27
The King is Dead, Long Live the King!
In November 1978, Warner Communications held its annual budget meeting in New York City. As chairman of Atari, Nolan Bushnell represented the subsidiary before a group of Warner executives to discuss strategies for the coming year. What should have been a straightforward presentation quickly devolved into a shouting match.
The past year had not been one of Atari’s finest. After chip shortages, production delays, and late deliveries had partially spoiled the 1977 Christmas season for the new Video Computer System (VCS), Atari found itself with unsold systems sitting in warehouses. Atari consumer sales director Malcolm Kuhn was ordered to clear out the back stock at the start of the new year, but when he pointed out that retailers were not going to stock the expensive video games again until Christmas, he was fired and replaced by Don Thompson.1
At Warner Communications, Steve Ross and Manny Gerard worried that their Atari investment was about to blow up in their faces. Gerard continued to believe in the VCS, but it was now clear that while Atari was good at engineering, it lacked experienced leadership in manufacturing, finance, and marketing.2 Finance resolved itself as Bill White stepped down as CFO due to health problems and was replaced by Dennis Groth of Arthur Anderson, who had been serving as an independent auditor of the Atari books.3 To shore up marketing and production, Ross and Gerard discussed bringing in an outside consultant to spend some time in the Atari Consumer Electronics Division. They were unsure who to approach for this task until Bill Sarnoff, the head of Warner’s book publishing division, suggested his friend Ray Kassar.4
Raymond Edward Kassar was born on January 2, 1928, in Brooklyn, New York. His father, Edward Wahid Kassar, was of Assyrian decent and immigrated with his family from Syria in 1911. The family controlled silk mills in Patterson, New Jersey, but lost everything in the Great Depression, so Edward worked a variety of jobs from handyman to cab driver to support the family. Ray graduated high school at 16 and matriculated to Brown. Due to World War II, the university implemented accelerated semesters, and he graduated in 1948 at age 20.5
At Brown, Ray roomed with Robert Love, whose father, Spencer, was the founder and chairman of textile conglomerate Burlington Industries. They became friends, and at a Christmas party at Spencer Love’s Palm Beach house in 1947, Spencer offered him a job and the dean of Harvard Business School offered him a scholarship. Ray started at Burlington in 1948 as a trainee moving from mill to mill in North Carolina for nine months and worked at Burlington for two years before taking an official leave of absence to attend Harvard.6 When he returned to Burlington with his MBA in 1953 after two years at Harvard and one in the Air Force, he became a sales trainee in New York for the Galey & Lord high-fashion cotton clothing subsidiary.7 With an eye for fashion and a mind for marketing, Kassar rose to manager of the Industrial and Diversified Fabrics Division of Burlington in 1954.8 Presidencies at Burlington Narrow Fabrics and Burlington Decorative Fabrics followed in 1956 and 1957, respectively, before he rejoined the parent company in 1959 as the youngest vice president in its history.9
Kassar worked closely with Spencer Love until his mentor died of a heart attack in 1962. Whispers had been circulating for some time that Kassar owed his rapid rise solely to his close relationship with Love, so incoming CEO Charlie Myers demoted him, and he had to prove his value to the corporation all over again.10 Despite this setback, by 1970 he was an executive vice president overseeing all the home furnishing subsidiaries of the company.11 In 1974, Kassar was one of three candidates to become the next chairman and CEO of Burlington. Although he was the youngest candidate by more than a decade, he also oversaw the most profitable portion of the firm. Despite this, he did not get the job. Sensing he would never be given a shot at the top spot, he resigned his position and established his own boutique firm, R.E. Kassar Corp., to import cotton shirts and dresses from Egypt.12
When Bill Sarnoff approached Kassar on behalf of Warner about running the Atari Consumer Electronics Division, he had no interest in leaving the East Coast to manage a high-technology company, but he agreed to take a meeting with Gerard.13 After listening to Manny talk for four hours,14 he was still not convinced, but he agreed to come out to California for a few weeks subject to certain conditions, including not giving up his own company, working at Atari only a couple days a month, and being able to commute to Sunnyvale from an apartment in San Francisco via a chauffeured car, both of which would be provided by Warner. He figured Gerard would turn him down, but Warner agreed to all his terms.15
Kassar started his consulting gig as president of the Consumer Electronics Division in March 1978 and was dismayed by what he saw.16 Financial controls were poor, marketing was non-existent, quality control was lacking, and inventories were high. Nevertheless, like Gerard before him, he was fascinated by the VCS and convinced of its future potential. Therefore, he committed to working at Atari full time and sold his business. Over the next several months, Kassar devoted himself to improving quality control and company infrastructure while developing a proper advertising campaign for the VCS.17
