Acquired - Season 5, Episode 5: Atari (with Nolan Bushnell)

Episode Date: October 15, 2019

We’re joined by the legendary Nolan Bushnell, founder not only of Atari, but also the only person ever to hire Steve Jobs, the recipient of Sequoia Capital’s first-ever investment, and the creator of Chuck E. Cheese, the canonical GPS navigation arrow, and a little project that would go on to become Pixar. We cover it all in this special episode!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Links:Spacewar!, the first video game: https://en.wikipedia.org/wiki/Spacewar! The meaning of Atari: https://en.wiktionary.org/wiki/atariNolan’s current project, St. Noire:  https://www.amazon.com/St-Noire-Hosted-Cinematic-Exclusive/dp/B07P693BG1

We'll talk, you know, during the paid portion of this podcast where I advertise my game. Welcome to Season 5, Episode 5 of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and early-stage venture fund in Seattle. And I'm David Rosenthal, and I'm a general partner at Wave Capital, an early-stage venture firm focused on marketplaces based in San Francisco. And we are your hosts. Today, we are talking about the company that invented the home video game industry, Atari. And we have someone with us who's got some pretty

good stories about it. The founder of Atari, the father of the video game industry, Nolan Bushnell. Hello, Nolan. Great to be here. Good fun. Thank you so much for joining us. As some of our listeners know, Nolan has started a swath of other businesses, one of which awesomely is Chuck E. Cheese, which we will get much, much deeper into later this episode. We dug up some photos of young Ben last night. Yeah, Nolan, I should let you know, I'm going to turn my computer around right now. Chuck E. Cheese was like by far and away my favorite place in the world growing up. And it was designed that way, you know. Here's some pictures of my third birthday at Chuck E. Cheese.

And there's me with my favorite toy, which is a Chuck E. doll. How fun. Now, Nolan, this is fun timing for us and for our listeners. Since our last episode covered the early days of Sequoia Capital and Don Valentine's career, which you had a lot to do with. Well, Don was really maybe the best board member I've ever had. He was also the most frustrating and infuriating. He had this ability to ask me a question about my own company that I didn't know. But the minute he asked it, I knew I should have known then. And so I started to cram for board meetings saying, okay, Don's not going to catch me this time.

And he always would. So I always believe that a proper, insightful question can be very instructive. Well, and that was, as we covered on our last episode, you know, down in the Socratic method, that was really the root of, you know, what he pioneered at Sequoia. Yeah. Well, listeners, our last limited partner episode was a deep dive into marketplaces from an academic perspective. On this show, we often talk about the levers at play in marketplace businesses. And as you would suspect, there are experts who have spent their careers studying and categorizing things like take rate, search and discovery problem, and when to subsidize. One such expert is Ramesh Johari, a professor at Stanford and advisor to

Wave along with Uber, Airbnb, Stitch Fix, and many other great marketplace businesses. So if you want to listen and become an acquired limited partner, you can get started with a seven-day free trial and listen right here in the podcast player of your choice by clicking the link in the show notes or going to glow.fm slash acquired. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation, and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know, from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this. So what are AI agents? AI

agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other, and they continuously improve, handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and Agentic AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences,

and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. And now on to Atari. Yeah, let's do it. Nolan, you were born in Clearfield, Utah, right? Just is that just outside Salt Lake City? It's about halfway between Salt Lake and Ogden. Okay. Okay. We were talking a bit before the show about you're reflecting on how you became an entrepreneur. It started pretty early, right, with strawberries. Yeah. Can you tell us the story about your first business venture in Clearfield?

Well, my mother, over dinner table, said, we've got too many strawberries. We always had a truck garden in the back of the house. And she said, we've got way too many strawberries. We're going to have to give them away. So happens the next day she took me to a grocery store. And I noticed in the produce section they had strawberries in these baskets for 50 cents a basket. I thought to myself, so, hey, there's a market. And I went home.

I picked the strawberries, filled the basket. We had a bunch of baskets sitting on the shelf in the garage, filled them up and marketed them door to door. At the end of the day, I mean, this is an hour and a half's work, at the end of the day, I had five bucks. This is in a world in which my allowance was 15 cents a week.

Wow. And so all of a sudden, I said, What did your family think of this? Well, my mom was really, first of all, she said, well, you took that money from our neighbors. I said, no, but I provided a service. They didn't have to go all the way to the store. Yeah. You're like the good eggs of, I don't think good eggs is down in Southern California yet, but it's fresh farm-to-table groceries delivered to your door in San Francisco. It's wonderful. Jenny loves it.

We use it all the time. Now, here's the question. I've often felt that that changed my brain to say, okay, D-Link pay for hours hours into get a good project? Or did I have a brain that was different to begin to see that connection between strawberries and a marketplace? Yeah, nurture or nature. Nature or nurture. And I can't answer that. But you saw this yourself.

I mean, your mom didn't tell you to go start selling strawberries. Yeah. Yeah. You must have been younger than 10 at this point, right? I was eight. Wow. And then when you were about 10, you started a TV repair business. That's great.

Literally, right? Yeah. And that would come in quite useful later, I would imagine. Well, I'd always been kind of a techie kid. I was always curious about how things worked and that sort of thing. And I watched a TV repairman that came to our house. The TVs were big and bulky, and so it was all house calls. This was the 1960s?

Oh, no. This was 1953. Wow. I mean, you know. So real big. The TVs were like a piece of furniture. Yeah. And basically cost a month's salary.

Wow. You know, so it was a different ballgame. And I noticed that all the guy did was change tubes. So the next time our TV failed, I said, I'm going to give this a go. And of course. I'm sure it went great the first time. Well, I got a shock and, you know, there were various things. I learned how to discharge the CRT because, you know, it's popped up to 15,000 volts.

You don't want to do that. Entrepreneurship comes with risk. Yeah. But, you know, in those days, the schematic on the back panel, one tube was a vertical oscillator, another one was the first IF. And so all of a sudden I could tell which was. So if you had a lot of roll, that was the vertical oscillator. And so just by looking at the screen, it was almost self-diagnostic. And so I fixed it.

And in doing so, I'd found a wholesale supplier of tubes. These are all tubes. This is before semiconductors. I'm really old. This is before Fairchild. Yeah. And so I said, hey, maybe there's a business here. And so I started marketing my skills.

