Pushkin too quick. No, it's perfect push kid stop. You got it.
Robert Smith, here is the big question for today's show. Yes, how did Atari essentially invent the video game industry, win the hearts of millions of young people in the nineteen seventies and then blow up entirely in the early nineteen eighties basically never to be heard from again.
It's a great question.
We are both of the age where we remember this personally.
Yeah, I remember my dad coming home with one of the first Atari sets. It was like magic.
What was it?
It was Pong, which was a ping pong game, if you know what. Little paddles and you'd send a little electronic ball across the screen. And it was transformative because it was the first time you could actually interact with a television set which was sitting there in the center of your home. And to be clear, I was not an early adopter. I was not cool. Everybody had the Atari set.
I'm a little younger than you, not to throw it in your face, but so for me, I don't remember Pong, but I remember the Atari twenty six hundred came to be called the twenty six hundred, which was like the first video game system like we know it today where you buy it and there's different cartridges. And this was, you know, the dominant video game in the early eighties. I loved it. I had Defender, had Journey, the game Journey like the band played it for hours, and so
the big question is what happened. I'm Jacob Goldstein and I'm Robert Smith, and this is business history. What's it about? Jacob esterday Business Today?
On the show, how a company can invent something that changes the future, changes all of culture and wind up in utter failure, like literally wind up having to bury hundreds of thousands of its own products, unsold video game cartridges in a landfill.
In New Mexico.
I feel like today's show is like walking through my childhood. We started with Atari, and our next step.
Is an amusement park that I initially called the Lagoon in Utah, and you pointed out it is called Lagoon And you know this because.
I grew up in Utah and went there once a year and it was the best day of the year. It's an amusement park, right, You play games, the rides, you eat a lot of fried salty foods. It was amazing, Robert.
I guess you would have been going to Lagoon in the seventies. A few years earlier. It was this college kid named Nolan Bushnell who worked summers there on the Midway, like where there was games like whatever, guess the way to the guy and knock down the milk cans or whatever.
And just in case you have an image of someone who's a carneye working the milk jug games, this was not Nolan Bushnell, but.
He was a carneie genius. He became King of the Midway, was running running all the games when he was like twenty years old, because he was really good at getting people to spend their money on the games. Like one example he gave later that is dear to my heart is this. So there is that game where there's these like metal milk jugs. I guess it's like metal bottles, and there's whatever four of them or six of them, and they're stacked up and you have a like a
softball or something. You throw it at it and try and.
You're trying to win a stuffed animal.
Yeah, maybe a giant stuffed animal or something if you knock down all the milk bottles, right, and it turns out He talked about this later that like half of the bottles are heavy and half of the bottles are light, and so if you put the light bodels on the bottom, it's really easy to knock them down, right, If you put the heavy bottles on the bottom, it's really hard to knock them down. Physics, And so he had this movie he would make when like a bunch of high
school students would come. There'd be like, you know, the captain of the football team, and then like the water boy kind of trailing along behind.
Okay, I was more of the water play.
Obviously, he'd get the water boy to play, and he'd set it up the easy way so that it's really easy to knock him down. The water boy knocks him down and gets the big prize, and then the captain of the football team's like, oh, I'm definitely gonna just kill at this. But then Nolan Bush nowould set it up the hard way so that the you know, football player throws and they don't fall down. He's like, Okay,
I'll try again. I'll try again, and he'd basically take all of the football player's money because he couldn't knock him down.
He realized that games are psychology yeah, you know, it's storytelling in psychology, and this would of course come in useful.
Yeah, and he had a real sense of fun, right, like this was fun for the water boy, not fun for the football player. But like he he loved a party, took a lot of drugs. He was studying electrical engineering in school, but it took him like seven years to graduate. Eventually he moves to Silicon Valley, not called Silicon Valley yet, but it's becoming that. Right, this is right where we were at the end of last week's show, and he's going to invent the video game industry, but he doesn't know it yet.
So at the time, he works for a company called Ampex, famous for those of us in the radio business as the makers of magnetic tape.
Did you use Ampex tape?
Of course, my clauset's filled with its stillcitually it is actually can't get rid of them. But Ampex was notable, not just because it was an electronics company in the Bay Area, but because it had this policy that allowed their employees to basically take stuff home and tinker with it, you know, to come up with new ideas based on the equipment. And so Bushnell starts taking stuff home thinking about games.
And in particular he's thinking about video games, or really video game because at this part in history, there's essentially one video game and it was created by these guys at MIT, of course MIT in the early sixties, to be run on, you know, a computer, which at that time was a big machine that you had at a university that costs hundreds of thousands of dollars. The game
was called Space War exclamation mark. Great name for a game, and it was fun if you understood like Newtonian gravity, right, you like have a spaceship and there's a star and it's like I go around the Sun to get just the gravity goes into the square of the distance. Whatever. So he's thinking about Space War exclamation mark. And you know when he first played it in college, he played it at the university on this extremely expensive computer where
it obviously wouldn't work anywhere else. It wouldn't work as a business because the computer was too expensive, and you just did it at night for fun. But by the time he's in Silicon Valley in the early seventies, you know, Moore's law, like we talked about last time, is cranking along. Computers are getting cheaper and cheaper and cheaper and faster
and faster and faster. And he's like, oh, maybe now that technology has got to a place where I could make Space War on a machine that I could build cheaply enough to put it in a bar next to a pinball machine and get people to put corners in it.