Meanwhile, the programming staff of Bob Brown’s microelectronics department continued to expand throughout the year, and the number of available cartridges for the VCS more than doubled to 20. Having already ported most of the significant coin-operated games on the market to the system in 1977, the 1978 lineup included only two more: Breakout and a clone of Gun Fight called Outlaw. Two sports games were also introduced, Home Run and Basketball, as were two one-on-one dueling games, a Tank-like game called Slot Racers and a port of the mainframe classic Space War. Rounding out the lineup were a Hangman cartridge – the first to use a 4K ROM rather than 2K – a capture-the-flag-style game called Flag Capture, and three games created for a new “keyboard” controller consisting of two number pads introduced to counter the encroaching threat of the microcomputer. These were a memory matching game called Hunt & Score, a guess-the-number game called Codebreaker, and Brain Games, which featured several math games and two variants of Touch Me.18
On September 15, 1978, during the World Heavyweight Championship fight between Muhammad Ali and Leon Spinks, Atari launched its 6-million-dollar advertising campaign for the holiday season developed by the new ad agency Kassar secured for the company, Doyle, Dane, Bernbach. The centerpieces of the campaign were three 30-second TV spots unified by the slogan “Don’t Watch TV Tonight, Play It” featuring a host of celebrities including Pete Rose, Pele, Billie Jean King, Bobby Riggs, Kareem Abdul-Jabbar, Carol Channing, Jack Palance, Gene Rayburn, and Don Knotts. Commercials subsequently aired during major sporting events, the premiere of the television series Battlestar Galactica, and other high-profile programs. Alongside the television blitz, full-page ads appeared in People, Playboy, TV Guide, US Sport, and Penthouse magazines.19 Kassar and his management team instructed Atari’s sales reps to follow up the ads aggressively as manufacturing worked diligently to produce 800,000 units of the VCS for retail.20
But 1978 was the year that handheld electronic games were in and video games were out. The collapse of the dedicated console market after the 1977 holiday season and the emergence of electronic handheld and tabletop games convinced retailers that the video game fad was over and that the programmable systems on the market like the Fairchild Channel F and the VCS were destined to fail. Retailers were still happy to stock programmable systems and their attendant cartridges, but they were determined not to repeat 1977, when overstocking of dedicated consoles led to drastic price cuts, unsold inventory, and greatly reduced profits.21 By late summer, Atari had shipped over 400,000 systems, but then orders virtually stopped. With nearly 400,000 systems sitting in warehouses, Atari looked set to lose money again.22
While Kassar was working long hours to sell the VCS, Nolan Bushnell and Joe Keenan were often nowhere to be found. Newly wealthy from the Atari deal, Bushnell purchased the former Folger mansion in Woodside, California, and began tacking long vacations onto business trips. Both he and Keenan stopped paying as close attention to the day-to-day operations of the company, basically letting Kassar in consumer and Gene Lipkin in coin-op run their businesses without much oversight. Bushnell would periodically show up to make pronouncements, however, which would prompt a frustrated Gerard to tell him he could “not rule the company by the divine right of kings.”23
For Bushnell’s part, he was not happy with the direction the company was taking. The solid-state pinball division established two years before had failed to be the innovative operation he had hoped for and could not compete with the Chicago companies on costs, and he was ready to shut it down. Atari was preparing to enter the emerging home computer market as well, but Bushnell was not certain Gerard and Warner were really prepared to make the financial investments necessary to break into a new product category. Most of all, he disagreed with Warner about the future of the VCS.24
When Atari launched the VCS in 1977, it maintained high profit margins on both hardware and software.25 The logic was that consumers would probably only buy two or three of the eight additional games available, thus necessitating a decent financial return on the hardware as well. In reality, the average consumer bought between three and four cartridges, and some were purchasing every title available.26 A single cartridge cost only around $4.00–$5.00 to produce and sold for $20. Even accounting for the cuts taken by distribution and retail, this represented an enormous margin on each unit sold. Bushnell felt it would be better to cut the price on the VCS and reduce hardware profit margins to further stimulate software sales.27
At the November 1978 budget meeting, Bushnell stated that it was time to cut the price of the VCS and start looking toward its eventual replacement. To the room full of shocked Warner executives, most of whom did not follow the Atari business closely, this sounded like Bushnell wanted to give up on the VCS business entirely and liquidate the product.28 Gerard pushed back, arguing that a steep price cut would devalue the system in the eyes of consumers and lead to the end of the Atari consumer business. Bushnell responded that Gerard had no feel for the consumer electronics business at all. When the shouting finally died down, it was clear something would have to be done in response.29