And at those days, a house call was five bucks. Wow. So you could spend all day selling strawberries or you could do one house call for the same amount. No, but I didn't believe that they were going to let a 10-year-old kid get into the back of their thing for five bucks. So I decided to charge 50 cents for a house call. Oh, you undercut the market. I undercut the market a long way. And my theory was that I would monetize a

different way through marking up the tubes. And that worked swimmingly. It's almost like a coach who did a console business. And then, you know, a couple of months in, I started getting a reputation. So I went up to a buck a house call and two. So it was a thing house call and two. So it was,

it was a thing of market entry price. You know, you give a discount and I had a, I made a lot of money just repairing TV sets around the. So this is pretty awesome. So like you're 10 years old, you have your experience with TVs and the technology going into televisions at the time.

Then your next job, I believe, you get exposure to the game world. Was your next adventure at Lagoon Amusement Park? Actually not. My TV repair business turned into a full appliance repair business and I became part of Barnum Furniture Company. And with that, I would go out. I'd repair washers and dryers and that sort of thing. And basically, Barlow would be able to charge a lot more, and I'd get half. Pretty good for a 10-year-old. Yeah.

Well, this was 10, 11, 12, 13, 14, 15, 16. I continued that until I went to college at 18. And you started at Utah State, right? Correct. Got it. I was living at the fraternity house and I started doing gigs. Like, you know, in those days, there was this thing and I always had money because I saved. You've been an entrepreneur.

I was an entrepreneur. In those days, there was what they called 25 for 20. And that means that a lot of the kids would get the check from their parents at the end of the month. And they'd be out of money by the 15th. And so I'd lend them 20 bucks, but they had to give me 25. It's early lunch on 25 for 20 when did you need to collect it by oh the fifth of uh of the month they have five days then to yeah yeah wow that's awesome i can see how you got into the carnival business oh yeah i'm a carny.

So you have these quite, I mean, at the time, quite lucrative, especially for a college student, businesses going on. Well, I was driving a MGA sports car, and later on I traded in for a Mercedes 190 SL. So were you getting any funny looks from people that are like, how are you getting all that money to buy cars like that? You know, nobody really thought about it that much.

But then I did a really good one. And this was called the Campus Company. And the Campus Company was a student blotter that had a calendar of events in the center. And I'd sell advertising around the side and give it away free to the kids at the beginning of the quarter yep and i'd sell five thousand dollars worth of advertising and it cost me 500 bucks to print it and give them away the part that i didn't know is that once you did that i'd do it for every quarter, everybody would re-up. So I only had to sell a couple who had fallen out.

So it was like nothing. So I went from Utah State to the University of Utah to BYU to Weber State. And so all of a sudden I had- You had all the colleges in the area, yeah. All the colleges in the area, 5,000 piece. And since I was in the area, yeah. All the colleges in the area. 5,000 piece. And since I was doing the sales, when I'd go to a menswear place, I'd say, you know, you can pay me, you know, 150 bucks or I'll take a suit. And I got a moped.

I got all kinds of great stuff. Amazing. That's amazing. It's like trading the paperclip for the house. Yeah. Yeah. Wow. So the reason I bring up Campus Company, because that was actually the driver for me to get the job at the amusement park.

Okay. I was wondering why you needed the money to work at the amusement park. Well, it was a thing where I was putting myself through college. I had a relatively good lifestyle. I'll say. Let's put it this way. I am an undisciplined, disciplined person. That is, when it comes to short-term,

I'm somewhat undisciplined. That is, a summer night in Utah, going out with girls and things, you can spend a lot of money. And I decided that in order to remove harm's way, I'd get a fun job at the amusement park. It'd keep you off the streets. Get me off the streets.

And that's why I say I'm disciplined in terms of long-term strategy, but undisciplined when it comes to short-term. You have to remove temptation. Exactly. It violated kind of one of my rules, which all of a sudden I was working for a paycheck. Yeah, trading time for dollars. Trading time for dollars.

But then I discovered that in the games department, they paid commission when you did above that. And so all of a sudden, I could turn this $1.25 an hour job into a $2.50 an hour job, which was triple. Triple. You're making money that's worth it. Yeah. And then because of the commission thing. Is this a ski ball? Ski ball, guess your weight, knock the milk bottles down, you know, get the ball to stay in the basket.

What did you make the most money on? Like what were people just like they just couldn't keep themselves away from? A game called tip them over. And it was a softball and it was a one throw. You always think that you can knock them over. Well, you kind of can, but it's really hard. But it's perfect for marketing strategy. Because the way the games work is you were supposed to give away $1 for every $3 that you made.

So you were to run your booth at a 33.3% merchandise percentage. The way the bottles worked, there were two heavies and two lights. And the two heavies were on the bottom and the two lights were on the top, unless you wanted to give an animal away. Then you'd put the heavies on the top and the lights on the bottom. And then a small breeze would knock them down. So we had a dance hall and a concert venue. Yeah.

And so people would come down with dates to go see the Beach Boys or what have you. The high school kids, they'd come in clusters. And there'd be the captain of the football team and the head cheerleader. And then there'd be Nathan. Someone like us in high school. Yeah.

Nathan, the water boy. I was captain of my high school football team. That's great. I was definitely not. I was at Chuck E. Cheese. So anyway, what I do was when it came time for Nathan, the water boy, to throw, I'd set a stack and he'd win one for marrying the librarian in his state.

Oh, we are so grateful for you. And it would turn the worldview of the head of the football team upside down. And so I could extract all the money he had because he wasn't going to let the head cheerleader to go without a stuffed animal. That's spectacular. That is amazing. It was diabolical. I'm envisioning the Pong marketing strategy in the future in bars here. But was it after that summer then that you transferred to the University of Utah? Yeah. What happened is once I got the job, there was actually a gap year where I went to work for Lytton Industries in aerospace and in a clean room doing guidance systems and things like that.

Because you were studying engineering at Utah State. Correct. And then when I was in the fraternity house, I decided that engineering took too much homework. And so I transferred over to philosophy, then to economics, and then mathematics. And it was just really about being able to screw around and not do so much homework. I kind of got into it. I like the carny life. It does get into your bloodstream. Yeah, I bet. But when they made me manager of the department, because I was good at it, and one of the guys, the guys that was the manager, quit. And so I was chosen to be manager. I had 150 kids working for me, and I'm 20 20 years old and had to train them and manage the labor

percentages and set up things. And I started changing the games to increase their revenue. A lot of times when the park was packed, we were undergamed. The faster you could get a cycle time, the more money you could make. And so the Lagoon had the highest per caps of any amusement park in the nation. So when I got ready to graduate from college, I actually had offers from all over. I had from Great American, things like that, where I could have stayed in the amusement park game business at significantly more money

than I could have gotten as an associate engineer. But I said, hey, I've got that legacy. That's evergreen. My engineering degree is not going to be that way. I need some experience. I need to go where it is. So let's talk about that. When you get to the University of Utah, the university of utah at this time is like an amazing place in

pioneering computer science and in particular computer graphics right exactly four four places in the world stanford stanford ai project yep mit champagnebana, and the University of Utah, which doesn't belong. But it was really Dr. Evans, the guy who later founded Evans & Sutherland. Yep. And for listeners, too. I mean, some of the other people who were there around this time, Alan Kay was there, John Warnock, who founded Adobe, Jim Clark, who had co-founded Netflix with Marc Andreessen. Netscape.

