The story of Atari ultimately is the story of the birth of the video game industry as a whole. Ted Dabney and Nolan Bushnell's release of Pong changed the way people interact with games; taking it further than the board games that so many were accustomed to, into both the home living room and to the personal computers that were finally becoming small and affordable enough to become reasonable purchases for entertainment. A golden age for Atari occurred from 1977 to 1981, with the release of their most enduring legacy - the Atari 2600. This single platform introduced many of the classic games that continually come up in any conversation of highly revered classics for many people's childhood (and/or young adulthood) memories. In the end, the first incarnation of Atari (right up to the purchase by Jack Tramiel in 1984) represents a historic time in history for the video game industry. Many of the cornerstones were built right here with this company, and the story is just as interesting simply because it rekindles memories within so many of the people that have come to be major forces in leading the gaming industry to where it is today.
1972-1975: The Roots of the Gaming Industry
Atari's naming was of special significance to Nolan Bushnell, as it was named after his favorite game - Japan's centuries old classic Go. The term "atari" is used by Go players to politely inform their opponent that they are about to be overrun. The company was created in 1972 with money earned by Bushnell's first game Computer Space. While this initial game was not considered to be a success financially, it seeded the ideas for the game Pong, which would become the first gaming classic the budding gaming industry would see. By most gaming historians, this is considered to be the true birth of the gaming industry as it sparked countless knock-offs, and eventually brought video games into the home. Until now, video games were not considered mass market items, and had not penetrated into people's lives like this would.
Far simpler than most games of the time, the idea of Pong was an electronic version of ping pong. It may be said that it is the simplicity that sparked the imagination of the masses in America, bringing video games to the mass market for the first time. It was no longer only relegated to the likes of computer engineers and college researchers. First marketed as a coin-operated machine placed in restaurants and bars, the game captured the hearts and minds of America. Headlines and nightly news shows sang the praises of this new form of entertainment that was quickly spreading across the nation like wildfire. Atari's Pong created a market for clones, and unfortunately its own version was quickly marginalized in the same market that it helped create. Many of the knock-offs managed to corner a vast majority of the market. Within two years of the games introduction in late 1972, only 10% of the cabinets produced were sold.
What profits were made were quickly invested in many projects and ventures that, in hindsight, come across as shortsighted and nonproductive. The financial burden of half a million dollars used to try and penetrate the Japanese market with their products proved to be one of the largest blows to both the founders when it eventually failed and was aborted. None of the successive arcade games that they produced managed to incite the imaginations and hearts of Americans like Pong did, forcing Atari to think of a much different strategy in their own fight to stay solvent and survive within this burgeoning market. Taking a cue from Magnavox's Odyssey, which was the first home console created, Atari entered into a partnership with Sears, Roebuck & Company to create their own platform. Sears, becoming the sole retailer, agreed to purchase all 100,000 units built, signaling the introduction of Pong for the home in the fall of 1975. It proved to be quite a success as Sears saw a huge demand for this game during 1975's holiday season. While the Odyssey is considered to be the first hole console, it was Atari's PONG (and the many successive iterations) that would capture the majority of people's mind share.
1976-1981: Atari's Golden Age
While the success of PONG managed to help Atari gain a lifeline, it was not a panacea for their problems. What was brewing underneath was much more complicated, and the financial problems were only the beginning of what would eventually lead to the sale of Atari to Warner Communications in 1976 for $28 - $32 Million (est .). The reality was that their PONG machines could only be used for one game, and the same people that lined up in droves in late 1975 quickly become disinterested with this single-minded novelty. The release of the MOS Technology 6502 in 1976, gave Atari the ability to put a CPU in what would become their VCS ( Atari 2600) that was both cost effective and powerful enough to make it the multi-game console that they were looking to release.
In 1977 Atari was able to release what would become their lasting legacy, the Atari 2600. This machine allowed players to play several games on one console. During the first holiday season in 1977, the 2600 did not manage to supplant the PONG machines, and was met with stiff competition from several other manufacturers that had built multi-game machines as well. The reality was that for as much as the 2600 would eventually signal in a golden age for Atari, this initial response was a huge burden on the company financially.
