Video Nation

 AL ALCORN

By 1983, video games, and Atari in particular, had captured the nation. Fifty new video game arcades opened in the United States every week.¹ One in five American convenience stores had at least one arcade game on site.² A case arguing that children under seventeen should be restricted from playing video games reached the Supreme Court.³ The New England Journal of Medicine reported a new type of ligament strain: “Space Invaders wrist,” named for the popular arcade game manufactured by Taito Corporation and turned into the bestselling home video cartridge by Atari’s Rick Maurer. Steven Spielberg told Newsweek that he had eight arcade games in his house and wondered aloud if he might be in the wrong business. Atari ran a series of ads around the concept of a nation addicted to video games, even setting up an “Atari Anonymous” toll-free hotline.⁴

Thanks almost entirely to the Atari division, Warner stock soared 3,000 percent in the six years following the acquisition. The division was so profitable that the other parts of Warner, while also making money, diluted Atari’s performance.

Then it all crashed. In June, Warner announced losses of $310 million in three months, more than $3 million per day. Even Warner CEO Steve Ross seemed stunned, admitting that while he had expected a loss, one “of this magnitude clearly was not anticipated.”⁵ Atari had begun missing its earnings estimates at the end of 1982, but the second quarter results for 1983 were nonetheless mind-boggling. By the end of the year, the company had lost roughly $500 million. The previous year, it had recorded profits of $323 million.

Steve Ross and Manny Gerard blamed competition for game cartridge sales, by far the most profitable part of Atari’s business, for the devastating losses. (It did not help that companies such as Mattel were selling more advanced game systems with better graphics.) Atari had introduced several new games—including PAC-MAN and E.T. the Extra-Terrestrial, a tie-in with the Universal film—with graphics and design that many players considered primitive. Of E.T. one critic wrote, “It wasn’t a game. It was a thing waddling around on a screen.”⁶ E.T. had been rushed to market after Steve Ross had made a deal with Steven Spielberg, reportedly guaranteeing the filmmaker $23 million in royalties, without consulting anyone at Atari.^V

By the end of 1982, some twenty competitors were selling cartridges for Atari’s VCS game system—but Atari made only one-third of the three hundred cartridges available for the console.⁷ There were games from serious companies such as Activision, but also offerings such as Chase the Chuck Wagon (from Purina, the pet food company) and Custer’s Revenge, a pornographic game in which a sexually aroused George Custer dodged arrows to advance toward a naked Indian maiden tied to a post. The game manufacturer’s appalling slogan: “When you score, you score!” Atari sued the manufacturer of Custer’s Revenge. The game also generated protests by women’s and Native American groups who said it promoted rape.⁸ Atari had lost control of the market it had created.

Only hours before the first of Warner’s losses was announced in December 1982, Atari president Ray Kassar had sold 5,000 shares of stock. Investigated by the SEC for insider trading, he had to return the profits. Then he was fired. Warner CEO Steve Ross, who had sold stock worth $21 million in the months leading up to the announcements of Atari’s slipping earnings, faced no investigations.⁹ Atari laid off three thousand workers in 1983, after which the company faced a unionizing attempt that quickly failed. “It’s an agonizing time emotionally here,” one executive said. “This was the best place to be in Silicon Valley, and people don’t understand how all this happened.”¹⁰

“It was as if the entire industry disappeared,” explains Warner’s Manny Gerard. Bally’s profits fell 85 percent. Mattel, the maker of Intellivision, laid of 37 percent of its workers.¹¹ Some two thousand arcades closed in the first nine months of 1983. It seemed as though video games might be only a passing fad.

