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Active Television
In September 1978, Atari’s computer project faced a crisis. The company had publicly announced it would introduce the Personal Computer System at the January CES, but the programmers hired to develop its operating system (OS) had failed to provide a working piece of software. Project leader Jay Miner could tell the OS would not be ready for the debut of the computer absent drastic action. George Simcock, the head of the VCS programming group, saved the day by volunteering three of his own programmers to complete the job: Alan Miller, Larry Kaplan, and David Crane.1
These three were not chosen randomly; they were some of the finest programmers working on the VCS. Kaplan, the first VCS programmer hired, had figured out the trick for displaying more sprites on the screen using H-move. Miller, a North Carolina native with an electrical engineering degree from UC Berkeley, specialized in large-scale computer systems in college and worked extensively with hardware before joining Atari, developing a control system for a lumber mill, doing computer contracts with NASA, and working for National Semiconductor.2 His 1978 Basketball game for the VCS was a graphical marvel by the standards of the system, with reasonably human-looking players dribbling and shooting in a one-on-one competition.
Kaplan and Miller were part of the first batch of programmers hired to work on the VCS. David Crane joined in the second wave. A native of Indiana, Crane began dabbling with electronics when he was 12 years old and once built an unbeatable tic-tac-toe machine for a science fair. He was also an avid game player who often modified the rules of the board games that he played with his friends. After graduating from DeVry School of Technology in Phoenix, Arizona, he took a job with National Semiconductor designing linear circuits, where he worked with Alan Miller.3 They remained in touch after Miller joined Atari, as they lived in the same apartment complex and often played tennis together. In mid-1977, Miller asked Crane to proofread an Atari job ad, and Crane decided to apply.4 He joined the programming group in fall 1977 and created three games, Outlaw, Canyon Bomber, and Slot Machine.
Over the course of 12 grueling weeks, Miller, Kaplan, and Crane wrote and debugged a complete operating system for the Personal Computer System with a little assistance from fellow VCS programmer Ian Shephard, former VCS programmer Gary Palmer, and a consultant named Harry Stewart.5 They also selected a BASIC for the system, choosing a firm called Shephardson Microsystems rather than Microsoft because Kaplan did not like that the company’s 6502 BASIC had been machine converted from the 8080 version rather than coded from scratch.6 The trio also developed some of the first games for the system, with Miller contributing a port of his Basketball game and Kaplan providing a port of Super Breakout and a drawing program called Video Easel.7
Kaplan, Miller, and Crane finished their work on the OS just as Ray Kassar was assuming control of Atari as CEO. The beginning of his tenure was marked by a freeze on much of the company’s short-term R&D and design work so the company could focus on exploiting the VCS and bringing the 400 and 800 Personal Computer Systems to market. This decision sent shockwaves through the Atari product development apparatus. Bob Brown, who had been eased out as director of microelectronics in 1978 and placed in charge of an R&D group called the advanced projects division,8 left the company in January when his department was cut.9 Larry Wagner, who also worked in the advanced projects group, followed him out the door. In February, Jay Miner also departed, unhappy that Ray Kassar would not let him begin work on a 16-bit computer design because the company had not even brought its 8-bit computers to market yet, and Kassar wanted a better sense of where Atari would fit into the new market before authorizing a next-generation project.10 His fellow chip designer, Joe Decuir, departed a few months later to start his own company after becoming interested in network communications technology and sensing he would not be given the opportunity to pursue the field at Atari.11
Many of the VCS programmers were also unhappy because the removal of Brown from a management role and the elimination of the microelectronics group in 1978 had placed them under the jurisdiction of consumer engineering, where most of the management and staff were analog and industrial engineers rather than digital hardware experts and did not appear to fully understand complex digital computer systems or appreciate what the programmers were accomplishing on the VCS. They were also unhappy with their financial compensation. In 1977, there had been talk with Joe Keenan and Bob Brown of a bonus pool generated from VCS hardware and software sales. When the VCS struggled a bit and the consumer division lost money, those promises were quickly forgotten. In the aftermath, a written bonus plan was created in 1978 based on hitting a set of vaguely defined goals, but no money was ever paid out.12 A few top programmers were given bonuses under the table in early 1979 after mounting discontent, but the raw feelings remained.13
Lack of recognition also stung some of the programmers. In the VCS group, a single programmer created a game from start to finish. This meant not only developing the concept and gameplay and writing the code, but also providing all the graphics, sound effects, and music. The job was made even more difficult by the limitations of the VCS hardware, which required a programmer to count cycles and implement clever tricks in order to make a system designed to play only Pong and Tank recreate the latest arcade hits. This turned out to be a rare skillset, and the top programmers in the VCS division took pride in their accomplishments. Management recognized this talent to an extent, but Atari feared headhunters poaching the best programmers for the competition and denied the programmers individual recognition.