Netflix, yes, Netscape. And then, of course, Ed Catmull. I have to ask, was Ed there at the same time that you were? Wow. And I always thought that I was kind of the cheap and dirty guy because I was doing games. You were the entrepreneur. All these guys were doing great check.

Wow. Did you know at that time? I mean, you say you were called the Utah guys. Did you have a sense at the time that this place and this group of people are sort of a special primordial soup of what would become the foundations of the technology industry? Or were you like, ah, these people seem smart. I feel smart, but kind of dirty and this carny. Yeah. No, I had no idea that kind of dirty and this carny. Yeah, I know. I had no idea that it was going to be prescient.

I mean, it's pretty amazing that you have this, you know, we spent all this time on you growing up, but it's all three of these things. It's your entrepreneurial instincts. You learn management running the amusement park. And then this incredible engineering and graphics environment that you're in a utah and all of those kind of we'll talk in a sec about what comes next but uh i've often said that my life has been a series of happy mistakes you know you know or serendipity because to add to that when i went to california and worked forpex. And Ampex made recording equipment for like Hollywood and music industry.

And so what I learned there was really polishing my digital skills and my video skills. So we had the big computers. I learned how to program. But the computers we were working on had a clock speed of 750 kilohertz. Oh, boy. The computers we were working on had a clock speed of 750 kilohertz. Oh, boy. And the screens that were on the computers were all vector graphic because raster scan wants 3.58 megahertz of data. And so if your computers are going 750,

now they had a wide address space, 64 bits, so you could do some serious calculations but they weren't fast at all yeah ball on the screen or the you know space invaders weren't going to move very fast well what would happen is remember that the early video games were not von neumann architecture they were basically complex signal generators. And you played Space War back at Utah, right? Correct. So Space War was the first game ever built for a computer, right? Absolutely.

I stand on the shoulders of Steve Russell, who did that as the MIT Hobby Railroad Division. And he did that on a PDB1. How did it get traded around and end up at Utah and other places around the country? I mean, it wasn't like you could just download it off the internet, right? It was digital equipment. Basically thought it was a cool hack and just shipped it with every computer they sold. Oh, wow.

Cool. So every deck, were these mini computers or were these mainframes? They were PDP. The one that we used was a PDP-8 and a PDP-10. Okay. Utah never had a PDP-1, which is what the original source code was.

Wow. And so they shipped it. It was like the solitaire of, wow, with Spacewar! That's incredible. And so was it the first time that you saw Spacewar! that you really realized what could be possible in creating this next generation of games? Managing the games department, I had a couple of arcades. So I knew intimately what a coin-operated game cost and what it had to earn. And I said, if I had this screen with a coin slot, it would earn a lot of money. But those machines cost like a million dollars.

Yeah, 25 cents for three minutes into a half a million dollar or a million dollar computer. The math didn't work. You're never going to recover the cost of the machine itself. But I went through the math and I said, maybe someday. Yeah. And then. So when you arrive at Ampex, this was shortly after like Fairchild had gotten set up and National Semiconductor, which we talked about on the Sequoia episode.

So National then pioneered outsourcing fabrication of chips to Asia and that dropped the price of chips hugely, right? Yeah. One day I remember sitting in my office at Ampex and glue chips, there was a thing called a 7400 series from TI and the 9300 series. They were basically glue parts, flip-flops and gates or gates, exclusive or all the Boolean constructs. Yeah. And they went from $2 a chip to 15 cents a chip.

Wow. And so it was that precipitous, I mean, two orders of magnitude. And I said, maybe now is the time. This math might work. Getting close. Yeah. Yeah. Huh.

Coincidentally, that Wednesday night in the Bay Area, I became a go player. Ooh. Yeah. And there was a, I knew we were going to get into go in a minute. Well, there was a, a go,

go being the game go. Yeah. The game go. And there was a Buddhist church in San Francisco that had a 24, seven go parlor. Oh, wow. Wow.

And so I could just go up there and, and, and I would generally show 1970 this was 1968 yeah and so i would go up probably eight o'clock on a sunday morning i'd play until three or four and every weekend that was kind of my go-to but But I was living in Santa Clara, California at the time. And additionally, Stanford had a Go Club that met every Wednesday evening. And so I'd attend that. And I got playing with a couple of the Go players there.

And one of the guys was named Jim Stein, who was a graduate student working at the Stanford AI lab. And after we played Go one time, he says, hey, do you want to play Space War? I said, holy shit, I haven't played it since I was in college. Let's do that. And so we left the Stanford Go club probably 10 o'clock. Yeah. the Stanford go club probably 10 o'clock yeah and we played we went up to the AI lab and played space war probably until three or four this is I mean my wife is not amused this many times but like when I was in college but I'm sure when you

were in college like this is what you do you know like a bit nightly like get back from dinner at the dining hall and be like oh yeah all right we're gonna play mario kart till four in the morning like yeah exactly we're gonna play halo you were the first generation that was doing this yeah and so that was i said you know those two situations the drop in the chip price and my reacquaintance with Space War were concomitantly the driver that said, let's do this now. For folks that know of Atari, they're probably imagining the 2600 or they're imagining at the very least something they're playing at their homes. That's not how it started.

No, it started as a coin operated game business. Well, it started as Scissorgy, right? Correct. You can't correct Nolan, David. No, it's correct. I think he knows how it started. Well, I'm just putting it wasn't Atari yet. And so the original plan was that we were going to be a studio and we would design games for manufacturers and get a royalty.

That was the original plan. We got some things moving around on the screen. I went to the dentist and told him about my project. And he says, oh, you should call this guy, which was the head of marketing for Nutting Associates. I didn't even know they were in town. Wow. They were a game manufacturer. A coin-operated game manufacturer. In Mountain View.

Huh. And I went up and showed them the game, and they said, yeah, I think we'd be willing to license this. They said, but, you know, we don't have a chief engineer now, and I don't think they, you know, the one we had would understand this technology. Are you available? And I said, I don't know. I'm pretty expensive.

