Atari Corporation - Company Profile, Information, Business Description, History, Background Information on Atari Corporation

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History of Atari Corporation

Before its merger with disk drive maker JTS Corporation in 1996 the Atari Corporation was a prominent manufacturer of video games and home computers that pioneered the industry of video entertainment. Its history was beset by a series of successes and defeats: it made money from arcade games, then nearly went bankrupt; it took on new life and astronomical profits in the early 1980s, only to see its industry crash once again, leaving the company to rebuild slowly under different management and then finally succumb to the rise of the PC-based CD-ROM as the preferred medium for computer games.

Nolan Bushnell's Game: 1972-75

Atari was founded by Nolan Bushnell in 1972. Bushnell had first become interested in computer games as an engineering student at the University of Utah. After graduation, he worked as a researcher in a Silicon Valley firm, and there he developed his first electronic game, called Computer Space, in 1971. Although this game, like all the other fledgling products before it, was not a commercial success, Bushnell used $500 to start a company with a friend anyway, naming it Atari, a term from the Japanese game of "go" used to politely alert opponents that they are about to be overrun.

Bushnell's second game was a revolutionary development, in that it was far simpler than other games had been. Called "Pong," it was an electronic version of ping pong, played on a screen with a vertical line down the middle and two sliding paddles that batted a blip back and forth. The company first marketed a coin-operated version of this game in 1972 for use in arcades. Since the game could be played by two people in direct competition with each other, Pong was a dramatic departure from the solitary skills of pinball, and it changed the nature of arcade games.

Unfortunately, Atari was unable to reap the rewards of this advance, since dozens of competitors quickly duplicated the game and grabbed a large portion of the market. Within two years of Pong's introduction, its inventors had sold only ten percent of the machines in existence.

Atari channeled the profits it had made into ventures that turned out to be shortsighted and nonproductive. The company wasted half a million dollars on an abortive attempt to market its products in Japan. In addition, it sunk resources into an attempt to open game arcades in Hawaii. Although Atari introduced a series of new games to follow Pong, formulated in the company's informal, unstructured atmosphere, none caught on as its first offering had.

Video games for use in the home had first been introduced by Magnavox in 1972, and Atari decided that a logical next step would be to introduce a home version of Pong, to be played on a television screen. Short of funds, the company worked out an arrangement with Sears, Roebuck & Company for the retailer to buy all 100,000 of the devices that Atari manufactured, as well as helping out with funding for Atari's inventories, to guarantee delivery. In the fall of 1975, the home version of Pong was introduced.

Enter Warner Communications: 1976-80

Clearly, Atari needed further funds to expand. Rather than sell stock to the public, the company decided to look for a buyer. In 1976, after four months of legal wrangling complicated by a lawsuit filed against Bushnell by his first wife, Atari was sold to Warner Communications Inc. for $28 million. Of this, Pong's inventor collected about $15 million.

By the next year, however, Atari's problems had moved beyond funding. The company's products at the time could be used to play only one game, and consumers were beginning to feel that the novelty of playing that one game had worn off. In late 1977, however, Atari's researchers introduced the Video Computer System, or VCS 2600, which used a semiconductor chip in a programmable device. With this product, the customer gained versatility. Any number of games could be played on cartridges, which were inserted into the set like cassette tapes.

Introduced shortly before the big Christmas selling season, the new games initially failed to conclusively dislodge the old, single-purpose products. In addition, the company had come up against steep competition from several of its competitors, who had also introduced multipurpose video game equipment. Throughout 1978, Atari saw its new product languish on the shelves.

This disappointing news was compounded by administrative confusion at company headquarters. Original Atari employees felt no loyalty toward their new bosses, and top administrators also disagreed with some of Warner's key decisions. After a chaotic budget meeting in New York, Bushnell was ousted from his position as chair of the company.

In his place, executives with backgrounds at large companies were installed, and procedures and practices at Atari became much more businesslike. In an effort to sell off some of the backlogged inventory of slow-moving games that the company had built up, Atari launched a $6 million advertising campaign in the last seven weeks of 1978, designed to clear out inventory and make way for new products.

The strategy worked. At the important, industry-wide Consumer Electronics Show in January 1979, store owners demanded more products to sell. Over the next 12 months, Atari was able to sell all of the game devices it manufactured.

In addition to its game operations, Atari ambitiously branched out into the hotly competitive personal computer field, introducing two models, dubbed the Atari 400 and the Atari 800. These were intended for the home rather than office market. In the company's second year of operation in this field, it lost about $10 million on sales of twice that amount.