These tensions came to a head when marketing promulgated a list of the best-selling VCS titles of 1978. The purpose of the list was to indicate what types of games were proving most successful and to encourage the programmers to create similar products in the future. For Alan Miller, Larry Kaplan, David Crane, and Bob Whitehead, the list revealed that between them they developed product responsible for roughly 60% of total cartridge sales even though Kaplan, Crane, and Miller had spent the last few months working on the computer OS, and Bob Whitehead was largely stuck trying to wrangle Video Chess. Under these circumstances it was hard to swallow making only around $30,000 a year and not even being allowed to have their names on the boxes.14
Alan Miller, perhaps the most business minded of the group, decided to do something about it. Arguing that top VCS programmers had special talents and generated enormous value for the company, Miller presented Simcock with a compensation scheme based on practices in the book publishing and record industries that would provide them both recognition and a modest royalty. Simcock brought the plan to consumer engineering VP John Ellis, who agreed to take it to Kassar. For a time, it appeared a deal would be reached, but in the end Kassar shot it down.15
The exact reasons for Kassar’s dismissal of Miller’s royalty plan are not known, but they appear rooted in his experience in the textile industry. The former Burlington executive had worked with designers for much of his life, but only on everyday commodities like home furnishings and towels. In this context, the designer was an important cog in product development but was not singled out vis-á-vis the rest of the production staff. In a subsequent meeting between Kassar, Miller, Crane, Kaplan, and Whitehead, the CEO emphasized that the programmers were part of a team alongside the people on the production line and the sales and marketing staff, and he did not feel it appropriate to single out their contributions in the way they wanted.16 For Miller, this was the last straw. Figuring the four could do better on the open market than continuing to make cartridges for Atari, he proposed they start their own company.17
To launch this scheme, Miller contacted Decuir to learn what law firm he had used to organize his new startup. Decuir referred him to Art Schneiderman of Wilson Sonsini Goodrich & Rosati, a firm that was fast building a reputation as the premiere law firm for startups in Silicon Valley. At this point, Miller and his companions were unsure exactly what business to pursue. Ideas included serving as a contract developer for a console company like Atari or Mattel or entering the emerging computer software business as a publisher.18 Schneiderman changed the course of their plans – and indeed of the entire video game industry – when he introduced them to a marketing executive looking to establish his own computer game startup named Jim Levy.
***
Born in November 1944 in Shreveport, Louisiana, James Harmon Levy showed some aptitude in math as a high school student, so he matriculated to Carnegie-Mellon University in 1961 to study electrical engineering. After three semesters, he realized the career path was not for him, but he was successful in several management courses, so he switched majors and remained at the school until 1966 to earn both BS and MS degrees in Industrial Management and Industrial Administration.19 After graduation, Levy worked for Hershey Chocolate Corporation for two years as a marketing manager before moving to Time, Inc. as the assistant business manager of Time Magazine. In 1970, he established a new publishing venture for Time called Time Life Audio to produce entertainment and information content on audio cassette for the home, business, and school markets.20
After three years at Time Life Audio, Levy moved to San Francisco to manage a Time subsidiary called Haverhills involved in mail order merchandising. Around 1975, Levy left Time for GRT Corporation. Established in 1965 as General Recorded Tape, GRT was one of several companies that emerged in the late 1960s to release popular music on the new magnetic media of 8-track cartridge and compact cassette. As the major record labels were interested only in the vinyl market, they would license their music to companies like GRT rather than engage with audiocassette production and sales themselves. Levy joined GRT to start a new mail order marketing division and later became first manager and then VP of business affairs.21
In late 1977, a group of executives led by Vern Rayburn approached Levy with a plan to create a computer software subsidiary at GRT since the cassette tapes the company traded in were the same medium on which computer games were published. Levy played a key role in helping them establish a software publisher named the G-2 group, which emerged as one of the few bright spots for GRT as its traditional cassette music business declined due to the record labels gradually reasserting control of their audio cassette rights in response to the proliferation of component stereo systems with tape decks. As GRT spiraled toward bankruptcy, Levy developed a business plan in early 1979 to purchase G-2 and spin it off as an independent company.22
