BY THE END OF 1980 ATARI HAD BECOME THE FASTEST GROWING company in the history of the United States. Thanks to continued strong sales of its Video Computer System (VCS) and the Atari computer family, which had been introduced in 1979 and was a massive success, as well as the arcade release of Missile Command, Atari posted revenue of $415 million, up from $39 million just four years earlier, when Warner Communications had acquired the company and Ray Kassar had taken the helm. Warner was extremely pleased with Kassar’s leadership. He had taken a money pit and turned it into a pile of gold.
Things were looking good, and Kassar believed the company was finally on its way to sorting out the problem that had been building for the last five years. The audience was finally there; they just needed to double down. Then 1981 rolled around. New arcade hits like Tempest took over arcades while classics like Missile Command and Asteroids made their way to the VCS. As Atari continued to grow, it was unable to keep up with the massive demand. To ensure that it could manufacture in high enough quantities for the rising demand, Atari demanded distributors purchase their inventory a year in advance, unsure that the company would be able to fill additional requests otherwise. Distributors complied, trusting that Atari’s success would only increase as massive blockbusters like Pac-Man (which Atari had licensed from Namco for release on home consoles), Raiders of the Lost Ark, and E.T. the Extra-Terrestrial were released the following year. Atari reported revenue of over $2 billion, accounting for roughly a third of Warner’s total revenue for the year.
But as 1982 arrived, Atari began to face stiff competition. Its release of the VCS version of Pac-Man met with wide dismay. Fans had expected to receive a fully featured version of what they played in the arcade, but were treated instead to a substandard version that didn’t hold a candle to the arcade version. Despite this, it did exceptionally well, eventually selling nearly eight million units. These sales came with a cost, as many felt burned, unsure of Atari’s ability to compete in a rapidly growing market.
Just a month later, Activision released Pitfall, an adventure game that tasked players with running from screen to screen to collect treasure within a specified time limit, and that many credit as the first side-scrolling platformer. It was a huge hit, outselling every Atari release but Pac-Man. Around the same time, Atari finally lost its multiple ongoing lawsuits against Activision, opening the market for dozens of third-party developers to create games for the system in exchange for a royalty.
Suddenly Atari needed a real winner. Thankfully, E.T. was just around the corner, and everyone was counting on it to be a big hit. Atari needed the win, and distributors knew that the movie’s success would help drive sales, preordering millions of copies the year before. Their hopes were quickly dashed as the game was released and considered by fans to be a massive flop. The graphics were terrible, it was hard to tell what was going on, and aimless direction left players confused as to the purpose of the game. Though it sold well at 1,500,000 copies, this fell short of the hope that everyone had for it, and consumer confidence in Atari waned even further as other games failed to sell as well as they had before.
While still successful, Atari was in a tough spot. The market had become too saturated and the company was failing to innovate, allowing itself to be overtaken by its own success, just as it almost had been in 1974 with the release of Pong. Now it was stuck with games people didn’t want, increased competition, and little room to move forward. With the end of the year closing in, the company released the Atari 5200 in November, renaming the VCS the 2600 to signify that the 5200 was two times better than the VCS, but it was too little too late. The 5200 sold well, but on December 7, 1982, Warner Communications reported a sales increase of 10 percent, adjusted down from the 50 percent they had been boasting about, due to poor sales of Atari games. Warner stock plummeted more than 40 percent in the proceeding two days, signaling rough waters ahead for Atari. Things got worse just one week later, as the US Securities and Exchange Commission announced an investigation into Kassar and Atari vice president Dennis Groth. It was later revealed that that just twenty minutes before announcing their fourth quarter earnings, Kassar sold off five thousand shares of Warner Communications stock worth about $250,000. He claimed this was entirely unrelated, but the public remained unconvinced, as it very well should have.
Just like Missile Command, E.T. for the VCS had an urban legend of its own. In September 1983, a full year after the release, the Alamogordo Daily News in New Mexico reported that that more than a dozen semi trucks had picked up unsold games and systems from Atari’s recently closed El Paso, Texas, warehouse and dropped them in a New Mexico landfill, never to be seen again. Atari dismissed these claims, and they fell to the wayside, doomed to the same fate as other urban legends of the time. Meanwhile, Atari reportedly sent steamrollers to crush what remained of the discarded games before encasing them in cement to ensure they would never be found. But in 2014, a documentary, Atari: Game Over, which profiled the crash of 1983, would unearth these cartridges, eventually finding that more than 700,000 cartridges of all kinds of Atari games had been buried after distributors returned them following poor sales.
Sales continued to plummet in 1983 as fans flocked to other home console options, unimpressed with the Atari 5200. Atari tried to recover, moving its manufacturing plants overseas to cut down on costs and increase profitability, but it was too late. Later that year, Warner reported losses of more than $283 million, largely attributed to Atari. By the end of the year, this would climb to $536 million, causing the entire gaming industry to crash around it. Atari’s largest competitors reported massive losses and began laying off large portion of their workforces. In a matter of months, Kassar resigned as Warner sold off Atari to the former president of Commodore Computers, Jack Tramiel, who continued to try to save the company.
Believing the future of the company to be in computer technology, Tramiel declined Nintendo of Japan’s offer to distribute their Famicom console in the US, which Nintendo would then go on to do themselves under the name Nintendo Entertainment System. Realizing the error of his ways, Tramiel attempted to pivot back to video game consoles, but competitors had already taken hold, and Atari struggled to find a foothold until eventually laying off nearly the entire company just a decade later in 1996, leaving a shell of the former company to license out the brand. It was sold to Hasbro in 1998 for $5 million.
In the span of twenty-six years, Atari had gone from a company manufacturing machines in an abandoned roller-skating rink, to more than $39 million in sales at the time of the Warner acquisition, to raking in more than $2 billion in profit in 1981, to being sold off for scraps at $5 million. There’s no denying that Ray Kassar’s influence over the company was extraordinary. He took a struggling business that couldn’t afford to create its own product and turned it into the fastest growing company in US history. But at what cost?
The company that had once been creativity and innovation incarnate fell prey to its own success, failing to stay true to the vision that its founders set out to achieve. In an attempt to increase profits and grow to the heights that Warner hoped for, Kassar had alienated the very people who had made Atari what it was. Without that guiding foresight and thirst for innovation, the company failed to see what was headed its way, and it paid the ultimate price as a result. In spite of what ultimately became its slow and painful death, Atari’s legacy lives on today through the games it created, which captivated the minds and quarters of millions of people.