Of course you did. So I sound like such a carny, don't I? This is great. Well, also, I mean, this is like, I had in my notes we didn't cover, I mean, the people that were starting companies that we talked about on part one of the Sequoia episode at this time, like the Trader Asseid and the like,

these are hardcore scientist engineering types. Usually in their 40s. Usually in their 40s. None in their 20s. You were the first, I think, real like hacker type entrepreneur. I think so. Yeah. I've often said that I blazed the trail for both gates and jobs, you know, just proving that it could be done.

Yeah. Because they didn't look like, you know, Gordon Moore and Bob Noyce. It's kind of like the five minute mile problem where people say, well, it can't be done. And then someone does it. And then suddenly there's this massive wave after them of people that are awoken to that. The world is accepting of young, brilliant 20 something CEOs and boom, we have this wave of them. No question about it. Yeah. Oh, but I got to, I got to finish mine. Yeah. Yeah. Please. So you had set up scissor G engineering, right?

Yeah. And then I went to Nutting. I said, I'm pretty expensive. And they said, well, how much? I was making $850 a month at Ampex. I said, $1,600. Yeah. They said yes too quickly. Whoa.

Oh, so you left them on the table. And a company car. Yeah. quickly. Whoa. Oh, so you left them on the table. And a company car. So how did that turn into what would become Atari then? Silicon Valley has a couple of things going for it that are, I think, underappreciated. One is that almost everybody knows intimately somebody that went off started something and made a gobsmacked full of money and they say i know that guy or that girl and i'm smarter than they are and i'm sitting here doing nine to five and they're out making a lot of money yeah i can do it do it. You know, it's funny.

I, uh, I think I might've referred to this on the show before, but I went to business school at Stanford many years after you were there. But I think that was one of the most powerful things is like all these entrepreneurs would come talk to us, guest teach classes, be there for cases, do lunchtime events for us. And we just, you just realize like they're just people too. There's nothing special about them. But then i had a real advantage with nutting because nutting put the first computer space in and all of a sudden you start noticing and saying these guys are bozos they're paying me sixteen hundred dollars month. I have a company car. What are they doing?

Well, they fired the head of sales because he was making too much money on commission. Now, that is a real bozo move. That's a really bozo move. And so when it came time for the next game, I said, I really don't want to hang my star with these guys because you know, because they will underproduce, they'll nickel and dime things. And my theory in life has always been go big or go home. Yeah, clearly.

And so when it came time for that, I said, you know, I'm going to have to leave and I will design your next game, but we'll do it under a contract. Little be knowns to them, I'd already gotten a contract from Midway in Bali. So I had two contracts to based on. That's great. And so you were game designer. Were you also the sort of lead engineer on that first game with them? Okay.

Yeah, I was lead engineer. I basically did all the digital stuff. And that was computer space, which was a commercialized space war, basically. Precisely. Yeah. We come to the next chapter of total serendipity. My first engineer, Al Alcorn, was actually my tech.

And he was in a work-study program at Berkeley. And he'd do six months on, and then six months at Berkeley, and then six months as my tech. It turns out that Steve Bristow was his alternate. And both of those guys, like when Atari came along, Bristow became head of engineering and Alcorn became head of research. They were brilliant engineers. They were really good, but very different. Al was much more rigorous. That was his brilliance

and his downfall. He would interview 30 people and not find one that was acceptable. Although, is he the one who brought Steve Jobs to you? Yeah. So he found one who was pretty good, although not an engineer, but we'll get there. But Bristow, if you said, okay, we need another 20 projects, and we need it in the next 15 minutes,

he'd go out, he'd hire a bunch of people, he'd fire some and what have you. I mean, he was a scrambler. It'd be messy, but it'd get done. It'd be messy, but it'd get done, It'd be messy, but it'd get done. Exactly. But the first day that Al came to work for us. And us being now this new company that is working on a contract.

With Ted Abney and I. Yeah. Yeah. It was the same day that I'd heard about Magnavox showing a video game at a trade show up in Burlingame. Yeah. And so I went up and I saw this thing and it was an analog piece of crap and uh and i said gee you know there's no competition here but i looked around and they were playing this ping pong game and it looked and they were having fun with it

and and there was so many things wrong with it there was no score there was no sound there's no score who's gonna play that yeah that? Yeah. Not just that. After you hit the ball, you could change the dynamics of it by twisting a knob. You don't get to change the nature of it. That's just wrong on so many levels. Yeah. So it was analog, though, like it was running on vacuum tubes? No. There's RC time constants. So basically

if you have a capacitor and a resistor it'll change the voltage based on how fast it is and that gives you a delta V. It's kind of incredible that early video games were actually analog. Oh yeah. I mean, Ralph Baer

with these designs were really important. In fact, the very first game that predated Steve Russell's at MIT was an analog game played on an oscilloscope at the Brookhaven National Labs with a guy named Willie Higginbotham. Huh. In terms of full history disclosure here. Always building on the shoulders of giants.

Yeah. Okay, so you saw the Magnavox, you thought, thing's a piece of crap. Yeah. But I said, you know, using our technology, maybe this would be a fun game. But more than that, I needed a test project for Al because computer space was really

complex. And I thought, you know, as a learning project, what you want to do is bite-size things down to get people to understand the tech. And so I described the game and I said, that's your first project. And no, like, design doc or spec. It was like, here's kind of how it's going to go. Yeah, this is a blackboard. Yeah.

Before whiteboards had been invented. And I said, you got to get it done in a few weeks because I think I can sell it to General Electric. I might have told him I've got a deal with General Electric. And I'll be damned if in two weeks he didn't have a working Pong machine. Wow. But it had some problems. For example, it had on the paddles angle, incidence, angle, reflection, you know? Yeah.

I read something that this was sort of Al's idea after what you sort of drew and described that he thought, well, it would be way more fun if we cut the paddle up into eight segments and then each segment, depending on how far away from the middle it was, actually affected the sort of angle that it bounced off of the paddle. Now, that's very interesting because the way I remember it, I came up with that idea. I'm willing to give it to Al. I don't care. Well, who came up with speeding the ball up as play went on?

Again, I think I did. But I'm not going to opine to it which is another great mechanic because it means number one you don't really get bored of it because you can't just keep it going forever ramping up the difficulty and two if you're collecting coin drop then that's going to speed up those games and you're getting more people flowing through precisely so okay so before we get into what happened with this prototype the name name of the company, can you tell us how it became Atari? Which, of course, is a term from Go. In those days, everything was snail mail.