The majority of 1978 did not bring much change to the companies outlook, as more strife was brewing between the employees and leadership of Atari and the heads of Warner Communications. All of the internal chaos culminated in a budget meeting in New York where Bushnell was ousted from his position as chair of the company. In his place, several executives were hired that had a stronger business background within larger corporations. The ensuing months represented a large change in focus, as a $6 million ad campaign was put into place at the tail-end of 1978 aiming to clear out the backlogged inventory that most retailers had, making way for new games that would be coming out shortly thereafter. This brought about a huge turnaround in their financial viability as they were able to create a buzz around the 2600 at the Consumer Electronics Show (CES) in January 1979, with store owners demanding more products to sell.
Over the course of the next year (1979) they were able to sell all of their stock of machines that were manufactured to retailers. Atari would enjoy an ever increasing lion's share of the home console market through 1981, with $740 million worth of cartridges and consoles being sold over this time period. Great financial success came from the large profit margins built into the release of each game cartridge, which at its peak, were being produced at a rate of one each month. The only competition came from Mattel's Intellivision in 1980, but the 2600 managed to overcome its strong ad campaign, remaining the console of choice for the vast majority of households (80% market share by the end of 1981)
Another arm of Atari was forming concurrently to the team that headed up the research and development of the 2600. This part of the company was focused on the burgeoning home computer market, and they tried to produce the most powerful machine on the market. Both the Atari 800 and 400, being aimed at this new market, were met with strong competition from the Apple II. This division initially lost an estimated $10 million, but was more than offset with the strong profits that the 2600 was able to produce for Atari as a whole. By the end of 1981 the home computing division managed to become profitable, dominating the sales of low-priced home computers.
1982-1984: The Slow Fall From Grace
Even with the great successes that Atari manged to produce through the end of 1981, a larger concern was starting to brew. With their emphasis on new software products being the companies main focus, they did not put enough attention into a true successor to the 2600 early enough. The only hardware products that had been introduced were expensive add-ons that did not manage to gain any traction at retail (i.e. a remote control model known as Touch Me). A large amount of their financial resources were quickly put into research and development of the 2600's true successor - what would ultimately become the Atari 5200. Many analysts truly felt that Atari would remain at the front of the home console market, possibly indefinitely, but stiff competition from other hardware and software companies proved to be the beginning of their eventual fall from grace. Upwards of 30 other game makers launched onto the scene, all vying for a piece of the ever-growing market share; one of these companies being Nintendo, which would eventually take the world by storm with the release of the Famicom (released in Japan in 1983) and NES (released in the rest of the world in 1985).
In a financial call during December 1982, Warner Communications would announce that their previous sales estimates would have to be reduced because they could not be met due to "unexpected cancellations and disappointing sales during the first week of December." The harsh reality was that many of Atari's lead game designers were leaving to go to other companies, delivering a blow to the company that they would not be able to recover from. The eventual fallout from this financial call would soon become debilitating as the stock's price would plummet dramatically and several Atari executives would be investigated by the SEC for insider trading. While all charges would eventually be dropped, the repercussions were already set into motion, causing 1,700 US workers to be laid off and all US manufacturing facilities to be moved to Hong Kong and Taiwan.
The prognosis was not any better in Atari's home computing division, as it was also being met with stiff competition from other computing manufacturers. Even with significant cuts to the price of the 400, total losses for the company in the first quarter of 1983 reached $46 million. Nolan Bushnell was approached by Atari to try and reinvigorate the former innovative luster that it had, but even this was not enough to stimey the eventual losses that they would incur. The one bright light came with Nintendo, as they approached Atari to enter into a partnership to produce the hardware for the NES/Famicon. The June 1983 CES was to be the forum in which they would both sign and announce their deal, but the entire agreement dissolved after Coleco demoed Nintendo's Donkey Kong on their new Adam computer . Nintendo would eventually decide to make their own hardware, and the downward spiral of Atari's finances came to a head shortly after, culminating in a mass layoff of 10,000 employees - nearly half of the company.
In July of 1984, a $240 million deal was struck between Atari and ex-head of Commodore, Jack Tramiel, and all of Atari was sold except for the small coin-operated arcade business, Ataritel. Immediately following the sale, Tramiel began aggressive cost cutting measures, laying off hundreds more employees and making strong efforts to collect on all unpaid debts and balances. Because so many unwanted game cartridges were unable to be sold, Atari dumped truckloads of them into a New Mexico landfill. Atari would eventually be renamed Atari Corporation and would never be able to regain control of the console market, or have the same amount of clout that they had during the peak of the 2600's popularity.