That's Bushnell's law, which is basically, if people have coins in a place of amusement, they will spend all the coins they have on something that's new and fun.
Yes, And so he starts working with this other guy from Ampex, and you know, he buys a black and white TV at Goodwill and he actually, interestingly, he builds essentially a computer from the ground up, right, because he is optimizing for cheapness, right, he wants to build the
cheapest functional machine he can. And he gets like a little coin slot like they have in pinball machines, has like a paint thinner can for the coins to go into, and they build a functional prototype of a game that is a lot like Space War and it looks like an arcade game, although there's not really any such thing as our kid gets at this point, but it's a.
Box in the corner. It's next to the juke box. It stands up and it has yeah, and it has computer space on it, and you're like, oh, computers space.
There's a screen, and there's controls, and there's a place to put coins. It right, the three things you need. They get this company to make fifteen hundred of the machines. Right, it's going to be a thing in the world. Now it gets out into the world, and and nobody really wants to play it, basically because it's not that fun. It seems it's it's violating one of the tenets you laid out in your made up Bushnell's law.
Right, you had to have a lot of instructions to play it is the way I understand, Yeah, or at least like it helps if you understood physics.
You know what I think about physics when.
You're playing a video game, but not in a bar now.
Yeah, And so you know what do you do in Silicon Valley if you make something and it's a failure, you start your own company, exactly right, and they call it, of course sissy g s y z y g.
Y really going in on the astronomical theme, which you know SIGs win like the planet's lineup something.
Yeah, so I think so clearly a bad name, hard to say, hard to spell, and kind of a lucky break for Nolan Bushnell. It's already taken by a candle maker up in Mendocino. So they go with another name Atari.
And for those of you who have played the game Go, it's like check in chess. You say Atari when you I've almost surrounded someone's stone.
You're saying this, like you play Go? Have you played? I have played? God? You never talked about this?
Oh yeah, yeahah Taro, And I mean so much so that.
It also has your Go game. It's okay, really yeah, it's okay. So now they have a company and a name. One key thing they're missing a game that people want to play.
Yeah, minor thing.
It's nineteen seventy two, and one day Bushnell hears about a thing happening at a hotel in I think Sunny Vale, somewhere in in Silicon Valley. Magnavox, the TV company, they're working on their own video game. This is actually going to be one not to put in a bar, but to play at home. Right. Their idea is they're going to have this machine that will help them sell more televisions.
Yea.
And so they have a prototype of this machine, and you know, there's like a special preview for insiders, and so Bushnell's like, I got to see this thing, and so he drives over there and he does not say I'm a competitor or no. He says, oh, yeah, I work at the Magnavox store whatever over down El Camino or whatever.
It is. Corporate intrigue.
It's easier to get away with a lie. I guess the nineteen seventy two, right, They're not gonna look him up on the internet. And he gets to go in and and see what this product is and it kind of sucks, so he's relieved, right It to him is clearly made by somebody who doesn't understand games. And one thing about bushnells he really understands games because they're just
not that fun to play. But there is one game that has some spark of promise to him, and it's essentially like a simple tennis or ping pong game where there's like two rectangular sort of paddles or rackets and then like a square ball and it goes back and forth and there's two players, but there's no score in the game. There's no music like it's it's it's just a weak version, but that shows some promise to him, and for those of you who have played pong what
he is about to develop. It does have this amazing sound doink, which is just so.
Like I can hear it in my brain right now.
Right. So Pushnell goes back to the office and there's this engineer who's just started that day, and he's like, you know, make this, make this kind of pingpong game, but make it fun, make it do all these fun things. And the engineer does a great job, and you know, a few weeks later, they have this prototype of an arcade style game that they call pong. They just want to see how it does, right, it's a prototype. So there's this bar nearby. It's called Andy Capps Tavern.
Named after a cartoon character from the newspapers of the nineteen seventies. Too hard to explore.
Its basically what we would call today an alcoholic a problem. Yes, and they say, can we just put this machine in the corner here at Andy Caps Tavern, like you know, like a pimball machine, And the guy at the bar says sure, and so they put the machine there and it's you know, it's really simple. It's called pong. It has two knobs, one for each player, and unlike computer space, it has beautiful simple instructions. Avoid missing ball for high score.
That's it. Love it, just a few words, yeah, yeah, three plays for one quarter. They plug it in and they go back to the office, and a few days later, like three days later, they get a call from the bar, and the guy at the bar is calling him says, yeah, the machine's broken. I don't know what's going on. It's not working. I like whatever. It's a prototype, you know, it's a new kind of computer. Of course it's gonna break.
