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Atari - What Actually Happened

How Arrogant Ignorance Destroyed a Company and an Industry


Nolan Bushnell started the Atari Corporation in 1972, with $250, when he was 29 years old. They had a smashing success right from the start, PONG. Four years later he sold the company to Warner Communications for 28 million dollars.

Warner Communications put Ray Kassar, a Burlington Mills, fabrics executive in charge of the company. In his opinion Atari was selling a commodity, a product much like any other product. Nolan had stayed, continuing to lead his old company, but it wasn’t doing well, sales and profits were falling off and Kassar was supposed to turn it around. There was no way that the two could work together, Nolan was the Silicon Valley archetype, casual dress, intuitive thinking, and flex hours. Kasser was the opposite. He worked all the time, dressed impeccably, and thought bottom-line.

Warner and Kassar kept tight control over all phases of the company from the creation, through to the manufacturing and distribution of the product. In 1981 Atari controlled 75% of the video game market and accounted for two-thirds of Warner’s profits. By 1982 Atari had become a two-billion dollar-a-year empire and the fastest growing company in the history of American business.

By the end of ‘83 the end was in sight and the fall of Atari was imminent. What happened to cause this legendary business disaster?

There’s no doubt in my mind that the fall of Atari can be laid at the feet of the arrogant and ignorant executive who was brought in to “save” the company, and to the arrogant and ignorant top executives in Warner Communications.  Kassar was the president during the company’s phenomenal growth, and I believe, from personal knowledge, that he felt that all that success was due to his genius and his efforts.

However, this was not true.  He just happened to climb onto a great horse for the ride of his life. Atari was a marketing company, with all design and engineering decisions being made by executives that didn’t know that they didn’t know what needed to be done to assure success in this area.

In addition, with 75% control of the market, Atari felt that whatever they delivered would sell. They didn’t think the consumer had any concept of quality product, “they just want our games … they’ll buy whatever we manufacture.”  However, other game manufacturers had begun business, specifically Activision, and they were putting out quality product. It didn’t take long for the buying public to realize the difference and begin demanding Activision’s level of design and programming from everyone.

Just when this realization was taking place, Atari obtained the video game license for ET. The purchase price was negotiated at Warner Communications and while some believe that Kassar thought the $22 Million was too much to pay, I doubt it, especially since Atari had had some success a year earlier with Raiders of the Lost Arc. I believe Atari’s senior executives, especially Kassar, saw this as an opportunity to make a killing. However, they believed that the product had to ship in time for Christmas sales, so they demanded a production schedule that was impossible. The result—arguably, the worst video game ever developed by any major video game company.

To add insult to injury, Atari’s marketing department had originally planned on manufacturing 2 million games. However, Kassar, again demonstrating an exceptional level of arrogant ignorance, didn’t think that was enough so he doubled it and 4 million were manufactured instead. Atari succeeded in selling 1.5 million into the channel, but only 1 million sold through, which meant that retail stores all over America were stuck with a-half-a-million games they couldn’t sell­–Atari would not take the product back. In addition, even though Raiders of the Lost Arc had sold fairly well and was considered a superior product, stores were still stuck with Raiders’ games from the year before.

Note: There is an urban myth that, not able to move the additional 2.5 million units of ET, Atari ultimately buried them in the New Mexico desert … so, you see, ET probably did get buried in New Mexico (see Roswell UFO story). I suspect the myth is essentially true. By the time they would have decided to dump the games, Atari was on the ropes, which would preclude them breaking the product down and reusing the pieces.

I remember, as training director for Activision, going into small record stores throughout California and seeing box after box of ET and Raiders, sitting on the shelves in back rooms; no room available for any other merchandise. Even worse, with up to a million unsold units, retailers didn’t have sufficient “open-to-buy,” which meant that they were slow to purchase the new games that were coming out.

Note: Open-to-buy is the amount of money a retailer has available to buy product in a specific category. At the beginning of the season, after the purchase of new merchandise, the open-to-buy is pretty much used up, when sales happen in a category, the open-to-buy becomes available again … if sales don’t happen, the retailer can’t, doesn’t want to, buy new merchandise.

Since open-to-buy is usually for a category of goods, this meant that retailers were buying few video games, including games from Atari’s competitors. The result … the end of Atari, actually, though many don’t realize this, it was also end of the video game industry. Even Activision was forced into massive layoffs and had to redo its entire business model, focusing instead on computer games. This transition was not as easy as it might sound, but that is another story.

It would take five years for Nintendo to convince retailers that the category had a future, and the videogame industry could be reborn.


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Copyright 2007, Brad Fregger