jivaro tribes shrunk heads, and the science behind love at first sight? Get ready to be thoroughly entertained while occupied on the throne. Uncle John rules the world of information and humor. It's simply Ahh-Inspiring! Since 1988, the Bathroom Reader Institute had published a series of popular books containing irresistible bits of trivia and obscure yet fascinating facts. If you like Neatorama, you'll love the Bathroom Reader Institute's books - go ahead and check 'em out!