Somebody from Atari goes down there to check it out, and it turns out it is broken because the coin box is full. It's broken because people have put too much money into the machine. It's too good. It's too good. Yeah, you know, Nolan Bush and out of his colleagues have built a machine that people just cannot help themselves put money into. We're gonna need a bigger coin You're gonna need a bigger box. People love to put quarters into a new thing.
Well, to see the new technology and then tell everyone about it, right, That is the That's one of the first insights of the technology, and then it's gotta be worth playing a second time, which is what he also had.
He had the two pieces. It's super fun. It's a new thing and it's super fun. Now he's got a scale, very classic startup problem. You have a thing, people want it. But remember he essentially stole the idea from Magnavox. By the way lawsuit, they said out of court whatever. Lots of people now you know it's Silicon Valley. People are coming by Andy Kapps Tavern, who are engineers who are like, we can do this. And so he's got to get video games out into the world fast.
Gonna need money.
He's gonna need money. Nobody's gonna give him money yet, Right, he's just some stoner with one video game in a bar. So he makes a move that has already come up a few times.
On our young show, your favorite negative cash conversion cycle.
The negative cash conversion cycle. He's able to sell games before he has to pay for the parts. So the parts to make a game cost atari like three hundred dollars. But crucially they don't have to pay for those parts unto right, they have like a month. So the parts come in Attaria doesn't have to pay anything. They put them together and sell the machine for nine hundred dollars, and then a few months later they have to pay three hundred but meanwhile they got the money from that machine.
They're growing. They're often running now other problem, classic scale problem hiring. And then one day this like nineteen year old hippie kid walks in and he says he won't leave until they give him a job, and the receptionist calls the head engineer and she goes, yeah, we got a hippie kid in the lobby. Says he won't leave until we hire him. Should we call the cops or let him in? And the engineer says, bring him on in.
It's nineteen seventies, a Silicon valley, and this guy wanders in and he is when if you tell a story like this, you know who it is.
It's Steve Jobs. It's Steve Job. So fun, it's so delightful and perfectly. Steve Jobs is very good at his job, yes, and very unpleasant to wrqu with class unsurprising. He tells Bushnell that like everybody's soldering wrong, right, they're actually putting together the hardware, soldering the hardware He's probably right, and Bushnell was like, yeah, he was right. He keeps calling his manager a dumb shit.
Probably was not.
Kind, but not necessary. Bushnell winds up putting Jobs on the night shift, partly so he won't bother so many people, and partly because he knew that Jobs like to hang out at night with his buddy Steve Wozniak, who was a great engineer, would be great to have hanging around Atari, And in fact, Jobs and Wozniak helped to make Breakout a great a target. Remember Breakout, of course.
You're trying to knock down the bricks in a wall.
Still, games like that, when you got a little paddle at the bottom.
End, there's a moment when it goes through the wall and then.
Goes so good. So Jobs worked at Atari for a little while and then decided he wanted to go off to India to find his guru perfect and asked Atari to pay for the trip. Nobody, ever, said he lacked moxie, and wound up making a deal with Atari where they pay him to go part of the way there. There they had exported some games to Germany and there was some kind of problem with the games in Germany, and they're like, we'll send you to Germany to fix the games and then you can get the rest of the
way to India from there. And that's what happened. And you know, the Germans said Jobs was terrible to work with, but he fixed the games.
You know, there's an alternative history where we're carrying around Atari devices in our pocket.
It's true. And you know, there is something, right, I was thinking about, like the link between Atarian Jobs and what did he learn there, and it felt like maybe a little overdetermined, but I do think you know, clearly he had this profound sense of aesthetics and of delight, right, Like think of the Macintosh, right, this breakthrough Apple machine
in the eighties. It was round and instead of squares, it was rounded, and it costs them more money, but it was beautiful and it was fun and you were engaged with it like a game.
It almost looked a little bit like an arcade game with the curves. Yeah, but more than that, I think that especially at Silicon Valley at the time when they were dealing in actual silicon right with him making chips for somebody, you're thinking about the future and the computers.
You're not thinking about the psychology of the customer, because the customer was another electronics company, right, And so Atari and the strength of it was really the first time where they're just like, how will a regular human being who has no training whatsoever interact with technology?
Yeah? Yeah, with a computer? Right, Like what they are making is going to become essentially the first widely adopted home computer, the first computer that ordinary people literally children can just plug in and turn on and interact with.
But the inside Bushnel had is that it wasn't labeled a computer. Yeah, it was a fun game.
Yeah Yeah. So Atari Now mid seventies, they're selling all the machines they can make. They're growing, they need more space, and so they rent an abandoned roller rink. They stencil Atari on the window, and they turn it into this office slash video game factory.
I've been ten years older. I would have loved to have worked in a roller rink video game factor.