To fund the G-2 purchase, Levy turned to the same Art Schneiderman working with Miller and company, whom he had worked with on several deals at GRT. Schneiderman worked in the same building as pioneering venture capitalist Bill Draper, who had co-founded the first venture fund in Silicon Valley in 1958 and now managed a firm he co-founded in 1964 called Sutter Hill, and got Levy a meeting with him.23 When Levy attended the meeting, he learned that Draper owned a TRS-80 and was frustrated by the lack of quality software for the computer. The venture capitalist gladly agreed to fund Levy’s acquisition attempt.24
With Draper’s backing, Levy attempted to negotiate the buyout with GRT, but management was busy trying to save the firm, and in late May 1979 he was told no one would negotiate with him. The next month GRT collapsed. Meanwhile, Levy called Schneiderman over Memorial Day weekend to relay the bad news. Days later, Schneiderman called Levy to arrange a meeting that same afternoon with Kaplan, Miller, Whitehead, and Crane, who required both an experienced executive and funding to launch their proposed startup. By the end of the meeting, all parties agreed to explore working together.25
Over the next few weeks, Levy and the Atari programmers met frequently to continue feeling each other out on the specifics of their partnership. By late July, they had decided to work together and focus their efforts on developing and publishing software for the VCS. Levy wrote a business plan over the next few weeks and delivered it to Sutter Hill on August 23, 1979. In this plan, Levy did not present the potential enterprise as a technology company, but rather as a creative company developing product for a new entertainment medium. He also defined the company’s product area as software for home computer systems generally, though he acknowledged that the short-term plan was to focus on the most developed platform, the Atari VCS.26 Despite requiring double the investment as Levy’s previous proposal of buying out GRT, Sutter Hill agreed to fund the venture.27
In summer 1979, the four Atari programmers began leaving the company one by one. Larry Kaplan was the first to depart in June,28 followed by Alan Miller and David Crane in August. Bob Whitehead stayed the longest, as the family man did not want to jeopardize his livelihood until he was certain the company was moving forward.29 On the advice of counsel, none of them took any materials when they left to avoid credible accusations of stealing trade secrets.
Even as the programmers began to depart Atari, there was no guarantee they would end up joining Levy. In fact, Alan Miller, the most gung-ho among the group about creating a new company, nearly backed out of the venture at one point because he worried Levy was “not entrepreneurial enough” to make it successful.30 The financial arrangements also gave some pause. Sutter Hill was willing to provide several hundred thousand dollars’ worth of financing, but most of it was in the form of a loan. The company also demanded that each founder make a substantial upfront investment in the firm, and that they each take a pay cut from their Atari salaries, which were already slightly low for an engineer in the Valley.31 After evaluating the risks and potential rewards, Crane, Miller, and Whitehead decided to see the plan through.
At the last second, Larry Kaplan dropped out. In the weeks leading up to the incorporation of the firm, the Atari programmers met with other suitors, including Chuck Peddle at Commodore. Peddle convinced Kaplan that rather than go through the hassle of starting a company, reverse engineering hardware, and setting up manufacturing and distribution, he should work with Commodore, where all of this would be provided. Kaplan joined a startup supported by Commodore working on speech recognition software, but after a couple of months it was clear the company was going nowhere, so Kaplan returned to the fold in December 1979. Because he joined late, his stock award was half that of the other three founding programmers.32
One of the more difficult tasks for the founders ended up being naming the company. In the business plan, Levy referred to it as “Video Computer Arts,” but this was merely a place holder indicating the mission of the company and was never intended as a final name. After some deliberation, Levy decided to call it “Computervision” to signify that the company was developing product that merged a computer with a television set, but this name was already in use by another company.33 During a brainstorming session to generate a new name, Levy focused on the interactive nature of the company’s products by combining the words “active” and “television” to name the company Activision.34
Activision incorporated on October 1, 1979.35 The company’s first order of business was to ensure it could deliver product for the VCS in a way that did not violate Atari’s rights to the system. Even before the company incorporated, Levy began working closely with an intellectual property attorney named Aldo Test to determine the most likely grounds upon which Atari might sue Activision for infringement.36 They agreed the major sticking point would be the design of the cartridges, as Atari had taken out two patents related to their mechanical engineering and design.37 These patents constituted Atari’s main bulwark against unauthorized publishing on the VCS, and the company felt confident that they would keep competing companies off its system.