With the start of the 1980s, however, Atari's successes in the video game field more than made up for its losses in other areas, as its growth and profits shot up. In January 1980, Atari began an effort to shift the emphasis of the video game industry away from holiday-generated sales, to prove that people were willing to buy video games all year round. To do this, Atari introduced four new video game cartridges late in the first month of the year. The tactic was successful, and demand for the company's product continued to build. By the end of the year, Atari had sold all of the video game machines that it had manufactured. Among its biggest selling cartridges was Space Invaders, an adaptation of a coin-operated arcade game originally designed in Japan.

New Games, New Markets, New Competition: 1980-83

Atari's arcade operations were also going strong. In 1980, the company introduced Asteroids to compete with the Space Invaders arcade game, which was produced by another company. Atari's version proved to be a popular alternative. By the end of the year, 70,000 of the units had been shipped. Overall, revenues from coin-operated games reached $170 million, up from $52 million the year before. In addition to its arcade business, in 1980 Atari also began to explore the market for its products overseas. The company's overall revenues had more than doubled in just one year, topping $415 million, and its operating income had increased by five times.

Because the sale of video cartridges was extremely profitable, Atari introduced new games at a steady pace, releasing titles at the rate of one per month. In 1981, with demand running at feverish pitch, the company decided to ration its product. More than one million cartridges of Space Invaders had been sold. All in all, with its competitors falling by the wayside, Atari was the world's largest producer of video games, holding 80 percent of the American market. At the end of 1981, the company had sold more than $740 million worth of video game equipment and cartridges. In addition, its home computer operations had become profitable, and Atari products dominated the sales of low-priced machines.

To protect its strong market position in the video game field, Atari also began an aggressive effort to shut down video game pirates by taking legal action against them. In November 1981, the company won an important case against a company that was selling a copycat "Centipede" game.

Although Atari was aggressive in introducing lucrative new software, it lagged behind in marketing new hardware. Essentially, the company had not followed its introduction of the Video Computer System with a second, more sophisticated generation, except to produce a remote-control model, known as Touch Me, that cost $100 more than the basic set.

The introduction of a Pac-Man cartridge in the spring of 1982, however, helped to stave off these concerns, as the company estimated that it would sell nine million of the games, to reap over $200 million in that year alone. Pac-Man was a breakthrough game, attracting many women and families to the video game market for the first time, and thereby expanding the industry's consumer base. In the fall of that year, Atari also took steps to update its game equipment, introducing a more elaborate version of its game machine, which sold for $350. It also quadrupled its sales of personal computers. In general, Atari poured tens of millions of dollars into research and development, in an effort to stay out in front of the competitive industry.

Despite these efforts, however, by the end of 1982, Atari's rise in the industry, which many had believed would continue indefinitely, had been checked. Competition in the video games industry had expanded dramatically, as new companies rushed into the lucrative field. Now, Atari faced more than 30 other game makers, some of which had lured away the company's top game designers, a damaging loss in a field where innovation was suddenly as important as distribution. On December 8, 1982, Atari's corporate parent, Warner Communications, announced that previous sales estimates would not be met because of "unexpected cancellations and disappointing sales during the first week of December," as the New York Times reported at the time. In the wake of this sudden news, the company's stock value dropped precipitously, and several Atari executives were later investigated for insider stock trading, since they had sold off large blocks of stock just before the announcement.

Following this setback, Atari announced in February 1983, that it would fire 1,700 U.S. workers in order to move manufacturing facilities to Hong Kong and Taiwan. This move set off a wave of protest. In the financial community, it was taken as the sign of a company adrift, since Atari had hired 2,500 new U.S. workers just the year before in a campaign to build up its domestic production capacity, only to undo itself a short time later.

In addition, Atari found itself being challenged by competitors in its home computer business. In May 1983, the company reduced the price of its outmoded 400 computer by two-thirds, from $299 to $100. By the end of its first quarter, losses overall had reached $46 million. In an effort to restore some of the original creative luster to Atari, the company announced an agreement with ousted founder Nolan Bushnell to sell consumer versions of the coin-operated games he was developing in his new business.

By September 1983, quarterly losses had reached $180.3 million, and its nine-month losses reached $536.4 million. The company ended the year with overall losses of $538.6 million on sales of $1.12 billion, half its previous year sales of $2 billion.

