What we can learn from the rise and fall of Atari
Atari was, by all accounts, an overwhelming success. They had more money than they knew what to do with, hired the best minds, fostered the best think tanks, established a whole new market category… And then it all fell apart in a matter of years. They went from a $452 million leading edge company to a husk of a brand name. This is a brief look into Atari’s dramatic rise and fall.
The rise
Atari’s true start began on the University of Utah’s campus when a youthful Nolan Bushnell played one of the first video games ever invented, Spacewar!. The game was rudimentary and could only be played on the oversized campus computer. Nevertheless, the experience left Nolan inspired.
At the time, he was employed at a local amusement park, where pinball machines were the hot topic. Nolan saw potential in Spacewar as high powered alternative to the entertainment of the day. He envisioned a world where people regularly had access to these games.
Soon after his experience on Utah’s campus, Bushnell and partner Ted Dabney developed the Spot Motion Circuit that would allow video games to run on machines that would fit inside a cabinet rather than an entire room. Their first game, Computer Space, was a recreation of Spacewar that would fit in an arcade. The re-creation was groundbreaking in many ways and (as a proof of concept) was a dramatic success. While it didn’t live up to the financial goals of their manufacturer, Bushnell’s beliefs were confirmed, a video game arcade as he had envisioned was possible.
The creation of Pong
A year after the release of Computer Space, newly hired Al Acorn developed a game that would change the world. Pong was released in September of 1972. While not a revolutionary concept, it would be the game that defined a zeitgeist. The game was first tested at a local bar and (as the story goes) after a few days the owner of the bar called Bushnell to inform him the game had broken. Upon inspection, Bushnell discovered the source of the problem, the coin receptacle was jammed full of quarters.
By 1974, only two years later, they had sold over 8,000 Pong cabinets. The arcade machine was so popular that Atari literally had to send representatives to the venues to collects sacks of quarters by hand. While video games had previously existed in various forms, Atari brought them to the masses. [source]
Risking it all
Bushnell continued to drive innovation, sometimes even to the company’s harm. A failed international expansion and the costly production of Gran Trak 10 nearly bankrupted the company. Production workers were unhappy and it’s rumored that employees sold game components to competitors costing the company even more money. The company laid off half of its employees but survived the year after the successful release of Tank.
“We risked the company every year on new ideas. We were young and if it failed we could always get jobs in Silicon Valley”
— Al Alcorn [source]
During these early years, the stakes were high. Atari often had difficulties fending off competition and properly managing cash flow. But with high risks comes high reward. The company, and Nolan Bushnell specifically, very intentionally sought to create an innovative and highly productive culture.
To foster this kind of innovative culture they developed a work hard, party harder mantra. There was no set time designers and engineers had to show up to the office, no rigid business attire employees had to wear and friendships were encouraged, regardless of structural hierarchy. Creativity was fostered, having fun was encouraged. The result was a highly collaborative and productive environment. This strategy worked, between 1972 and 1975 Atari released 120 game titles including Tank, Steeplechase and Asteroids.
This kind of culture requires hiring and working with the right people. While Bushnell coined the phrase “innovative leisure” to describe Atari’s ethics, underperformance wasn’t accepted. But this isn’t a problem when you hire passionate people:
“A corporation is simply people banding together in an organized fashion to produce products or accomplishments which would not be possible otherwise. When the goals of Atari and the goals of its people are in harmony, Atari is strong and its people are happy and satisfied.” — Nolan Bushnell’s Atari Manifesto [source]
The innovative culture and exciting products must have been attractive to talent at the time. Atari managed to employ some of tech’s most well known names, including the likes of Bill Gates, Steve Jobs and Steve Wozniak.
Bringing games to household
While the company found success in the world of arcade cabinets, Bushnell envisioned a world where games were even more accessible. After the moderate success of Home Pong and the creation of the microprocessor, Atari began work on the VCS (later branded 2600). However, Atari lacked the capital to create the VCS themselves. Seeking more funds, Atari was sold to Warner Communications for 28M in 1976. Warner in turn invested a fresh $100 million into Atari, allowing them to bring the VCS to market the following year. The home console took a little time to gather steam but would ultimately introduce the concept of a home gaming console to the world.
The console was an astounding success. By 1980 they had sold 2 million units of the 2600 and, by 1982, had generated $10 million in sales. At its peak Atari was worth 452M and accounted for 70% of Warner’s income. [source]
The learnings
- Foster a creative and engaging culture
People and even community are a key to success. Maintaining a strong culture and encouraging staff to have have fun at work aren’t expenses, they’re investments. Happy people do better work. [reference] - Take risks
No progress can be made when you do the same thing you’ve always done. Cabinets were Atari’s bread and butter, bringing games to the house hold was a risk but the decision would ultimately change the entertainment industry. - Above all, hire the right people
It’s been said a lot. Hiring is one of the most important business decisions to make. Find people who are disciplined and passionate about their work and you’ll And if you’re doing 1 and 2 you’ll find yourself attracting the right people.
