The rise and fall of Atari: From $2B king to industry collapse

In 1982, Atari was the fastest growing company in America. They were doing nearly $2 billion a year in sales. Just one year later, they lost $536 million, and the mistakes they made nearly brought down the entire video game industry. This video is the rise and fall of Atari. In 1972, Nolan Bushnell was a 29-year-old engineer with a big idea. He'd already created the world's first commercialized video game. Called Computer Space, but it flopped because it was, well, too confusing and too complex. Undeterred by this first failure, Bushnell and his partner Ted Dabney scraped together $500 to start a new video game company. They called it Atari, which came from the Japanese game Go, which basically means like the chess equivalent of check. You can say I'm about to capture your pieces. That's what Atari means. Bushnell hired a young engineer named Al Alcorn, and the guy's first project was a test project. It was, go make a version of ping pong, but make it electronic. The guys lived in Silicon Valley, and when they played the game themselves, they liked it. So Bushnell went and took it and put it in a friend's tavern, uh, in Sunnyvale there in California. A few days later, the bar owner called and said, hey, the machine's not working anymore, come out and fix it. And when Alcorn got out there, he was shocked at what he'd found. The machine wasn't working because it was overflowing with quarters. They called this first game Pong, and it was about to change everything. Atari shipped the very first commercial Pong unit in November 1972. It took off like wildfire. In 1973, they shipped 2,500 game cabinets. 1974, over 8,000. And as a fun fact, if you look at the Atari logo, it was designed entirely around the game Pong, designed to have two players on either side with a cord in between them. Pretty fun. But Atari had made a mistake. They hadn't done anything to protect their game, uh, and by 1975, there were over 75 clones of Pong out on the market competing with Atari. Beat Atari just increased the velocity at which they were releasing games. They created some pretty stuff now that's pretty famous. Asteroids, Missile Command, Centipede— they're all done by Atari during this time, designed to get out into the market and make up some money. And something I learned researching this video, Steve Jobs originally worked at, uh, Atari back in the day. And in 1976, Steve Jobs went to Nolan Bushnell and said, hey, uh, I'd like to sell you a third of Apple for $50,000. Nolan turned him down, and you'll see it later on in this story. That wouldn't be the first big opportunity that Bushnell missed. But while Jobs and Wozniak, the Apple founders, were focused on bringing general-purpose computing to the home, Bushnell's vision was, how do we bring gaming to the home? And until then, it had been a console played only one game. You played Pong, you played Missile Command, all that kind of stuff. Well, what if you had one console that could play many games? And in that era, Atari started to work on a new project. Called Project Stella. But this was before the days where there was a lot of venture capital and that sort of stuff around, which would have been typically where a company like Atari got its money. And to come out with this level of innovation, they were running out of cash, so they needed a savior. And in 1976, Bushnell sold the entire corporation to Warner Communications for $28 million. It turned out Warner had a lot of money and believed in the vision. They poured $100 million into the development of what at that time was called the the Atari VCS, or Video Game System. Uh, it later would be called famous Atari 2600. In September 1977, they launched the very first one of them. It was $199 in back then money. Today that would be about $1,100 for the system. In these stories, I usually tell you that whatever product was released that was revolutionary, the consumers flocked to it and it took off like wildfire. But that didn't happen here. The Atari 2600 only sold about 250,000 units. In its first year. The problem was consumers were burned out. The market was oversaturated with Pong units. There were even home Pong units at this time. I remember because my grandparents had one. Remember playing that back in the '80s? It's good times. But Warner, they stuck it out. They believed in the vision. And frankly, they kind of had to. They had $100 million invested in the thing, plus what they paid for the company. Uh, and whether right or wrong, we sometimes call this the sunk cost fallacy in, uh, in business. You spend a bunch of money on the thing or a bunch of time on it, and you feel like, yeah, you got to keep going. And I wasn't in Warner's heads at the time, uh, but in this case, whether they had the fallacy or they just thought it was a good idea, they made the right choice to keep pushing forward. Well, Warner at the time was also like a huge kind of corporate type American style company. There was a corporate kind of culture clash going on with the Atari folks. So Warner at that point brought in a guy from Burlington Industries, yeah, the clothing guys, uh, to come in in 1978 and, uh, help turn Atari around. Kassar had famously spent 25 years in corporate America. The hippies that were working at Atari, they famously smoked pot outside the office and threw wild parties. It was a very different environment between owner and team. Remember Bushnell? In December 1978, after clashing with management, he was shown the door and fired. But Kassar brought discipline to the whole place. Under his leadership, the thing became a corporate juggernaut. He