And so if you wanted to incorporate, the standard way to do it was to put five company names in case the first one wasn't available. Atari was actually number three. Oh, wow. So was one Syzygy? One was Syzygy, which was owned by a candle company in Mendocino. And so this is with like the state of California? Yeah.

And to this day, I don't remember what number two was. But then number three came back, Atari. And what an amazing name, by the way. I mean, it starts with A, which is great. You know, it's funny. When we first got it back, we weren't sure we liked it. And Atari is like the equivalent of check in, or checkmate in Go.

Correct. Yeah, check is probably a good thing. Hmm. Close enough. So you didn't like it at first or you weren't sure. Weren't sure. Yeah. Which is really funny because, you know, I really believe.

Yeah. That like Shakespeare says, you know, arose by any other name. Yeah. Over and over again, I've named a company that has not sounded right two weeks in it's the best name in the world yep it's like uh how phil knight hated both calling the nike swoosh the swoosh and the swoosh itself and now it's the you know one of the top five most valuable brands in the world yeah exactly well and this comes together with pong right because the amazing atari logo which we'll link to in the show notes if you don't you know have it etched

into your memory as a as a child uh is is wonderful and you know it's a great day and uh and the pong paddles and the yeah how did you come up with the logo how'd that come to be that was done by george opperman who was a brilliant, brilliant graphic designer. And I said, we need a good bug for the company. He came up with 10, and I said, that one. Wow. I mean, truly, today, one of the most iconic brands ever created. Really?

T-shirts everywhere and hats. Yeah. I mean, you can't go a week without seeing the Atari somewhere in your life. It's pretty, and it's optimistic. It's kind of, you know, upward driving. And it was the paddles

from Pong that inspired it, right? No. Oh, no. That's revisionist history. Revisionist history. Okay.

There we have it from the man himself. So, okay. So you had this prototype of Al Alcorn's demo, you know, prove himself project. And it turns out it's pretty fun, right? So I thought to myself, you know, my carniness. Your carny instincts kicked in.

Let's rebrand carny as incredibly entrepreneurial. Like we can keep saying carny on the show but like we shouldn't deprecate this this is like a core yeah you know personality trait of wildly driven scrappy entrepreneurs yeah well i thought to myself so maybe i can get bally to take this game and complete our contract six months in advance Because you weren't planning on this being the next game. No. This was just a test project. This was a throwaway. Yeah.

But if they're impressed and say, look, here's the game, maybe let's see what they think. So we built up two, and these were in wire wraps. They were going to put one on location and I got on the airplane with the other one under my arm with a modulator

so I could hook it up to a local TV. And I went to Bali and Midway and they were not impressed. And because in the coin-op business, there had not been a single successful two-player only game. Yeah. There was no AI driving the other paddle at this point. Right. So if there was just one person who wanted to play the game at the bar, like it was going to be a non-starter. Which in 2020 hindsight turned out to be brilliant because it gave a woman an ability to choose who she played with. The equivalent of, I assume at that time women weren't like buying drinks for men, no but a woman could be like buy a game of pong yeah i'm you know i want to play pong but i need a partner so she pulled somebody off a bar stool wow so i mean it introduced a completely new environment variable into the bar and and it was also concomitant with the hippie female empowerment you You know, women are as good as men, da-da-da.

This is 1972, right? This was 1972. Yeah. Wow. So when Bally and Midway reject this. Correct. But you see the potential. Would you call it a wire rig?

Wire wrap. Wire wrap. And so I'd imagine that's no cabinet. It's just the electronics, the, you know, however many boards are in there. Correct. Wires, and then you hook it up to whatever TV you can. Correct. Well, in the early days when you were prototyping, there was a technology called wire wrap, which you'd had these pins sticking up and you had this machine that would really wrap a wire,

a copper wire around it very tightly. So it was a very good prototyping system. I don't think they use it anymore. I'm not sure. So basically you wouldn't have to solder, but you could ensure that the wires were going to be where you thought they were going to be on the chips. Precisely. Got it. But,

but when you looked at it, it's like a RAS nest. And what happened is that when I presented to Bally, they were tepid. They said, let me think about it. And when I called back to the plant, they told me about the earnings that it was making at the local bar.

So you had put a prototype in. Yeah. When I heard how much it was, I called up Bally and I said, Midway doesn't want it. You mean how much money it was making at that bar? At Andy Capps. Yeah.

Wow. Put it in context. The game was making over $300 a week. And. That's like 3X what a normal game would make, right? Oh, yeah. And the bill of materials on the machine was $325. Wow.

Wow. So I said to myself, there's a business here. There's a six-day payback on this, assuming you get to keep on. Is it 50-50 with the bar? How does the revenue split work? Right, it's 50-50 in those days. Okay. In two weeks, you're making your money back. You're making your money back.

Now, did you charge the buyers up front? Did they have to pay for part of the machine up front, or was it just a revenue split? You got to put it there. Re split? You got to put it there. Got to put it there. And I said to myself, hey, if I can't sell these things, I can operate them and be okay. Yeah. So I took all the money that we had in the bank,

and it was enough to build like a dozen of them. And then from there, we got the money, and we sold some because people started hearing that this game was doing well. And so we went up to the San Francisco distributor and he ordered 10 and the guy from Los Angeles ordered 10. I'm curious, what would the Bally and Midway deals have given you? It was, I mean, obviously they take care of manufacturing because they would make the actual cabinets and hook it all up. Do they also take care of distribution? Absolutely.

They do everything. So you're then saying, you know what, we're so confident in this thing. We're going to tell these guys that in a nice way and in a clever way that we're going to do this ourselves and that we don't, you know. No, I didn't say that we're going to do it ourselves. I said, we'll go ahead and finish the project, the driving game that you wanted. Oh, I see. Which there's another chapter to this four months in bally came back to us and said we'd like to do palm huh and you already knew what a golden goose you had yeah and so i said oh of course at this time there were 20 companies that were copying us because, you know, we had a garage shop.

The more things change. Anybody that had a garage shop could knock these puppies out. We hadn't, you know, in those days, it took four years to get a patent. We'd applied for it, but we didn't have it. And so, you know, it was the Wild West. And so, Bally was really noble by saying, hey, instead of just knocking us off, they took a license and paid us 5% royalty. Wow. That's a stand-up business practice right there.