Turnaround under Jack Tramiel: 1984-87

To stem Atari's losses, Warner brought in a new head executive who fired more than half the company's 10,000 employees. Nevertheless, costs could not be brought in line with revenues, and the company needed an infusion of further funds to pay for research on new products. Unable to support this continuing drain on its resources, Warner Communications began to look for a buyer for its failing subsidiary. In July 1984, the company announced that it had agreed to sell all Atari operations, with the exception of the small coin-operated arcade video game business and a new telecommunications venture, called Ataritel, to Jack Tramiel, a businessperson who had made his reputation as the head of Commodore International, Ltd., a computer company. The price for Atari was $240 million.

Three days after purchasing the company, Tramiel began his own aggressive effort to cut costs, laying off hundreds more employees and taking steps to collect outstanding funds owed to the company. Unable to sell unwanted video game cartridges, Atari dumped truckloads of them into a landfill in New Mexico. Tramiel installed three of his sons in top management positions, brought in former associates to fill other key spots, and made plans to raise funds through the sale of stock to the public. To Tramiel, Atari was poised to become a computer manufacturer to rival his previous company, despite the fact that its extant computer offering, the 800XL, was outmoded and less powerful than its competitors.

In January 1985, Atari unveiled two new lines of home computers, the XE series--an improved version of the old 800XL made cheaper by a reduction in the number of components and renegotiated contracts with suppliers--and the ST line, a cut-rate imitation of the Apple Macintosh, that used a color screen, fancy graphics, and a mouse, in an effort to move in on the market for Apple computers in the home. By July, the 520-ST had started to make its way into stores. The computer arrived past schedule, with no advertising to announce its presence, and no software to demonstrate its capabilities. Many machines in the first shipment did not work at all because microchips inside had been shaken loose in transit. Nevertheless, with a price of $799, the product initially seemed to have found a receptive public, with a large percentage of sales taking place in Europe.

Despite this good news, Tramiel continued to run Atari in crisis mode. The company's U.S. staff had shrunk to 150, and in May 1985, executives agreed to have one-third of their salaries withheld indefinitely. The company finished out 1985 posting a loss of $26.7 million.

By 1986, the industry in which Atari originally made its mark, video games, was beginning to show signs of life once again. This time, however, product lines were led by sophisticated, expensive Japanese equipment, sold by companies such as Nintendo and Sega. Atari re-entered the field with its old machine, the VCS 2600, which sold for only $40, and also introduced the 7800, a more advanced unit, which sold for twice as much. The company also began a modest advertising campaign for these products for the first time in two years. By the end of the year, these efforts, combined with Atari's home computer sales, had resulted in profits of $45 million, on sales of $258 million. With these strong results, the company was able to offer stock to the public for the first time in November 1986.

With these funds, Atari increased its advertising budget in support of new products it introduced. In 1987, the company began to market a clone of IBM's PC, priced at under $500, as well as a more sophisticated video game console, in addition to introducing products for the desktop publishing field. In October 1987, Atari purchased the Federated Group, a chain of 62 electronics stores based in California and the Southwest, for $67 million. Tramiel hoped that the stores could provide a good distribution outlet for Atari products, and he put his youngest son in charge of the chain. Operating in a depressed area of the country, however, Federated continued to lose money, and the company was forced to shut the stores after just one year.

At the end of 1987, Atari held 20 percent of the U.S. video game market and relied on foreign sales of its home computers, which remained unpopular in the United States, for a significant portion of its income. Overall, the company earned $57 million, on sales that neared $500 million.

Slipping Sales: 1988-93

The following year, Atari once again allied itself with its founder, Nolan Bushnell, agreeing to market video games that he had developed. Furthermore, the company announced another big advertising push, in an effort to ensure that the video game crash that had threatened Atari in the early 1980s would not recur. Atari also turned to the courts in December 1988, charging that Nintendo's licensing policies monopolized the market. These moves reflected the continuing lack of demand for Atari's home computer products in the United States, as the company, hampered by its image as a toymaker rather than a high-tech powerhouse, fought for part of this highly competitive market.

In January 1989, Nintendo followed up Atari's suit with a countersuit charging copyright infringement, and by the end of the year, the dispute had reached the U.S. House of Representatives, whose subcommittee on anti-trust echoed Atari's charges. In November 1989, Atari continued its push into the game market by introducing a portable video game player called Lynx, which sold for $200, to compete with Nintendo's popular Game Boy. The company finished out the year with earnings of $4.02 million.

In the spring of 1990, Atari introduced its Portfolio palmtop personal computer. Early the following year, the company came out with a revamped, color Lynx product, and several months later it introduced new notebook computers. Despite these advances, however, Atari was in trouble. Sales of its home computers in Europe began to flag as the company faced increased competition, and in 1991 foreign sales collapsed. In the video games field, Atari's efforts to challenge Nintendo through legal means had been rebuffed, and the company was unable to regain significant market share from its Japanese competitors. By the first quarter of 1992, losses over a three-month period had reached $14 million.