cut R&D, installed security, and most importantly, focused relentlessly on marketing and sales. The conflict was big time. Kassar would famously refer to his programmers as "primadonnas," uh, and the programmers and staff would refer to Kassar as the "Talzar," uh, an homage to his years spent making textiles at Burlington. But here's the thing: it turns out if you take business seriously, uh, you could get some serious results. And things started to work at Atari. And one move that Kassar made would change everything. In 1980, Atari licensed the game Space Invaders from a game maker named Taito, and it became the killer app for the console. It's fun, but personally, I think the whole idea of creatures from outer space is a little far-fetched. Sales of the 2600 quadrupled, and in the next year, they went to 2 million units. Space Invaders would go on to become the first video game in history to sell over a million copies. Revenue went from $75 million in 1977 to $2.2 billion in 1980, That's a 2,900% increase. By 1982, Atari had sold over 10 million consoles. They had over 100,000 employees across Silicon Valley, and they were growing so fast they had to spread them out over 50 different locations in the valley. For the first 9 months of 1982, Atari contributed half of the revenue for Warner Communications, which was $2.9 billion, and a third of the profits. But as you've seen in other situations on this channel, like the Blockbuster Video, there comes a time when a company like this is throwing off so much cash that the conglomerate makes a mistake on what they do with all that cash. And instead of reinvesting in their golden goose, well, they take that money and use it to prop up the rest of their empire. At the time, Warner had struggling movie and music divisions, so they took the cash and, uh, injected it into those, and they started to starve Atari. So while at that moment Atari, which was the fastest growing company in the history of the United States up to that moment, uh, well, it looked like things were unlimited in terms of the future for the company, but in reality, cracks were starting to show underneath the surface. But before I tell you how everything went wrong, uh, here's a quick word from our sponsor. A ton of these rise and fall stories come down to the same factors over and over again, so I put them all in a new ebook on why businesses win and why they lose. You can download it for free at girdley.com/why-they-win. Link in the description below. Now back to the show. Remember how Kassar had called his programmers prima donnas? In 1979, 4 of Atari's best programmers had gone to Kassar and asked for royalties and better pay in exchange for all the work they'd done for the company. In fact, you know, they'd created some of the most memorable and most profitable games for Atari. Creative freedom was what, you know, we were searching for most. A place where we could design games, have a good time playing them. And create an environment where we could create games that other people would enjoy playing without the pressures, undue pressures of management. Between the four of them, they had generated 60% of Atari's $100 million in sales in the previous 12 months, uh, and they were getting paid a grand total of $22,000 apiece in salaries. Kasara was a textile guy. He didn't understand this kind of tech stuff and how important people who could create magical stuff were, and he reportedly told them, You're no more important than some guy I can put on the line making jackets or sweaters or cloth. So what do you think the four of them did? Well, they left to go start their own company called Activision, and it would be the first of many kind of companies that would make console games for consoles like the Atari 2600. First year, the four guys at Activision had produced console games that accounted for nearly 30% of the console cartridges sold for the Atari 2600 that year. At the time, the rights for third parties to make games for things like Atari, well, that was still kind of in the air and questionable from a law perspective. So Atari went and sued these four guys at Activision to see if that was allowed, try to get them to stop making console games for the Atari 2600. And guess what happened? Well, Atari lost in court, and suddenly that opened the floodgates to where the number of third-party game makers for the Atari 2600 went from 3 to over 158 within a year. But there was a problem. Many of these new console game makers had no experience, no expertise, uh, so they started to churn out terrible game after terrible game. The market was getting flooded with crappy, horrible games for the whole console. You can see what happens here. Terrible games come out, people buy them, they tell their friends about them, and suddenly the Atari 2600 platform and the whole gaming industry by that matter starts to get a terrible reputation. A Goldman Sachs analyst at the time noted that the demand for games was growing 100% per year, but the number of game cartridges created was growing 175% per year. The math didn't math. With the pressure building on the industry, Atari was about to make two catastrophic decisions that would push it over the edge. 1982, Atari released its port of the famous Pac-Man arcade game for the Atari 2600. First, the Pac-Man eats through a maze of dots, then the Pac-Man heads Atari was so confident that it was going to be a hit game that they manufactured 12 million cartridges. But guess what? There are only 10 million Atari 2600s in existence at that time. They were so confident that they thought people would buy the Atari 2600 just to play Pac-Man. But there was a problem. This