The next day, a shaken Steve Ross called Gerard into his office and asked him what they should do. Gerard told him all they could do was wait. They had only a few weeks until December 25, and they could not do anything to alter the course of the Christmas season even if they wanted to. On December 26, the VCS would either be sold out across America, thus proving retailers had underestimated consumer demand for video games, or the shelves would still be full, and the retailers would take the liquidation decision out of Atari’s hands anyway. All that was left to do was see how Atari and a diverse array of competitors would fair with the general public.30
***
The rise of the handheld market spelled a definitive end to the dedicated console market, though several companies continued to lurch through it over the course of 1978. Total unit sales collapsed from 7 million to 1.6 million, while dollar volume was cut nearly in half from $210 million to $120 million.31 Coleco led the depressed market as it deployed the final two units of the Telstar line: the Telstar Marksman, which did the previous year’s Telstar Ranger one better by shipping with a rifle controller instead of a pistol, and the Telstar Colortron, which was identical to the Telstar Alpha system released the previous year save that it sported color graphics and better sound.32 The company saw its revenues on video games decline from $49.8 million to just $4.6 million and exited the video game business for good to focus on its new line of successful electronic sports games.33
Those companies that remained committed to the video game business in 1978 generally attempted to stay relevant by dropping the dedicated console segment and concentrating solely on programmable systems. The one exception was APF, which remained the second largest producer of dedicated systems behind Coleco while deploying a programmable unit based around the Motorola 6800 processor called the MP-1000. Released in fall 1978 at $180, the system shipped with a simple built-in target shooting game called Rocket Patrol. Six cartridges were sold separately: Catena, Hangman, Bowling, Baseball, Blackjack, and a Breakout clone called Brickdown. Although the system could generate colorful graphics through use of a Motorola 6847 video display generator, the simplistic games did not endear themselves to the public, and the console sold few units.
For video game pioneer Magnavox, leaving the dedicated console market behind nearly meant dropping out of the video game industry entirely. In 1978, the company planned to release a new dedicated console called the Odyssey 5000 based on a chip by Signetics, a Fairchild spinoff that Magnavox parent Philips purchased in 1975. The system would play 24 different games largely consisting of ball-and-paddle variants, but also included primitive tank and helicopter games in the vein of Tank. With the collapse of the dedicated console market, the product was cancelled.34 Instead, the company half-heartedly continued work on a programmable console in partnership with Intel.
Stan Mazor, the co-designer of Intel’s first microprocessors, had been interested in the potential for computers to play games since seeing Spacewar! on a PDP-1 at the Fall Joint Computer Conference in Las Vegas in 1964. While working on the 4004, Mazor and Hoff told management at Intel that video games were a potential market for microprocessors and even had an engineer named Glenn Louie recreate Spacewar! using the 4004 chipset, but they were unable to convince management to promote that application of its processors. Nevertheless, as Intel continued producing newer and more powerful chips, the company kept tabs on the consumer electronics market to source potential clients. Mazor headed up the company’s effort to place its chips in these products, so a field rep in Chicago put him in touch with the Magnavox console design team led by Gene Kale.35
To power its programmable system, Magnavox settled on the Intel 8048 processor, a microcontroller containing a 1.79 MHz 8-bit processor, 1K of ROM and 64 bytes of RAM. A separate RAM ship provided an additional 128 bytes of memory. Magnavox also commissioned Intel to develop a custom graphics chip for the system. Kale and his team defined its functionality, and Intel engineer Peter Salmon designed the chip with the help of Sam Schwartz and Gary Bastian. Mazor served as the project manager for the chip and as the liaison between the two companies.36
The resulting 8244 chip could display only four sprites, but as on the Atari VCS, these could be reused multiple times on different lines to populate the screen with more objects. Unlike the VCS, it also had a built-in character generator that stored an additional 64 objects, of which 12 could be on the screen at one time. Many of these were letters and numbers, but a few were common objects such as trees and people. The chip could also generate a background grid of lines divided into segments that could be turned on and off independently to represent walls and other obstacles.