In September 1992, Atari took steps to stem its losses by cutting its research and development expenditures in half and closing branch offices in three states. The company hoped that the introduction of new products, such as the Falcon030 multimedia home entertainment computer would help to revive its fortunes. In addition, the company was working on a more sophisticated video game machine, called the "Jaguar." Nevertheless, 1992 ended with a loss of $73 million.

As Atari began to ship its Falcon030 system to stores in small numbers in early 1993, the company's fate was unclear. Decidedly, it was experiencing another severe downturn, which by the summer had snowballed into what the San Jose Mercury News called a full-fledged financial meltdown: between the second quarters of 1992 and 1993 Atari's sales plummeted 76 percent to only $5.7 million. Sales of its hand-held Lynx games were poor and its Falcon systems were barely visible in the PC marketplace. Atari's hopes now rested on the vaunted 64-bit technology of its soon-to-be-unveiled Jaguar game system, which promised to unseat Sega and Nintendo with the next generation of "high-performance interactive multimedia."

Atari Unravels: 1993-96

In June 1993, IBM signed a $500 million deal with Atari to manufacture Jaguar's hardware, and the first sets hit stores in November. As Jaguar tested the marketplace in 1994, Atari settled a licensing dispute with Nintendo by way of an agreement with former parent Time Warner to raise its stake in Atari to 27 percent. Atari also licensed Jaguar to Sigma Design of California, whose full-motion video technology promised to enable Atari to make the jump from dedicated video game players to the home PC. In September 1994, arch rival Sega also agreed to pay Atari $90 million for the rights to Atari's 70 U.S. game patents. Finally, a partnership with Britain's Virtuality Group seemed to promise a new cutting-edge application for the Jaguar platform: Atari and Virtuality would design a 3-D virtual reality home gaming system to debut in 1995. Within a year of Jaguar's introduction Atari boasted 30 titles for the system, and in mid-1995 Atari announced a CD accessory that would allow CD-ROM games to be played on the Jaguar platform.

All Atari's partnerships and cross-platform efforts, however, could not convince consumers to abandon Sega's Saturn and Nintendo's Playstation for Jaguar, and in October 1995 Atari announced that third quarter revenues had fallen a brutal 40 percent from the previous year. Atari responded by slashing Jaguar's retail price and announcing "Atari Interactive," a new division to make CD-ROM video games for PCs. But the writing was on the wall, and in January 1996 Jaguar was pulled from the U.S. market.

A month later Atari announced that JTS Corporation, a San Jose-based disk drive maker whose 1994 startup Jack Tramiel had helped fund, would merge with Atari in June. Although Atari publicly maintained that it would continue to market video game consoles and software as a JTS's Atari Division, it soon became clear that Atari's attraction for JTS was not its game technology but its still sizable cash reserves, which JTS would tap to battle disk drive competitors like Seagate and Quantum.

When the JTS merger was finalized in mid-1996 Atari's staff was gutted by 80 percent and its assets liquidated. Some Atari titles lived on through its licensing agreement with Sega, but by the end of 1996 Atari's quarter-century history as an early video entertainment pioneer had come to an end.

Additional Details

Further Reference

Bernstein, Peter W., "Atari and the Video-Game Explosion," Fortune, July 27, 1981.Biggs, Brooke Shelby, "Success Killed Pac-Man Creator Atari," Business Journal Serving San Jose and Silicon Valley, July 22, 1996, p. 1A.Chronis, George, "The Game's Over for Goldstar, Atari in Next-Gen War," Video Store Magazine, January 28, 1996, p. 1."Game Maker to Merge: Pong Pioneer to Unite with JTS Corp.," San Jose Mercury News, February 14, 1996.Hector, Gary, "The Big Shrink Is On at Atari," Fortune, July 9, 1984.Machan, Dyan, "Cheap Didn't Sell," Forbes, August 3, 1992.Petre, Peter, "Jack Tramiel Is Back on the Warpath," Fortune, March 4, 1985.Shao, Maria, "Jack Tramiel Has Atari Turned Around--Halfway," Business Week, June 20, 1988.------, "There's a Rumble in the Video Arcade," Business Week, February 20, 1989."U.S. Video Game Firm Gets Back in the Action," Miami Herald, November 7, 1993."Video Games Are Suddenly a $2 Billion Industry," Business Week, May 24, 1982."What Sent Atari Overseas," Business Week, March 14, 1983.

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