Yes, everybody smoked weed. Yeah, there was a hot tub. There was a pool party where everybody ended up naked in the pool at Bushnell himself looked back on it later and said, if that isn't a horror show for any hr person today, I don't know what is, but it was the seventies. It was a weirdo startup. I'm guessing they didn't have an HR department. I don't know.
This is a company that's making games, right, and so you need engineering brains, but you also need a sense of play, of fun, of freedom, right, and clearly Bushnell was deliberately trying to create that.
You know, he had this culture that was free and creative.
His office door was always open, and right next to that open door was a keg of beer. So Atari's doing well. You know, Pong is a huge hit, but Bushnell knows the big opportunity the hockey stick will be if they can make a home video game, you know, like Magnavox was trying to do, but that nobody has cracked yet.
All they have to do is get rich people into a roller rink with a hot tub and some beer and it's all going to work out. Yeah, they need money, and in order to get money, he's going to have to convince people that this is going to be a global phenomenon.
After the break, Okay, that's the end of the ads.
We're going back to the show.
Nineteen seventy four.
Atari Nolan Bushnell has dreams of selling a version of pong that people can play at home. We know it's going to work because you played it young Robert Smith's waiting, how are they going to get the money to do it well?
At this point, as we learned in the last show, like venture capital is just starting to be a thing. Rich people on the East Coast are starting to realize that there's a bunch of geniuses who can make money on the West Coast and are starting to at least shop around that money.
But there's not a whole system for it. There's not a whole system for it. The culture hasn't caught up that much. You talked about the culture shift last time. And so you know, a few vcs do go by Atari and they see that it's a roller rink full of weed smokers, and they're like, this is not the business we're in. But one day a venture capitalist named
Don Valentine walked in. Valentine had worked at Fairchild Semiconductor, that a company that was at the heart of the birth of Silicon Valley that we talked about last time. Valentine was the sales manager there and Fairchild was like this fountain of startups. They called them the Fair Children. Somebody from there started AMD, still one of the biggest
chip makers in the world. And Valentine, because he had worked with these guys, knew them, had invested out of his own pocket in some of the companies, understood what was happening in technology, and he started in the early seventies a venture capital firm called Sequoia a.
Little bit famous, right, They invested in Apple, Google and video Instagram, WhatsApp.
Yeah, like one of the you know, maybe two or three biggest most important VC firms. But at this time it was Valentine and he went to visit Atari. He smelled the weed smoke. He said it was enough to knock you to your knees. At some point he took a meeting in the hot tub, and so he's like, yes, this is obviously super sketchy, but also he was like, oh, these guys are onto something. This could be a way to get the computer into the house, this giant, transformative thing.
And so he offers Bushnel this interesting deal. He says, I'm not going to give you money to start with, but I will help you. I will help you, you know, find a partner essentially, so that you can get to the next level, and if you don't screw it up, then I'll give you money. Yes, And you know, the key thing Valentine wants to help Atari with at this point is how do you get this little stoner video game company connected with a big national retailer to distribute
their first consumer product across the country. So they're working on this together and toys Rus turns them down, Radio Shack turns them down.
Oh, they're waiting for the big Tandy computer they were going to sell years later.
At out the Tierrasady. They go to the New York Toy Fair. Nobody is interested, and this is partly because the Magnavox Odyssey, it was called the game that Bushnell saw under development from Magnavox, had come out. There was a you know, somebody tried a home video game and it had done badly. But it turns out that's because it was a bad game, and Magnavox just thought of it as a way to sell TVs. Classic incumbent mistake, right,
They're just thinking about their old product. Eventually, Valentine does get Atari a key break. He sets up a meeting with Sears, which of course was the biggest retailer in the country at this point, as we talked about a few weeks ago, gets in this meeting to pitch home Pong right Pong for the home. Valentine's sent Bushnell to Sears headquarters in Chicago for a meeting, told him to wear a suit, or at least that's Valentine's version of
the story. Interestingly, Bushnell has a different version. According to Bushnell, Atari Cold called Sears got put through to a buyer who was immediately interested and came out to California right away. And I actually love these two different stories. I think there's like a little in stop looking at your computer. I'm sorry, Plan Pung.
Yes, it's addictive, yes God.
And I actually think there's something interesting in the fact that these two guys remember this so differently, because it speaks to this divide between venture capitalists and founders that persist today, right, and the question is what is venture capital really doing. A lot of founders will say, oh, they're just putting up the money, and most of the venture capitals will be like, no, No, these are guys who don't know what they're doing. We're putting up the money.
We make introductions, right, we help guide your decisions.