Magnavox planned to release its programmable system in late 1977, but bugs in the 8244 forced the company to delay the release to 1978. In the meantime, Philips, which had never been happy with the video game business it inherited with its Magnavox purchase, decided to pull the plug on the entire project in August 1977. John Helms brought in Ralph Baer to brief senior management on how lucrative the video game business had been for some of Sanders’ other partners like Coleco and managed to save the system.37 Soon after, Helms left the company, and the video game division was merged with the laserdisc and video tape recorder business to form a new “interactive devices” division under an executive named Mike Staup.38
The Magnavox programmable system, originally announced in June 1978 as the Odyssey Computer Video Game System,39 finally began shipping to retailers in September as the Odyssey2.40 Unlike competing systems from Atari and Fairchild, it was positioned as both a video game system and a cheap educational computing device and therefore featured not only joystick controllers, but also a built-in membrane keyboard. It retailed for $180 with one cartridge containing three games: a Speed Race clone called Speedway, a Gran Trak clone called Spin-Out, and a word scramble game using the keyboard called Crypto-Logic. Golf, Basketball, Football, Blackjack, and a cartridge combining an educational game called Math-a-Magic and a Simon clone called Echo were also available at $20 each. Magnavox managed to ship around 100,000 systems by the end of the year,41 but sales were inhibited by late FCC approval, which kept the system out of the major department store chains that remained responsible for the bulk of video game sales in 1978.42
While Magnavox explored the fringes of the low-end computer market, arcade giant Bally fully embraced it with a console-computer hybrid. Like many of Bally’s video game projects in this period, the concept originated at Dave Nutting Associates. DNA began planning for a programmable console in 1975 as Jeff Frederiksen developed the Z80-based upgrade to his microprocessor arcade hardware, and development began in early 1976 using a scaled down version of that system.43 As with Frederiksen’s original coin-op video hardware, the system could not generate hardware sprites and instead drew the entire screen as a bitmap. This necessitated 4K of RAM to display eight colors drawn from a palette of 256 at a screen resolution of 160×102 at a time when semiconductor memory was expensive,44 but the company was able to negotiate a relatively good price because it was already one of the largest purchasers of RAM chips in the world to power its coin-operated games.45
Unlike its competitors, DNA included an 8K ROM chip on the system that not only contained several built-in games, but also a primitive operating system that functioned as an application programming interface (API). While Frederiksen and another engineer named Terry Coleman developed the hardware, programmer Jamie Fenton led the team that developed the software.46 The team wanted to include an eclectic mix of games for the built-in product, so the console incorporated an action game (Gun Fight), a strategy game (a port of Midway’s Blockade clone Checkmate), a casual product (a doodling program called Scribbling), and an educational program (a calculator). To play these games, DNA designed a pistol-grip controller inspired by the hand controllers of the Channel F that featured a trigger button in the grip and a plastic dial on top that could be tilted in eight directions for movement or rotated to control a paddle.47
DNA parent Bally planned to release the system as the Bally Home Computer Library in late 1977 through its new consumer division led by Bob Wiles, the former Magnavox color TV product manager who initially had responsibility for the Odyssey until it was spun out into its own unit. Electronics mail order firm JS&A signed on to sell the system in its catalog, while the Montgomery Ward department store chain agreed to sell it at retail. By July 1978, Bally planned to introduce a keyboard unit including more RAM and a dual cassette tape drive that would turn it into a full-fledged computer.48
JS&A began running ads for the Bally Home Computer Library in September 1977 alongside two cartridges: one featuring a port of Tornado Baseball alongside Tennis, Hockey, and Handball ball-and-paddle games and the other sporting two educational games called Elementary Math and Bingo Math.49 The console did not ship that year, however, because like most of the programmable console makers and early microcomputer companies, Bally ran afoul of the FCC and its interference standards. Even after these issues were resolved, the company experienced delays from its chip suppliers that caused Montgomery Ward to cancel its order.50 JS&A began accepting orders from customers in the fall as planned, but the extra shielding needed to pass FCC testing led to overheating problems that rendered the first batch of consoles defective. Bally was unable to start manufacturing until December 1977,51 and JS&A was unable to begin delivering units to customers until early 1978. Then, Bally discovered one of the chips in the console was defective, and it was forced to halt production again until May.52 Due to the manufacturing issues with the base unit, Bally cancelled the computer add-on despite displaying a functioning prototype at the January 1978 CES. The system was also renamed the Bally Professional Arcade, likely to not call attention to the company’s failed computer ambitions.