Stand-up business. And completed our contract. Wow. Was it around this time that you started your experimental distribution channel of your own of Pizza Time Theater within the company? No. You're talking about key games, not Chuck E. Cheese. Well, either. Well, there was kind of the ball and paddle phase. Then we went into what I call the game innovation phase of the company. I realized that in those days,

the coin-op distribution network, there tended to be two, sometimes three in every major city. And it was normal to have an exclusive relationship. So I could pick all the best distributors. The ones that didn't have an Atari deal, they were looking for anybody that they could put into business to compete with us. And I thought, that's perilous. So I decided to create my own competition. So I took the number two marketing guy

and the number two engineering guy and the number two manufacturing guys, and I had them leave en masse, set up a company across the street or down. It was actually another place. And it was just before a trade show. And they had a game, which was the next in the line that we were going to produce. We let them put their name on it. We went to the trade show, and they assigned their distribution contract

with all the guys that we didn't have. That's great. We had the world nailed. Wow. And that was key games. That was key games. And in those days, you know, there wasn't the internet and all that, but we knew that you couldn't keep it secret forever. So we floated the rumor that these guys had stolen trade secrets and that we were suing them.

Okay. And then a couple of months later, we floated the idea that we settled and that now we owned a piece of Key Games. And did you own the entire thing from the get-go? The entire thing from the get-go. Oh, that's great. And then we decided that we were going to merge the companies together take a nice photo shake hands welcome the yeah yeah and then there was a question distributors what do you want yeah should we take the thing away or should we give you both lines and at that

time so you change the business practices in the industry because they didn't want to give this up, right? Yeah. So now we gave both lines to both distributors. Wow. So you didn't have to have exclusivity with a distributor anymore. Bingo. Amazing. Oh, that's so great. You know, it's one of those things that in the coin-op business in 1975, we had an 80% market share. Wow. Amazing. Wow.

Amazing. Wow. And so, and then- Going from nowhere. You know, we were undercapitalized and all that. Give us a sense of how many cabinets you then manufactured from what, 71 to 75? Probably 300,000. Wow. And each of those earning

roughly a couple hundred bucks a week. Correct. How'd you capitalize that or did you manage to get pre-orders and have sort of a nice working capital cycle? Actually, the business model I'm more proud of than the technology because I

built this company on each, my partner and I put in $250 each. That's the only capital that went into the company until Don Valentine in 1975. And so what we did, I figured out just in time inventory. So all the cost was in the cabinet, the TV set, the coin mech, and the power transformer. The glue parts for the computer and all that, it was a lot of numbers, but not a lot of value. So we could actually, from the time a cabinet came on the floor, we'd have the TV set and all the other pieces

come in all at the same time. And so we were turning inventory 28 times a year. Oh, wow. That's like Amazon levels. Exactly. So we were able to essentially sell a product and have 60 days to pay for the merchandise. Because you had terms from your suppliers.

So the company operated in positive cash flow. Wow. Wow. And what were the payment terms when you would deliver one of the units to? 30 days. Okay. But we'd give a 10% discount for five days. But then we found this factoring company that would buy our receivables.

And so I'd get immediate cash. Wow. So you grew to millions of dollars a year on no capital. No capital. Wow. Had you spoken with Don Valentine or any other investors? Venture Capital hadn't really been invented yet. Well, Don invented it in a lot of ways. And from what I read, the sentiment around the time sort of associated Coindrop with mafia activity and gambling.

People didn't want to be involved in investing in this sort of mob-controlled or mob perception industry. Correct. Yeah. Well, it was true. During the Prohibition, the mob provided illegal booze, illegal gambling, loan sharking, and prostitution.

When Prohibition was repealed, they still had their three trochia. And then the games modified. In the speakeasies, they had roulette and slot machines and the whole nine yards. But when all of a sudden the speakeasies emerged from underground, they could easily identify the slot machines. And so they started disguising them as pinball machines, but they were payout machines.

They were gray area. So that's why pinball had such a negative stigma. Not because of pinball, but because a lot of them were actually slot machines. They were disguised slot machines. Fascinating. Wow. The proto-venture capital industry that we talked about,

the Arthur Rocks and the folks that were the Tommy Davises, they weren't going to. I'm sure, did you even talk to them? I didn't know. I hadn't heard of Venture Capital. I, you know, it was just. Wow. So how did you. I was just young and dumb. How did you and Don intersect then? He came to visit me. He found me. I didn't find him. And at that point in time, we were in six buildings and we were up about 30 million in sales.

This is like 74, early 75, somewhere in there. And so we were kind of getting to be big shits in the valley. Wow. And he had just set up Sequoia Capital, taking it independent from Capital Group. Now, you get this. He says, can I see your business plan? Oh, listeners,

I wish you could see the face Nolan just made. Business plan? We had no business plan. I'd been running this thing by the seat of my pants. He says, well, I'll set you up with a guy that can write your business plan for you because I need it for an investment because I like your business. So I spent a few hours a day for several days with this guy named Don Yost who wrote the business plan for Atari, the very first one we ever had. Wow. When you're already doing $30 million in sales.

Yeah, I know. Wild. Different world. And when Don first approached you, was it called Sequoia Capital at that point yet? Yes. Okay. So he had fully spun out from Capital Group. Correct. And how did a deal get done? Did he offer or did you, how did you broach the conversation between the two of you of accepting Capital to a business that had never had capital before? Well, to get the right patina on this, we had the summer of discontent. And I told you how we operated in positive cash flow. That's all fine and good until you fill up your production line with products that you can't sell because there's a part that's missing.

Uh-oh. What happened there? We almost went out of business. Hmm. Because. Don may or may not have withheld the part, no. There was a chip that we needed to get and it was on backlog for three months. And so one month in, we were way behind on our

payments we got sued and three months in all of a sudden we we didn't defend ourselves because we owed the money and so we had these judgments against us and so there were sheriffs on the front door you know coming to coming to collect assets. What they really want to do is collect from your bank account. Right. They didn't want your chairs and tables and stuff. And so what we did is we opened up bank accounts all over the nation. And so we would just go every week.

We'd use a different checking account to pay our people. Wow. Oh, my goodness. Wow. Because you're trying to keep the doors open. You're trying to stay our people. Wow. Oh my goodness. Wow. Because you're trying to keep the doors open. You're trying to stay in business. You think this will get resolved and you want to keep your great people around. Well, you know you have a great business too, right?

So was it in this really tumultuous time when you did the deal with Don then? Really close. Yeah. We were damaged. And I did a reorganization with all my creditors. And basically I gave them, I said, if you want 100 cents on the dollar, you've got to give me six months. If you want 50 cents on the dollar, I'll pay you in two months.

If you want cash right now, I'll give you 10 cents on the dollar. And then I said, and if you sue me, you'll never get an order from me again in our life. And then to get the line going again, I went to Jerry Sanders from AMD and I said, we've just been cut off because of credit hold. I said, but I laid out what the option to him was. And I said, I need a $50,000 credit line for your parts. And if you give that to me, you'll be my preferred vendor from now on. Wow.