Pac-Man port had been rushed to market. Uh, it was terrible. The graphics didn't work. Uh, it was simplified, so they took out a lot of stuff people had seen in the arcade. And critics hated it too. Pac-Man sold 7 million cartridges, which technically made it a hit, but they still had 5 million of them that were unsold. And suddenly Atari's reputation as a provider of excellent experience and quality, it had taken a huge hit. Then came E.T. the game. Warner CEO Steve Ross had personally negotiated with Steven Spielberg to get the exclusive game rights for his hit movie, E.T. the Extra-Terrestrial. E.T. phone home. It had been the biggest movie of 1982, so it made sense that it was gonna be a hit video game as well, right? So at the time, it would take up to 6 months to bring a game to market. Uh, but because it had taken so long to negotiate the rights with Spielberg, uh, a game developer at Atari was given only 6 weeks to bring the thing to fruition. And when the game came out, it was absolutely horrible. People hated it. I remember buying it when I was a kid and I was like, man, this is the worst game I've ever played. I couldn't figure out how to do any part of it. And I wasn't alone. Everybody else thought it was terrible. It got so bad that people would buy the game and bring it back to the shop the next day. And it wasn't like it was the game developer's fault. In fact, the guy they had given it to had been the guy who created Yars' Revenge, which had been Atari's very best in-home selling title up until then. He just wasn't given enough time to do it right. For the E.T. game, only 1.5 million units were sold and retailers were overwhelmed by returns, many pushing them so far that they refused to stock Atari products in the future. If you go look at some of the lists made of the worst video games of all time, E.T. is still up there even after 50 years almost. In December 1982, Warner Communications was ready to release their earnings, and they announced that Atari would only grow 10 to 15% that quarter, not the 50% that analysts expected. Seeing growth slowing, Warner's stock crashed by nearly 40%. But remember famous Burlington Industries head and CEO of Atari, Ray Kassar? Well, he had done something just before the announcement. He had sold 23,000 shares just minutes before Warner announced their bad earnings. The SEC caught wind of this and they investigated him for insider trading. That was illegal. You're not supposed to do what he did. Kassar would later settle without admitting guilt. But yeah, it didn't look good. And this continued to put shocks across the video game industry. By mid-1983, Atari had lost nearly $356 million. They were forced to lay off nearly a third of their 10,000 employees. By July 1983, Kassar was forced to resign, a.k.a. fired. But behind all these game consoles, something else was happening, and that was the home PC revolution. And at this moment in the early 1980s, Apple, Commodore 64, and others were all airdropping general-purpose PCs into everybody's homes. All this supply and too many vendors created a vicious price war. Commodore 64s and stuff like that were being sold for as little as $200, and people were asking, why would I buy a video game console if I can buy a computer that can do everything it can and more? The entire video game console industry dropped from $3.2 billion in revenue in 1983 down to less than $100 million 2 years later, a 97% decline. And in a famous moment in all this, in September 1983, Atari looked up and they were suddenly sitting on tons of unsold video game consoles and cartridges. So they took them out to a dump in Alamogordo, New Mexico, and they poured them in the dump and famously put concrete on top of them. This incident became an urban legend. And in 2014, some folks got the rights to go out and dig them up, and they discovered that the remains of nearly 3/4 of a million video game cartridges were there, though only about 1,400 of them were playable. The end of 1983, Atari's total losses were $536 million. Warner, the music and movie conglomerate, desperately wanted out. But here's something most people don't know. Around this time, Atari was actually approached by Nintendo. At the time, Nintendo had in Japan a console called the Famicom, which had a lot of promise to it. They wanted to bring it to the United States and they got talks going. But then something happened where Atari's executives went to a video game convention and saw a Nintendo product, Donkey Kong. Running on a rival Coleco video game system, and it spooked them. You see, much like the story of Nike and other ones, uh, these guys on the Warner side, the Atari side, they thought that Nintendo was double-dealing them, gonna sell them to distribute the console, but in the back end they were licensing their games to somebody else because they owned Donkey Kong. But in reality, it was all a big misunderstanding. And between Kassar's meltdown from his insider trading and Warner's kind of just craziness with the meltdown of their finances, A deal never got done. Nintendo is the Nintendo we know and love today. They went on to release the Nintendo Entertainment System. I owned one of those too, and I stayed up all night playing Super Mario Brothers until my fingers hurt. And if a deal had gotten done, well, Nintendo, which had saved the entire video game industry with the release of their Nintendo Entertainment System, uh, could have also saved Warner and Atari in the process. And remember, now twice in history, Bushnell had passed on investing in Apple, which would be worth trillions. Uh, and then Warner passed on investing in Nintendo. Just two huge