Abstract Trouble in River City: The Social Life of video games by

The Atari Empire: Up in Smoke, Down in Flames, 1977-1985

Atari began as the brainchild of Nolan Bushnell, a former amateur radio operator with a wild personality made up of equal parts snake oil salesman, hedonistic fraternity brat, brilliant engineer, visionary and workaholic. His inventions weren’t the clichéd products of a Silicon Valley garage, but they were close. He invented the circuitry for the first stand-alone video game Computer Space⁴ after he moved his daughter out into the living room on to a sofa and turned her room into a laboratory. Bushnell founded Atari in 1972 with one partner at a cost of $250.

Atari’s corporate culture was a fraternity of engineers fueled by sex, drugs and rock n’ roll. The hothouse atmosphere lead to a continuous stream of innovation, often at the expense of any sense of professionalism. There were few schedules, no marketing plans, and little long-term strategy. It was as if the hacker ethic had been given a fantastic toolbox of gadgets, encouragement and narcotics. Talented engineers and designers like Ed Logg, Al Alcorn, Steve Jobs and Steve Wozniak (who would “borrow” parts from Atari to create their first Apple computers) thrived at Atari (Herman, 1997). In producing the early arcade and home Pong games, Bushnell solved his manufacturing manpower shortage by hiring hippies and biker gang members and kept them steadily infused with good times. The Bay Area assembly line was run entirely by blue-jeaned workers, many of whom smoked joints on the job (Kent, 2000). Designers worked in similarly indulgent conditions.

This was, to say the least, a contrast with more established firms like IBM or Hewlett Packard. R&D retreats featured “funny cigarettes,” unlimited kegs of beer, and board meetings in hot tubs. Bushnell even maintained a “special fund in the event of an unwanted pregnancy, ” (Scott Cohen, 1984) another for bailing employees out of jail (Sheff, 1999), and kept an oak tap with Coors in his office (Sellers, 2001). Bushnell recently described the corporate culture this way:

We put a hot tub in the engineering building. We hired the best-looking secretaries we could find for that department . . . We were all around 30. Were there planning sessions when we smoked pot? Absolutely. Did we have some incredibly crazy parties? Probably true. Was the company the hardest working company in the world? Probably true as well. (Dolan, 2001)

Innovation came easily, but business acumen did not. One indication was their market research strategy. This consisted of installing their first major product, Pong, in a Bay Area bar called Andy Capp’s. They gauged it a success when the machine’s coin collector—a sawed-off milk jug—jammed up with quarters. The product was a hit, but Atari did not have the expertise capitalize on it. Not only did they not have the resources to scale up their manufacturing properly, they had no idea how to file or protect their patents. This small band of hedonistic innovators could make games, but they had no clue about national-level marketing, manufacturing or distribution, and their internal operations were shaky at best. Bushnell was so erratic that his engineering chief told the staff that none of Bushnell’s edicts were solid until he’d repeated them three times (Kent, 2000).

As a result of these problems, knock-off pong games had flooded the market within two years and Atari had only a 10% share (Kent, 2000). Bushnell knew that he needed capital and know-how from bigger players. Atari made its first deal in 1975 with Sears to sell home versions of Pong. When executives from Sears visited the Atari factory, the differences in corporate culture were readily apparent. They were greeted by blue-jean wearing, joint-smoking assembly line managers, and felt uncomfortable in their suits. Sensing the tension, Bushnell put everyone in boxes on the conveyer belt and conducted a factory tour. At the dinner that night, both sides tried to cross the cultural barrier: The Sears executives showed up in jeans and t-shirts and the Atari crew arrived in suits (Scott Cohen, 1984).

By the late 1970s, it was apparent that to reach the economies of scale necessary to make Atari a national powerhouse, a larger partner would be needed. In 1978, Warner Communications bought out Bushnell, purchasing Atari’s know-how for $28 million. After the sale, everything changed. Warner immediately infused the company with $100 million and made dramatic changes to the company’s operations. Warner installed a marketing executive named Raymond Kassar to run Atari. Kassar, a textile industry veteran, was at best ambivalent about games and game makers, but knew how to run a national-scale business. His team fired Bushnell, cut the R&D department and marginalized the highly successful coin-op engineers (Kent, 2000). He demanded that all employees wear proper business attire, be at work by 8, and use time cards. Larger assembly lines were established and thousands of workers were hired. These changes lead to immense profitability and scale, but at the expense of innovation.⁵ The beer bashes ended abruptly, and disgruntled game designers left to start their own firms, or stayed and grumbled (Herman, 1997).⁶ Kassar’ fat cat style struck the staff as autocratic and disingenuous. A 1982 article is an indication of the dynamic: “Says Atari President Raymond Kassar who is chauffeured to his office in a cream-colored Mercedes: ‘We’ve always treated our programmers as stars’” ("Chariots of Cartridge Power: Pac-Man and pals occupy the living room," 1982). Selling its VCS and scores of new games, Atari quickly amassed market power and became the dominant, monopolistic player in the industry. Within two years, sales went from $75 million to $2 billion. Competitors with superior machines were beaten back by virtue of the sheer size and leverage Atari maintained with distributors.

Unchallenged, Kassar and his team then made a series of strategic blunders that killed Atari and temporarily destroyed the entire home video game industry. They made these decisions because they could; with no competitors, Atari sought to stifle innovation industry-wide and retain the highly profitable status quo. The first problem was ignoring potential innovations. Atari had an opportunity to license superior technology from the fledgling Nintendo company, but spurned the offer. Steve Bristow, Atari’s VP of engineering later recounted “The corporate decision was to keep making games for the 2600, because there was no real competition, and for x dollars we could build a new factory and produce a lot more 2600s and make a lot more money, instead of taking a risk” (Dolan, 2001). The second problem was inflating Atari’s profit estimates, even when the firm knew things were deteriorating. Kassar sold 5,000 shares of Atari stock the day before a negative earnings report was released in 1982, undermining investor confidence.

However, poor game quality was the biggest factor in Atari’s demise (J.C. Herz, 1997). Not only were third-party developers producing a slew of mediocre games, Atari became the biggest offender. Unfortunately for the company, their early stream of successes and improvements had created a savvy consumer base with high expectations. Atari’s 1982 home version release of the arcade hit Pac-Man was the beginning of the end. The game was marketed aggressively but was of poor quality. The characters on the screen flickered and disappeared randomly. Although the game was a financial success with seven million copies sold, each dissatisfied gamer lead to an erosion of Atari’s brand.

Then, on the heels of this first disappointment, Atari release the much-hyped game version of E.T. The Extra Terrestrial. Reasoning that the game would sell console units, Atari manufactured more games than there were systems. The problem was that the game was hailed as possibly the worst ever made. The game’s opening credits took most of the cartridge’s memory, and the game play itself featured E.T. running away from generic government agents. The most common action in the game was for players to accidentally guide the alien into holes where he would become stuck. Atari dumped millions of unsold E.T. game cartridges into a New Mexico desert landfill, crushed them with steamrollers, and paved the site over with cement (Kent, 2000). By 1983, Atari was losing $500 million per year and had collapsed Warner’s stock. The following year, Warner sold Atari assets to cut its losses.⁷ By 1986, total home game sales had dropped from $3 billion to $100 million, and the industry was left for dead.