Who were you using for chips before? Fairchild. Fairchild, okay. And TI. And they were just jerks. And Jerry said, okay. Wow. It probably was worth $50 million to AMD to be the prime supplier for Atari.

Yeah. Pretty good okay. Very good okay. And we've been good friends since. Oh, that's great. So my understanding from doing a little bit of research before was that you effectively came to terms on what the investment would be from sequoia during the time of of tumult and before correct the amd agreement yeah but of course you hadn't

closed yet and closed you know you're you're you're maybe a month or a few more months goes by and you're getting ready to close the deal. And we'd gotten much healthier. We, you know, all the things that we'd done, we'd fixed up things, we were shipping, and all of a sudden we weren't under stress again. And so it became time to close. And that night I said to Joe, the president,

I said, I can't do this. This is not the right deal. Don had champagne iced up in his trunk and came out and I said, sorry, the price isn't right. And I said, this is the condition when I agreed to this. This is the condition now. The price is double. Double? Double. Wow. How did he did he react oh he was pissed

but i was willing to walk away because you didn't need the capital i didn't need the capital anymore two days later he came back and he said okay wow wow what a story for the first investment well it was my relationship with don was always a little bit love-hate. You know? I could see that. You know, and because you don't, you don't dick with Don Valentine that way. Oh, man.

Well, I've heard then that board meetings could take place in hot tubs. You know, can you describe the Atari culture at this point? We talked about you as the first hacker archetype as a CEO. I don't know if you called yourself a CEO, president, founder. I was CEO. Okay.

What was the company like and how is it different than other companies? I think to understand that clearly, you need to understand what was going on at the time. And we all had our hippie costumes that we'd dress up in our bell bottoms and our tie-dye shirts and go up to San Francisco and be posers. Because you guys were engineers. And we were engineers, but sometimes it was kind of fun totally and to go up there and so there was this ethic the the summer of love and all that that and you know don't trust anyone over 30 and you know smash the state and and all that but what really was it was a an idea that you treat everyone fairly not based on history not based on on legacy, not based on who you were

and what you came, but what your soul was, what your capabilities were. And so we actually created this company manifesto or constitution. And so we encapsulated equal pay for equal work, very first one in Silicon Valley. So we felt, and we had some amazing women that worked for us that were, just loved the whole idea that we had this manifesto. Speaking of the culture and the time, I mean, this must have been right around the time when this guy shows up at your office, right? Yeah. Jobs. Yeah. Unkempt.

Dirty. He just walked in one day. And said he's not going to leave until he got a job. And was it this like, I mean, you guys have become pretty big in the Valley. You are well known at this point. This is Steve Jobs, of course. Did he want to work at Atari because he'd heard about atari and heard about the culture and yeah absolutely and and you know he he liked the idea that we were doing something that wasn't bombs

wasn't uh you know uh military and uh by being in the game business we actually had a real advantage because a lot of the businesses had some military outlook. And so if you were a foreign national, a lot of times you couldn't work for those. So we had our pick of the crop in terms of, you know, the Brits at the time had just wonderful engineers and Germans and, and what have you from all over the world. Wow. Yeah, and you had that unique recruiting advantage. Not to mention, you're in the Bay Area. Vietnam had probably just ended at this point.

Yeah, pretty much. I'm sure there are a lot of people in the Bay Area at this moment in history who are none too keen to be working for companies that were selling to militaries. Yeah. All right, listeners, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to midsize businesses and provides enterprise grade security with the technology services and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech, it's about real people providing real defense around the clock. So, how does it work?

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who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. I'm sure you've spoken many times about your experience with Steve Jobs and Steve Wozniak. You are one of the very few people in the world that were ever either of their boss.

How did that go? How were they as sort of young budding talent? And what are some of the things that they did together at Atari? So I want to clear up this. Yeah. Wozniak never worked for me. He was always working at HP. So I want to clear up this. Yeah. Wozniak never worked for me. He was always working at HP. Yeah.

And I put Steve Jobs on the night ship because I knew Woz would hang out with him. Ever the entrepreneurial instinct. Well, I called it getting two Steves for the price of one. You got an advisor. Woz was an advisor. And Woz is and was a true savant i think actually was doesn't get enough credit for the success of apple because he could design discrete logic chips i I mean, he did the Apple II as a design construct.

It was brilliant. It was the most efficient articulation that you could probably... Waz did it all nighter, two nights in a row, developed the drivers and the hardware to interface this floppy disk drive

to the Apple II. Took Atari seven months. And we had some smart people. Wow. Wow. So those sorts of things, for me, just gives me tremendous respect for the man's capability. We had a deal where the engineers at Atari could bid on the projects. We'd give them a game list, and since we'd give a little bit of royalty to the engineers,

they only wanted to work on ones that they liked. And I came up with this game called Breakout, and nobody wanted it. A little quiet success out in the world, Breakout. Well, the perception was that ball and paddle games were over. Ah. And this was a ball and paddle game, but with a twist. What year was that?

74. Okay. So we're two, three years after the amazing success of Pong. Right. Got it. Might have been 75. I'm not sure.

But there'd never been a single player Pong. No. And it turns out that Breakout was actually the game that launched the Japanese market. For video games at all? Yeah. And so at this point, in 74, 75, Atari had just started shipping home consoles. 75.

75, got it. The VCS that became the 2600, right? Yes. So many of us had. My understanding was you were the sort of game designer and kind of visionary behind Breakout. This was a game that you'd sort of really come up with a concept for. And so you put it on this list for different people to bid on. How does it go from there?

They didn't want to do it. And so I put Steve on the night shift and signed it to him. This is Jobs because he's the only one that works for you. And I knew that he wouldn't do it, but Woz would. Amazing. Woz is not an employee of Atari. He's just hanging out with Jobs at night. How's the IP work on that?

It was a different era. They were employees. Who knew? Yeah. Crazy. Wow. the ip work on that it was different employees yeah crazy wow and so was does all the technical design of breakout yeah now i did a deal where they got a bonus based on how few chips they could use yeah so i read something about, that the cabinets typically had 75 plus boards in them, but it would save Atari like a hundred thousand dollars if you could remove each chip. Yeah. And that's absolutely true. And so the Waz's design was like 40 chips. I mean, it was unheard of, but it had sort of feedback systems that made it really hard to test.