what-ifs of history. But look, this is history is filled with a lot of issues like this where people say, oh, well, Blockbuster could have bought, you know, Netflix and all that kind of stuff. The reality is most of these acquisitions by big corporations of little nimble startups end up killing those things. And, uh, who knows what would've happened? Maybe Nintendo would've been never a thing if they'd have been under the Warner yoke. In 1984, a man named Jack Tramiel bought the Atari division from Warner, helping them get out of the video game industry for good. Tramiel was a Holocaust survivor from World War II, and he had famously founded the Commodore Computer Company. His motto was, quote unquote, "Business is war." Things were rough back in the '80s. Immediately shut down most of Atari's remaining 80 domestic branches and laid off most all the staff. He thought that the video game industry was dead, and his vision was to pivot Atari into the home PC market. And they went out to launch a new home computer called the Atari ST. This computer was actually pretty successful, especially in Europe, and it had something other ones didn't, which was what are called MIDI ports, which were really good for musicians. And they didn't give up on the video game market either. They released the 7800 console that had been under development for a while by 1986, and they also released something called the 2600 Jr., which was like a cute little version of the 2600. That year they actually earned $25 million in profit. It was a sign of life. But by then, the mistakes they'd made in the early 1980s meant that the industry had moved on. Nintendo was doing it right without making all the mistakes Atari had. They would hold developers accountable for putting out quality games, and if it didn't have Nintendo's seal of approval, it wouldn't hit the market. It may be the most addictive toy in history, and it's definitely the hottest thing this Christmas. Nintendo Video Game. And it's a big improvement over the first video games. Like Atari's Pong and Space Invaders. And Atari kept trying. In 1989, they released the Lynx handheld gaming system. It had revolutionary things at the time, like, uh, color video. But it had two problems. It was really expensive. It was $179 to Game Boy's $90, uh, and it ate batteries like crazy. Leveraging its wins from the Nintendo Entertainment System and the IP they had there for titles like, uh, Nintendo Golf, which was my huge favorite, and Super Mario Brothers, Uh, the Nintendo Game Boy outsold the Lynx 10 to 1. In 1983, Atari tried one more time and they released the first 64-bit gaming console, the Jaguar. In many markets like this where third-party developers build on top of a platform, whether it's Microsoft Windows or the Nintendo Entertainment System or the PlayStation, tends to be that one platform wins. And the reason is, is the ga— value of the platform is all about the stuff that's built on top of it. And if you're somebody who's building games or building applications for somebody else's platform, You're gonna build to the most popular one and you're not gonna build it for the second most popular one. And over time, that advantage for the platform compounds where you have something like Microsoft Windows, which has virtually all the desktop market, or in the case of Nintendo at the time, they had all the home console market. And so the Jaguar was hard to program and developers stayed away. I would program for somebody else if I was them too, need to make money. And then things got worse for Atari. Uh, folks like Sony entered the market with the PlayStation. Nintendo kept iterating on their consoles, bringing their IP forward each year into the future. Meanwhile, original Atari 2600 continued its production run into 1992. Over 30 million units were created from the time it started to the time it ended, made it the most produced and longest running console in history at the time. In 1996, Atari merged with JTS, a failing hard drive, uh, maker, in a reverse merger. 1998, JTS would sell the Atari name and trademarks and IP to toy maker Hasbro for just $5 million. Hasbro had paid $28 million for Atari in in 1976. Just under 20 years later, it sold for less than one-fifth that. Hasbro released some remakes of some nostalgia titles like Centipede and Missile Command, but eventually they gave up on the video game industry too, selling everything to a company called Infogrames in 2001. Eventually they gave up the ghost too on making video games and went bankrupt, and their assets were sold to a small French company whose main business now is licensing all of the Atari games and intellectual property for t-shirts and retro video game consoles. The once titan who had been the fastest-growing company in American history is basically just a nostalgia brand targeting people like me who can't let go of the past. Lots of lessons from this one. I think if you look back on it, the thing I would go back into that room with Warner is tell them, don't starve your champion. Uh, they basically cut off all of the cash reinvestment into Atari, made some mistakes along the way executionally, Uh, and that ended up ending the whole thing. But it might be a different world if they thought long term and kept reinvesting in the business. All right, if you like this video, you can check out this one about Blockbuster. It's a similar situation where Blockbuster got milked by its acquirer and that caused its downfall. That's it for this story about Atari, one of my most requested. Let me know what you think in the comments below, especially if you liked it. That encouraged me to make more. See you later.