The crash nearly destroyed the rising generation of video game startups. Activision, the company founded by four disgruntled Atari game designers, suffered through a lackluster public offering in 1983 before losing millions of dollars. Imagic, another Atari spinout, folded. “Atari’s meltdown created a tsunami that wiped out public interest in games . . . and gave gaming a stigma that lasted a decade,” says Trip Hawkins.¹² Hawkins, one of Mike Markkula’s “diamonds in the rough” at Apple, had left the company in 1982 to found Electronic Arts to build video games for personal computers. The first outside backer of Electronic Arts was Don Valentine, the venture capitalist who had funded Atari and introduced Mike Markkula to Steve Jobs and Steve Wozniak. Ben Rosen, the optimistic technology analyst, was another early backer.^IV

Electronic Arts had its first big hit in October 1983 with Doctor J and Larry Bird Go One-on-One, a basketball game featuring two of the sport’s biggest stars. The title was one of the most popular games for the Apple II and an early indicator of the enormous market for licensed sports video games. (Electronic Arts would exploit this market with great success five years later with the release of John Madden Football.^III) But in the wake of the 1983 crash, even Electronic Arts, which made games for computers, not dedicated consoles or arcades, had to retrench. “We had to operate like the Fremen of Dune, recycling our own saliva to survive,” Hawkins says. “We had to rebuild the industry brick by brick over a period of years.”¹³

Atari never recovered from the crash. Just as Alcorn and others had feared, when sales of Atari games began to decline, the company had nothing new to offer. A higher-end game system released at the end of 1982 played only a limited number of games (earlier VCS cartridges, for the 2600 system, would not work with it) and cost as much as some personal computers that could do more.^II The other two divisions of Atari—coin-op arcade games and the personal computer division—also lost money.

Too late, Atari tried to pay serious attention to research and development. After Alcorn left, Kassar hired PARC’s Alan Kay to oversee “long-term research” and gave him what Kay called “essentially an infinite” budget.¹⁴ In early 1983, Ted Hoff, a coinventor of the microprocessor and among the most senior engineers at Intel, joined Atari to focus on “short- and medium-term research.”¹⁵ Both men quit within a year, far too early for their efforts to have had an effect on Atari’s bottom line or technical direction.

In 1984, Warner split Atari, keeping the arcade division but selling the home computing and game console divisions to Jack Tramiel, the former CEO of Commodore Computer. The next year, Warner sold the arcade division to Namco. “It’s clear that the old Atari was dead,” one analyst told the New York Times. “It just wasn’t worth anything.”¹⁶

The video game industry would begin to resuscitate in 1985, when Nintendo introduced its NES game console. The NES, which in 2011 was named the best video game console of all time, was a closed system; it played only cartridges made or approved by Nintendo.¹⁷ The Japanese company had learned from Atari’s stumble.^I

---

I. Nintendo’s rise marked an important shift in the video game industry, from open to closed systems. Apple made a similar shift around the same time, moving from an open operating system in the Apple II and its descendants to a closed system in the Macintosh.

II. Some low-end home computers sold for $200; the new Atari 5200 was priced at $269.

III. As of 2013, Electronic Arts had sold more than 100 million copies of the Madden football game (today called Madden NFL), generating $4 billion in revenue.

IV. Valentine gave Hawkins an office at Sequoia Capital and helped him secure a $2 million round of funding from, among others, Kleiner Perkins Caufield & Byers and Sevin Rosen, a fund started by Ben Rosen. The original name of Electronic Arts was Amazin’ Software.

V. Many people point to the size of the E.T. deal with Spielberg—$23 million was roughly $22 million more than anyone had paid for video game rights to a movie—as the beginning of the end for Atari. But if the point of reference is not what the deal did to Atari but what it did for Warner, Ross seems to have gotten a bargain, since the agreement helped bring Spielberg, who had been making films for Universal, to Warner.

Taylor also noted that “the real challenge has been the transfer of an entirely new and quite different framework for thinking about, designing, and using information systems. This is immensely more difficult than transferring technology. Opportunities for pioneering completely new ways of thinking about large collections of ideas are rare. Over the past twenty years, I have been fortunate to have been a leader in three: timesharing; long distance, interactive networking; and personal, distributed computing. Each of these required large upheavals in the way people think about information systems.”