Yeah, yeah, and so I don't know what happened in this case, but whatever was the case. A buyer from Sears did come out to Atari one day in April of nineteen seventy five, showed up at eight am, and of course nobody from Atari is in the office yet, but eventually Bushnell and the others show up. They let the Sears buy or play with their pong prototype. It's fun,
you know. Bushnell gives him a sales pitch. Bushnell's a great salesman, and the Seers guy wants in and he asks Atari, how many of these, you know, home video game devices can you make for this year's Christmas shopping season. It's April right at this point, Atari has made zero
of these home machines. Yes, not even really this prototype, because it's a fake prototype box painted to look like it's plastic and like glued to whatever, a coffee table, and it's got a hole underneath it and there's wires running down to like a much bigger, essentially computer they've jerry rigged in like an apple crate hidden under the table.
And then an eight year old moving the pixels around.
Yeah right, it's a mechanical Turk home Pong. So the Seriers guy asks, you know, how many can you make for Sears, the biggest retailer in the world, I believe still at this point, and Bushnell's like, give me a minute to talk with the team. And he goes out and he talks to his head of manufacturing, and you know, they've been making at this point big arcade games where
a big run is five thousand machines. The head of manufacturing is like, many can we make, you know, in a few months to get him in time, we can make twenty five thousand, twenty five thousand. So Bushnell goes back in with the Seers guy and he says, for this year, we can make you seventy five thousand.
Just multiply it by three.
That's good.
That's a good CEO move.
If they asked him how he did it, he didn't even say multiply by three. He's talking about it later in an interview he said, quote, I was just pulling it out of my butt. Also a good CEO move.
Sears guy, here, seventy five thousand, and thanks, we're Seers.
Come on, come on, wit seventy thousand. You think you're talking to J. C. Penny here, Montgomery Ward.
Come on radio. Scheck one hundred and fifty thousand is what they.
Order, and Bushnell says, okay, I have a few months to do it. Now. Bushnell really does need that capital, but he also has a huge order from the biggest retailer of the world. Much easier to get funding, and Valentine Sequoia comes through with the money. Atari becomes Sequoia's first ever investment, and Sears now does the Sears thing that we talked about on the Sears Show. Right, they
help this little company figure out how to scale really quickly. Right, They get Bushnell set up with the Sears Bank, which is cool at a like nerdy finance way. They create this bonded warehouse so that now when Ataris makes this you know, one home pong game, they don't have to wait to get money for it. Then get eighty percent of the value of it right as soon as it goes into the warehouse. Clearly, a roller rink's not going to work to make one hundred and fifty thousand home
video game consoles. So they get a you know, a kind of real factory with a conveyor belt where Bushnell loves to ride around in a box on the conveyor belt. The guy loved to play, right, he loved he loved to play, which is essential. Actually, one day some serious execs in suits show up and Bushnell's in fact riding on the conveyor belt in a box. They're like, okay, whatever, just keep making the games, and they do. Atari that
year shipped over one hundred and fifty thousand units. They exceeded that one hundred and fifty thousand number for the nineteen seventy five Christmas season, and Sears sold all of them. Pong was the hit game of the year. Merry Christmas, Tiny, Robert Smith.
Happy ending.
There are no happy endings in technology. Nope, they're only happy middles. Right. You do not get to make home Pong and then coast on it forever. It is not Barbie, it is not monopoly.
Right.
Because of Moore's law, essentially every year people are going to make better video games. Right. This is clear to anybody in Silicon Valley. It's clear to Bushnell. And in fact, the year after Atari wins Christmas in nineteen seventy six, our old friend Fairchild, Fairchild Semiconductor. Yes, they start selling a home video game console that is not just one game like Pong, but it allows you to buy different cartridges and swap in different games. It's called Channel F
like Fairchild, but also Channel Fun. Because I was reading that, I was also like, remember channels. I don't think my kids know what a channel is. I guess. And then there were six of them. They were free and they sucked. So now Atari needs to make its own cartridge based game, and they need much much more money than they needed for Home Pong, right like Sears Bank funding them isn't going to do it that the capital costs are just too high. Venture capital isn't big enough at this point
to fund that. They consider going public, but it doesn't work out. So in nineteen seventy six, Bushnell and Valentine decide that they need to sell. They need to sell Atari to get the capital to take the next step, and they look around at you know, big incumbents who might buy them, and one possibility is Warner Communications based in New York.
It owns movie studios, record labels, getting into cable TV at this time.
Yeah, it's a media company. It's actually big media company run by a guy named Steve Ross, who coincidentally had recently taken his kids to Disneyland, where they spent a long time putting quarters into an Atari video game called Indy eight hundred, a driving game.
So he had a steering wheel.
Steering wheel, I'm sure, yeah, so good. Remember the one where you could sit in it and it will go around you. Yeah, it was rad. So Ross sends the Warner Jet out to California to pick up Bushnell and Valentine to discuss a possible acquisition. On the way to New York, the jet stops in Sun Valley, Idaho, to pick up Clint Eastwood, who is starring in a Warner
Brothers movie at the time. And they get to New York and Ross puts him up in this beautiful suite at the Waldorf Astoria and in fights him over to his you know, penthouse on Fifth Avenue for a screening of the Clint Eastwood movie that's not out yet. This is a.