By fall 1978, Bally was able to start delivering consoles in quantity, though its distribution only reached about 60% of the United States.53 Eight game cartridges were available, with the two titles advertised in 1977 joined by a driving cartridge featuring the games 280 Zzzap and a Wheels port called Dodgem; a one-on-one dueling cartridge with Tank and Jet Fighter clones Panzer and Red Baron; a target shooting cartridge incorporating Seawolf and Missile; a cartridge featuring a Breakout clone called Brickyard and a Circus clone called Clowns; a Football cartridge; a card game cartridge featuring Blackjack, Poker, and Acey-Deucey; a board game cartridge with Checkers and Backgammon; and a word game cartridge containing Letter Match, Spell ‘N Score, and Crosswords. While the computer add-on did not materialize, the company released a BASIC cartridge in October that allowed users to create their own simple programs that could be saved to cassette with the help of a separately sold tape interface. Bally managed to ship an estimated 75,000–80,000 units of the Bally Professional Arcade by the end of the year,54 but most of them remained unsold.
Meanwhile, Fairchild experienced its own ups and downs in the business. After the price difficulties the company experienced with the Channel F in 1977 due to the need for additional shielding to pass FCC testing, the company redesigned the system and deployed the new model in late 1978 as the Channel F II. Externally, the most notable changes were detachable controllers and sound passed through the television speakers. Internally, a new LSI replaced most of the discrete components in the system to bring costs back under control and allow Fairchild to drop the system back to the launch price of $150.55 New games for the year included a ball-and-paddle variant called Dodge It in which the players have to avoid a bouncing ball; a version of the board game Battleship called Sonar Search; a Breakout clone called Pinball Challenge; an Air-Sea Battle clone called Torpedo Alley; and depictions of Hangman, Bowling, and Checkers. Fairchild also advertised a “keyboard” controller like the one released for the VCS, but it never shipped.
By the middle of the year, Fairchild was considering exiting the video game business entirely in the face of its continued poor showing in consumer electronics generally and digital watches in particular. Perhaps sensing the current corporate climate, video products division VP Greg Reyes departed the company in June 1978.56 His replacement, Richard Bohnet, continued his predecessor’s conservative approach to the market, though the company did run a brief advertising campaign beginning in mid-November centered on print and TV ads featuring comedian Milton Berle.57 Fairchild sold roughly 150,000 units on the year, slightly more than it did in 1977.58 That modest total fell slightly below expectations, as Fairchild was forced to lower its forecasts in the face of the same retailer resistance encountered by Atari. In all, roughly 700,000 programmable systems were sold in 1978,59 far fewer than previous estimates of nearly a million.60
***
Despite the obstacles faced by video game companies in 1978, once the Christmas results were in it was clear to executives at Atari and Warner Communications that the VCS was, in fact, a hit. Not only did the 400,000 units accepted by retailers virtually sell out, but software sales also doubled as the average consumer bought five games per system sold. Ross and Gerard credited Ray Kassar for the success and asked him to stay on at Atari as president of the whole company. Kassar refused. The hard-nosed, no-nonsense Kassar did not get on well with the more laid-back upper management of the company with its 5:00 PM marijuana gatherings and hot tub board meetings. Kassar told Gerard that for him to stay, Bushnell would have to go.61 Bushnell’s behavior at the November budget meeting made the decision easy.
On December 28, 1978, Manny Gerard stripped Nolan Bushnell of his position as chairman and co-CEO of the company he co-founded with Ted Dabney in June 1972. Joe Keenan was elevated from president and co-CEO to chairman of the board, and Ray Kassar assumed the roles of president and CEO. Warner announced Bushnell would be retained as a creative consultant, but he quickly rejected that role and departed the company for good. Keenan lasted less than a year before following him out the door, after which Kassar added the title of chairman as well.62
The company Kassar inherited weathered the retail crisis of 1978, but it still lost money for the second year in a row, and its future was not assured. The coin-operated video game market remained stagnant, the pinball division was still a disaster, and the VCS continued to face stiff competition from the ascendant handheld electronic game manufacturers and the looming microcomputer business. Within a year, however, the company – and indeed the entire video game industry – would find itself on the brink of a new golden age of prosperity. This reversal of fortune stemmed largely from the release of a new Japanese video game called Space Invaders.