The fall
The decision to sell the company to Warner was a necessary step but also a deadly one. The money they received from the sale allowed for the production of the 2600, a revolutionary step for video games. But Warner’s traditional, corporate culture didn’t fit well with Atari’s more laid back approach. Differences of opinion resulted in Bushnell getting fired from Atari late in 1978.
Poor management
Ray Kassar from Warner Communications was promoted to CEO of Atari. Coming from a traditional business background (and running a textile company for 25 years) he often clashed with engineers. In a media interview he went so fas as to call Atari programmers “high-strung prima donnas.” Under Kassar’s leadership the focus was on marketing, replacing research and development staff with marketers. At first, the strategy seemed to have worked. Atari grew from $75 million in sales in 1977 to over $2.2 billion in 1980.
Despite the success, Atari may have been seeding its own downfall. The overemphasis on marketing and internal feuding was building a house of cards. An article in Creative Computing later stated that “[The people] at Atari had little or no idea what the products they were selling were all about.” [source]
Under Kassar’s strict leadership Atari had massive turnover, most of the original staff left, including Al Acorn the developer of Pong. In an issue of InfoWorld it was reported that “Atari used threats, intimidation and bullying. It’s incredible that anything could be accomplished. Many people left Atari. There was incredible belittling and humiliation of internal people.” While many left the company, the most notable to have resigned were four of Atari’s best game designers. These four formed a direct competitor, Activision. Activision would go on to sell games for the 2600 and (after winning a lawsuit against Atari) effectively created the 3rd party game developer as a business model. The introduction of 3rd party developers was disastrous for Atari. The 2600 consoles were sold cheap, and they expected to make up revenue on the sale of games.
Lowering the bar
The unoptimized treatment of developers also lead to some disappointing game releases. Under tight timelines, games were often rushed and incomplete. In the later half 1981 Atari bought the rights to Pac Man hoping to port the game in time for holiday sales. Despite the time crunch Atari hired a freelancer (perhaps, one could theorize, because they were quickly loosing internal talent) to port the game. The result was a terribly slow, buggy and ugly game that barely resembled the original. Regardless 7 million of the projected 12 million copies of Pac Man were sold. But the damage Atari’s reputation would linger.
Atari failed to learn from the mistakes made during the production of Pac Man. In 1982, Atari purchased the rights to make a game after the Hollywood block buster E.T. The purchase happened later in the year but Atari still wanted a game out by the holiday season. They gave a single developer 6 weeks to design, quality test, manufacture and ship a game. E.T. The Video Game would go on to be known as the worst game ever made. Consumers, wary from the Pac Man release, waited to purchase the E.T. game until reviews were in. Games sales dropped dramatically and Atari failed to meet sales quotas. Rather than store unshipped cartridges in a warehouse, Atari decided to bury roughly 700,000 units in a New Mexico landfill.
Shifting economic landscape
While Atari made plenty of mistakes on their own, the landscape around them was shifting. The early 1980s experienced a significant recession, which made investors a little more wary of risk and reduced the likelihood of consumers purchasing luxury items such as expensive consoles. The world of electronics was also evolving as the home computer started to become a feasible purchase for many families. Computers simply offer far more utility than a console ever can. Additionally, the new computers also supported long-term storage, which meant you could actually save progress in a game making it a superior purchase to a console. Atari attempted forays into computers and while they found moderate success, never managed to take significant market share.
In addition to the vicious turning of the economy, the video game market itself was oversaturated. Atari was facing an increasing amount of competition and the quality of games continued to decline. It seemed that every business wanted in on a quick buck, even Quaker Oats brought to market their own game. The glut couldn’t continue and in 1983 the entire video game market crashed. Three years later Nintendo would begin to rise from the ashes with the NES system. But Atari would never again see its time in the sun.
The learnings
- Never shift focus from quality in your core products
Once you have a strong audience and a core product, shifting to marketing and sales will definitely increase your revenue. But when you deprioritize the product, you will eventually scar your brand reputation. No amount of marketing can make up for that. It’s clear you can’t do one to the detriment of another. - Treat your employees right
It’s no secret that high turnover is bad for an organization’s bottom line. At the peak of their success, Atari was loosing its best talent. Through the poor treatment of their employees Atari may have created some of their own strongest competition. Karma of sorts. - Maintain a strong future minded vision
To survive the ever changing world you must maintain focus on your company’s mission. Build it into the culture. When internal politics and arbitrary business goals start taking precedent the product suffers. But when you can align a company to a common goal you foster engagement and innovation.
The video game market is on track to generate an annual revenue of $256.97 billion by 2025. This astounding figure would have never been possible without the innovations Atari brought to market 40 years ago. Truly their initiative revolutionized the entertainment industry.
And yet, throughout the years, markers of success don’t often change… In a way, there’s nothing new to learn from this study: Focus on your product, find good people and treat them right. It’s the sort of thing that sounds obvious until we get into the day-to-day grind. How easy it is to give into office politics and look for ways to quickly raise the bottom line. For me at least, Atari serves as a reminder to stay focused, take risks and keep driving forward.