Whole different league and a whole different business coming into video games.
Yes, and Bushnell loves it. Here's here's what he said later looking back on this experience. Were we impressed? Yeah? Were we smitten? Yeah? Did he worm us up? And you know, ready for the kill? Yeah? Yeah. I mean, when I think about it, you just have to really hand it to somebody that's a bigger con artist than you are.
I love this guy Byschanel. He's so good.
Yeah, he knows, he knows what's happening, at least he knows in retrospect, and he respects it. It's like the Midway, right, It's like Steve is like the Carney, and Bushnell is the room is the Room. He's played at a much higher level respect respect, and he respects it. So the next morning, the morning after the screening, Bushnell agreed to sell Atari to Ross to Warner for twenty eight million dollars.
And Bushnell stayed on. He kept running the company as he had been, and now he has the capital to work on this console that you know, we will eventually know as the Atari twenty six hundred. It had the Stick of Joy, had general stick of Joy, one joy stick, the orange button, one button that you usually you would fire or jump where the things it would do a
million times so fast, not just a knob. Now there's a button comes out in nineteen seventy seven, and it does it does like okay, does pretty well, but it does not do amazingly well, it is not the success that we know it will come to be. And the executives in New York at Warner decide the hippies out in California need a grown up to help them become a real grown up company.
Classic moment.
Barry and Warner brings in this guy named Ray Kazar to work with Atari. Not a tech guy. I'd been an executive at a big textile firm, started his own shirt company, shirts, Kids Love Shirts, and you know, initially
because Kuzar is kind of consulting whatever. But after a few months, the executives at Warner tell Bushnell that he can stay on his chairman, but Kazar is going to be the CEO of Atari, and Bushell says, no, no, this shirt guy is not going to be the CEO of Atari, and Warner says, yeah, we own the company. He is going to be the CEO and if you don't like it, you're fired. And Bushnell says, no, I'm not. You can't fire me.
I quit Ah expect something a little more creative from Bushnell, But maybe he made it. Maybe he was the first guy to say this.
It's definitely on Bushnell's kind of cowboy brand, right, he doesn't need the money made a bunch of money selling Atari, And interestingly, he has this little side hustle at this point a place he started in order to collect all the quarters that people were putting into the Atari arcade games.
A place called Chuck E. Cheese's Pizza Time Theater. Oh yeah, he had started as part of Atari, and then when Warner bought Atari, they're like, we don't want to own a pizza place, so he bought it from them for five hundred thousand dollars. So Bushnell is, you know, riding off into the sunset on an animatronic singing rat. Yeah, yeah, he's done an Atari.
But luckily the geniuses at a giant media company know how to run a video game company.
Right. That's after the break. We're back from the ad break. Bushnell is out and Kazar the shirt guy is in at Atari. And the next thing that happens is really surprising. This East Coast businessman who doesn't know anything about video games or engineering turns the Atari twenty six hundred into a smash hit. Turns out he's a really good marketer as a sense of what's going on, and he has the good sense to license a hit arcade game that was not made by Atari, a game called Space Invaders.
I'm sure you remember, well, of course, beautiful game. He licenses it for Atari to develop for the twenty six hundred, and it is a huge hit.
And this is a smart thing a big media company can do. Recognize basically franchises, right that are popular at the pizza place, which is where I played it, Red Banjo Pizza in Parks of Utah, and then get that into a home game, right, make money off of the name, and that's great.
Yes, And remember they're in the console business, right, console business is not doing great. The console business needs its killer app. Space Invaders becomes the killer app, and the popularity of this piece of software drives the sales of the hardware. Right, Everybody goes out and buys a twenty six hundred so they can play Space Invaders. So revenue at Atari, before Kazar got there it was less than one hundred million, and after he'd been running Atari for
a few years, revenues are over a billion. Right, he has ten ext it more. Now it's the early eighties and America is going bananas for video Pacman Feva, I don't know the name is an actual It was an actual hit song. I got a pocket full of quarters and I'm headed for the arcade. I don't make a lot of money, but I'm spending everything I make. I didn't look it up. I remember it, and if I'm misremembering it, you can tell me business history at pushkin FM.
Everybody's getting into the video games business now. Toy companies in particular are looking at this and being like, oh, this is a toy so Mattel Barbie. You know, they make the intelevision Kaliko, which around this time is making Cabbage Patch Kids, another eighties shout out a Kalico makes Calliko Vision. But Atari is winning. They are dominant. They have something like eighty percent market share. Incredible, and this is the peak. This is the moment. You have finished
the rise, and now we begin the fall. The fall starts with pac Man. Interestingly, this huge hit game, this huge hit arcade game, Atari doesn't make it, so they license it. Figure like work for Space Invaders, it'll work for pac Man. They make twelve million cartridges of pac Man, despite the fact that only ten million people own Atari
twenty six hundred. They think this game is going to be so popular that everyone with an Atari will buy it, and two million more people will buy Atari consoles to play. It doesn't happen. The game kind of sucks, just technically doesn't play as well.