Once Activision incorporated, Levy contracted with an injection-molding plastics expert who had previously worked on the early Atari cartridges named Howard Mullin to help develop a working cartridge that would not run afoul of the Atari patents. Mullin in turn brought in the designers of the Fairchild Channel F cartridges, Ron Smith and Nick Talesfore, to design the Activision cartridge.38 Smith determined that the primary mechanism on which the patent hinged was a door that opened to expose the edge connectors on the cartridge when it was inserted into the VCS. While intended to protect the internals of the cartridge, Smith and Talesfore determined after extensive testing that the cartridge worked just fine without that door, and it would be safe to remove it.39
While Mullin, Smith, and Talesfore designed a new cartridge, David Crane led efforts to reverse engineer the VCS. As the programmers were careful not to take anything with them from Atari, including development materials, he started by buying a VCS at retail and opening it up. Once he did so, he discovered an unused 24-pin ROM port on the board, which had presumably been included due to the original marketing plan for the system calling for one or two games being built into the hardware. Crane soldered a zero-insertion force (ZIF) socket to the board and burned simple programs onto EPROM so he could observe how the system reacted to various inputs. Within just a few weeks, he had assembled a programming manual for the machine.40 He then fashioned a development system consisting of a small, custom-built 6502 computer that plugged into the VCS cartridge slot and could interface with a PDP-11 minicomputer. The system was affectionately called the “blue box” for its blue sheet metal enclosure.41
Meanwhile, Levy began putting the company infrastructure in place. In November, he hired a recently dismissed plastics sales rep whom Mullin knew named Clifton Crowder to build a sales and distribution infrastructure. In January 1980, he hired an executive at a small Bay Area manufacturing company named Allan Epstein to run operations. When the January 1980 CES rolled around, the company was not ready to announce any product, but Crowder took meetings at the show to begin constructing a sales network.42
On January 31, Activision received a letter signed by Ray Kassar warning that if the company took advantage of any Atari trade secrets to violate any Atari patents, it could expect a lawsuit.43 In May, Atari sued Activision for $20 million. In early 1981, Atari filed an amendment to its suit asking for $1 million in punitive damages alongside its other requested remedies.44 Thanks to the sound legal advice of Schneiderman and Test and the careful reverse engineering and cartridge design work by Crane, Mullin, Smith, and Talesfore, Atari did not have a leg to stand on, and the companies settled in December.45
Activision announced its first four games in March 1980 and released them in July. These were Boxing by Bob Whitehead, Dragster and Fishing Derby by David Crane, and Checkers by Alan Miller.46 While all four games featured simple gameplay, they sported fantastic graphics relative to other VCS games because the programmers realized their products would need to stand out from the Atari lineup visually in order to entice consumers to buy from the new company.47 For instance, Boxing, played from an overhead perspective, featured large sprites and smooth animations, even if the boxers looked a little like crabs. The cream of the crop was arguably Dragster, a take on a 1977 Atari arcade game called Drag Race, in which one or two players race cars presented in a side view on a split screen. The game sold roughly 500,000 copies and provided half of Activision’s first-year revenues.48
Activision released four more games before the end of its first fiscal year. In December 1980, the company introduced Kaplan’s first game, Bridge, as well as a Skiing game by Whitehead. In March 1981, these were joined by Miller’s Tennis and Laser Blast by David Crane.49 Once again, Crane’s game led the field. Laser Blast was born of a desire to emulate the popular shooting games in the arcade like Space Invaders and Missile Command but reversed the action by placing the player above the surface of a planet to shoot at turrets on the surface. Crane did this because he felt too many shooting games focused on defending a planet, so he wanted a game where the player recaptured his planet instead. Crane also achieved a new technical breakthrough when he figured out how to reposition the “ball” sprite on every line to give the illusion of a continuous laser blast emanating from the player’s ship.50 With slick gameplay derived from the biggest arcade hits, Laser Blast became the first Activision game to sell 1million units over its lifetime.51
Levy kept his promise to promote the game designers, combining practices from the music and book publishing industries to provide them recognition. Each game box identified the designer of the game on the back, while the instruction manual included tips and tricks from the designer on how to master the game accompanied by a headshot and a signature. This not only promoted the designers but created a dialogue and sense of connection between them and their player base. This sense of shared experience with Activision games was further amplified through a clever marketing ploy emulating the score chasing currently dominating the arcade. For most games, the company established a point or time limit threshold for a player to aspire to achieve. If the player reached the goal and submitted a photograph of his television screen as proof, Activision would mail him a patch to commemorate the achievement.
In its first fiscal year, Activision achieved sales of $6.5 million and a profit of $744,000 while grabbing an estimated 5% of the video game market.52 The company was poised to do even better in fiscal 1982 as home video game sales surged to new heights, driven by a series of massive hits in the coin-operated space that briefly turned video games into the most profitable entertainment category in the United States.