Because part of the pac Man appeal was that it was a very fast movie game, like you had to turn on a dime. You have, like like you had these whole systems you had when you played in the arcades, and you wanted to use those systems at home, And if there's a little bit of a lag, it doesn't really quite works.
YEA, Well, it's not fun enough, right, There is this thing where a videogram has to be really fun to be a big hit, and pac Man for the twenty six hundred is not fun enough. So it's starting to get bad, and it's gonna get worse. And the reason it gets worse, which I love, is Et the Extraterrestrial.
Wait Et never made anything worse. He was so adorable.
It's not his fault. Ou so Et comes out in the summer of eighty two. So giant hit holds up, by the way, at least I held up my budget. I don't know, eight years ago with my children made Reesi's Pieces a big hit. Twotiful movie was not distributed by Warner Brothers. It's not distributed by Warner the company that owns Atari, right and a Ross. The guy running Warner Brothers really wants to work with Spielberg. Of course, you want to work with Spielberg. You're runing a movie studio.
You want to work with Spielberg. And so he thinks that turning ET into a hit game would help entice Spielberg to come work at Warner Brothers. So he makes this deal with Spielberg in the summer of eighty two. First of all, he pays a ton of money to license the game, and he tells Spielberg, we will have a great version of ET for the Atari twenty six
hundred out in time for the Christmas season. A problem with this is it takes like five, five or six months to make a new video game, but to have the game in stores in time to sell it for the Christmas season. This is the summer already. Yeah, yeah, and they have to you know, produce the games. They're gonna have to write this game in like five or six weeks instead of five or six months, and people are tired, like, no, we can't do it. You can't make a good game that fast. It's just not the
way it works. Kazar, who's running Atari, is like, no, whatever, it's Spielberg. What are you gonna say no to Spielberg? You say no to the CEO.
No, we can make a s We can make a shirt in like three hours.
Not many shirts. We could make my Christmas. You just gotta make one game. So they eventually find an engineer to make the game. A good engineer, guy who made Yars Revenge. I don't know if you remember that when it was a hit game at Atari. He gets it done in a matter of weeks. Atari makes five million copies, gets them on the shelves in time for the Christmas season. And the game is bad. The game is not fun.
You just like you move them along, and he like falls into hole and he makes it like er Like yeah, I'm going I'm.
Gonna read you. A couple of reviews from the time, one from a publication called Joystick. No c Et has nothing to phone home about? What another review from Electronic Games. If Et does call home, please don't tell him about this. I see a theme. So a there are millions of unsold copies. The engineer who made the game ends up leaving Atari, leaving the business, eventually becomes a therapist. It goes a lot for him to deal with, and Atari sucks.
Now right now, the thing is like, oh, I went, I paid a lot of money for this game and it sucks.
It's interesting, right, Like the thrill of a new invention only lasts so long. Right, you know the very first movie of you know, people moving around a garden, everybody's like, oh my god, it's amazing. You know, three weeks later they're like, the plot kind of sucks. Maybe an explosion or something, right, Yeah, probably the same thing with Gutenberg, right, yeah, yeah, that's amazing.
Yeah, I read the Bible. You got to go anything else? What's what's the honess? Was it your horness? I think it's your honest, but don't know. Business history of push him out of him. End of the eighty two Actually, Warner announces earnings. Right, they're a public company, They're way worse than expected. The stock crashes and as we go into eighty three, now it's not just Atari, the whole video game industry collapses. There is this incredible glut of consoles.
All these different companies are selling consoles of games there's a lot of really bad games. There's like third party companies are selling games, apparently chuck Wagon dog Food. There's like a chuck Wagon dog Food video game. And on top of all that, now you have home computers, real computers like we would think of as computers with keyboards. You know. There's the Commodore sixty four is coming out.
At this time. At my house, we had the lesser known Texas Instruments t I ninety nine four A, which I remember for its cassette deck instead of a disk drive. So Atari is now losing hundreds of millions of dollars. Kazar, the CEO, he gets accused by the sec of insider trading of selling shares just before that bad earnings announcement at the end of eighty two. He leaves the company in the summer, says he didn't do anything wrong, but
he's out. Word of replaces him with a marketing guy from Philip Morris, who helped come up with the Marlborough Man, and a few months later in the second half of eighty three, Atari actually has so much unsold merchandise, so many video games that nobody wants to buy, that they actually go and supposedly dump hundreds of thousands of unsold cartridges in a landfill and a pit in Alamo Gordo, New Mexico and cover it up. It's heartbreaking, it's heartbreaking,
and is it even true? Delightfully, I don't know. Ten years ago or so they made a documentary they actually went and dug up the landfill in Alamogordo, and in fact they found et cartridges there and other video games. This is really the end for Atari, and it's perfect obviously metaphorically right, Like it's a burial. They are burying video games, and you know Atari is going to have this sort of shambalic afterlife. As brands do, as companies do,
they get acquired and acquired and whatever. So let's go back to the question we asked at the beginning and try and answer it right. Like, Atari practically speaking, invented video games. They changed culture, they changed business, They brought the computer to the home. Video games continued to be this giant thing. Atari disappeared. Why, Like why did that happen? And I think there are a few answers that it's
worth going through right on. One is just timing. One is just kind of bad luck, right, like the Crash of eighty three. The video game crash of eighty three was brutal, and it took out everybody, right, It took out Atari, but it also took out Callco, which was making Calleco Vision. It also took out you know, Mattel gave up on intelevision.
And so as the incumbent Atari had more money invested they had, they were further out over their skis when the crash came. Yes, yes, and huge warehouses, employees, engineers, the.
Whole thing, hundreds of thousands of cartridges.
Yeah, and they have to keep, you know, putting out these things to support their legacy systems. Right. It's a classic classic incumbent proplem. Yeah.
And the glut goes on for a few years through the mid eighties, and and you know, retailers themselves don't want to stock video games anymore. They were left with them. And in fact, when the next video game revival comes, it's driven notably by a game that doesn't call itself a video game, calls itself an entertainment system, the Nintendo Entertainment System Classic. So you know, maybe anybody would have got wiped out. Maybe there was nothing Tari could have done.
But I do wonder. You have to wonder, right, what would have happened if Bushnell had managed to hold onto the company, if he'd managed to say go public, to not have to sell to Warner, Because clearly Bushnell was the perfect guy to run a video game company, right. He was the amusement park carnee genius, who knew what fun was, who knew what games were, who was also an engineer, who also created this culture where engineers could come and play and be creative. And when he sold,
he sold to an entertainment company. It's not about the engineering for them, which is why they sent a shirt guy to run Atari.
Right. He knew logistics, he knew selling, he knew how to get things into stores.
Sure, but it does seem like he thought the engineers were just employees on an assembly line. And that was a key mistake. And there's one story that I want to end with and I think really reveals this what
a mistake that was. And that's this. Not long after Kazar took over a few of the engineers, the game designers, the guys actually creating these games, realized that they had created games that were making the company millions of dollars and they were, you know, staff employees making like twenty thousand dollars a year or something. And so they went to Gazar to ask for a better deal. They're like, look, we're making these games, they're making all this money, give
us a better deal. And because I said no, he's like, anybody can do that, you know, you guys are just cranking out these things. And so these game designers left and they started their own video game company, not to make hardware, just to make games, which was not a
thing yet. Right, They are inventing the standalone video game company, and they create a company called Activision, and Activision survives the crash of eighty three and goes on to become one of the biggest video game companies in the world. They create Call of Duty, this gigantic franchise. They eventually merge with another company called Blizzard, and in twenty twenty two,
Activision Blizzard gets bought by Microsoft for sixty nine billion dollars. Nice. So, so, you know, when you look at the video game industry over the long arc, what you see is the companies that wind up dominating it are not media companies, right. Basically, Nintendo, Sony, Microsoft, These are all companies with very deep roots in electronics.
They are all at some level technology companies, and once Bushnell left Atari, I think at a deep level it wasn't fundamentally run like a technology company anymore, and that is why Atari failed.
I disagree. I think Bushnell had his moment, he changed the world, but as we often see with technology companies, the person who founded the company might not be the person to take it all the way. You know, he was using it as a game company, and it would eventually become a multi media you know, essentially movies in a box, a huge technological innovation that I'm not sure
he could have done. And we see this across other industries. Right, the first mover advantage is usually not an advantage, right, because you have to spend all this money solving problems that other people can come and just take from you. But also you have a certain arrogance, right you are the successful leader. Everyone wants an Atari, Everyone has an Atari system, so you don't really have to innovate to make a better Atari system. You just have to get
him to just keep buying cartridges. And yes, Atari did try and come up with a new system, and it was okay, right, it just didn't work that well because I think they were like, the world will always have Atari, Atari will always be number one. You can't conceive of a world without Atari, and then it happened.
We live in a world without Aitari. If you were into video games, there's a good chance you have thoughts about the things we got wrong on today's show.
And I don't take it to Reddit. Take it to the email systems.
Write to us at business History at pushkin dot fm, or leave us a comment. I will read all the emails in the comments, because frankly, we don't get that many yet, and I want to get more and I want to make the show better. Tell us if you listen to the show, if you watch the show, what do you want to hear? What do you want to see? We want to make shows that you like. We're very grateful that you're listening. And tell a friend if you
like it. Today's show was produced by Gabriel Hunter Chang, It was engineered by Sarah Bruguerer, and it was edited by our showrunner, Ryan Dilley, who told me that if you had told him in nineteen eighty two that he could play et at home and have a coca cola. He would have thought it was the greatest thing in the world.