And so once the game was done and everybody could see that it was fun, they did a rehash. But I paid the bonus based on the number of chips that came back, which was $5,000. And that was a lot of money in those days. Subsequently, Woz was over to the house and we were talking about breakout and what have you.

And I said, what did you do with your half of the money? He says, oh, I went out to dinner. And I said, that's some dinner. That's some dinner. And he said, what do you mean? And I said, well, you know, I figured you probably ended up with $2,500. He shook his head and says, Jobs did it to me again. Jobs told him it was $500, and he got $250.

Wow. And this is before they started Apple together. Oh, no, no. This is after. This is a long time after uh and and you know was i said you know i really don't care he said because of jobs i've made a lot of money much more than i ever thought i would at that and i said and he must have had a better need for it than i did wow wow what a feeling guy yeah did jobs come and tell you that he was gonna leave atari and go start apple like how how did that happen

well he asked me to be his first investor fifty thousand dollars for a third of apple and i just said no which i've kind of regretted. That's okay. Don made a mistake with Apple too. Well, it was really a thing where I actually think if I'd said yes, the world would maybe have been a slightly different place because Mike Markle, who did the first investment, was also a very hands-on mentor. And he basically turned jobs into an actually acceptable CEO that I probably wouldn't have done. Yeah. I think I've heard you refer to him as a Ho Chi Minh looking guy. Yeah. Yeah. And remember, Markkula was the first president of Apple. Yeah. Markkula had worked for Don Valentine, right? Correct. Yep. And the story is that Don sent Markkula over to talk to Steve.

I sent Steve to John. Don sent Steve to Markkula. Pinball game here. Wow. David, can you just catch us up on the timeline moving through the mid-70s, sort of what happens in 75, 76, and let's get to what the next financing would look like for Atari as a company. So Sequoia and Don invested in 75. Right.

Then in 76, you end up selling the company. How did that happen? We were far down the design path of the 2600. We knew that we had to, one, build a new factory, two, that it was going to be a highly driven by fourth quarter sales. And we just knew that we didn't have enough capital. And so we started down the path of taking Atari public. And we had an S1 drafted up and everything, and then the market kind of did a hiccup. And we said, maybe not. So we went down, so we said, okay, we'll see if we can get a corporate partner.

When we started down that path, Don says, hey, why don't you go talk to Warner people? And the Warner people came out and said that's kind of interesting and what have you, and maybe what we can do is we can do a structure where we buy it. And, uh, you guys make all the money and do all this stuff. And, you know, and, you know, it was, you know, we were young and dumb. I had a lot of hay coming out of my shirt, what have you. And, and so they send the Warner corporate jet to pick us up at the San Jose airport and we climb on board. And of course, just to really do starstruck, they stopped in, in, uh, Sun Valley and picked up Clint Eastwood and Sandra Locke.

What? On the jet? On the jet. Wow. And so we're, we're flying to New York on the Warner jet with Clinton, his girlfriend. Wow. That didn't come up in any of the research. Oh, really?

No. No, yeah. Well, and then we get picked up at the airport and a limo drops us off at the Waldorf Astoria side entrance. That's where the- The VIP That's where the VIPs go. The VIPs go. We go up and we're in a suite of rooms that has a library and a pool room and a kitchen. I mean, it's basically a 5,000 square foot apartment that we're in. And it's the Warner corporate apartment. Yeah. And there are three of us, Joe, Gene Lipkin, and myself. And we're in, you know, and, you know. And it's the Warner corporate apartment.

Yeah. And there are three of us, Joe, Gene Lipkin and myself, and we're there. And you realize you're being played a little bit, but you don't mind it because it's kind of cool. There is something very nice about getting sold to by someone who is an excellent salesperson. Exactly. So next morning we meet for breakfast and go into Warner's conference room and we start talking about deals

and deal structures and what have you. And can you give us a sense for the size of Atari's business at this point? Revenue or profit or anything you can recall? It's probably close to $40 million, $45. In revenue? In revenue. But this is all in the arcade business, right?

And you're about to enter... No, we were doing Home Pong. Oh, okay. You're doing Home Pong, but not the 2600 yet. Got it. I didn't realize, actually, that you had marketed home single-game consoles. Oh, yeah. There were two big dials, right?

You could sort of grab it and each player would twist them to move the panel. So anyway, we'd gotten to a few sticking points, what have you, hadn't quite shaken hands. We were invited over to Steve Ross's for dinner.

He has a Fifth Avenue apartment on the top floor, top three floors. And, of course, there was a screening of Outlaw Josie Wales for Clint and Sondra and us. Amazing. Wow. Talk about being sold to. Yeah, exactly.

Kind of like this life. So at the end of the day, we kind of shook hands on a proposed deal. Wow. And so that, if I read correctly, was a $28 million all-cash offer to the shareholders of Atari. It wasn't all cash. There were some debentures involved. And that was done as much for tax reasons as anything, because you wouldn't have to pay tax on it all at once. Got it. It's cheaper. But in addition to that, there was a huge payout.

Like there was a 10% bonus pool. So we personally, we'd get a big taste of the success of Atari. Oh, like an earn out. Correct. Oh, wow. Yeah. This was before startups learned that big companies always structure the earn-outs in their favor.

Oh, do they ever. You wrote the playbook in so many ways. Which of those ended up being more meaningful for you, the bonus pools or the actual one-time transaction that's actually hard to say because what i ended up doing is i hypothecated the bonus pool to get additional capital for chucky cheese uh so this is a excellent lead-in to okay a few of us who had like looked

into this before knew that you are also the founder of chucky cheese which when you the first time you learned that you know your mind's blown and you get tweety birds spinning around your head the thing that i didn't know until really diving in is you started chucky cheese as a part of atari and then bought it from warn's to spin it back out. Correct. Take us through that. Okay. The idea before Warner was there, as I felt we were selling these coin-operated games for $2,000 and in their life,

they'd do $30,000 to $50,000 in coin drop. It didn't take rocket science to say I'm on the wrong side of this transaction. But I didn't want rocket science to say i'm on the wrong side of this transaction but i didn't want to compete with the operators that were putting them in bars and restaurants and i didn't want to compete for locations for arcades and malls and what have you so i said i'm going to have to create my own location and so i said okay if I'm going to be building a big arcade, what's my best draw? And I said, well, we've got to have food.

And what the food needs to be is pizza because there's a wait time, ideal time for that. Then the most successful. Ideal time to go play the games while you're waiting for the pizza. Yeah. The most successful pizza parlor in the Bay Area was a thing called Pizza and Pipes, where they had a deconstructed Wurlitzer Theater organ all over the place. And so there'd be an organist and you'd see the drums going and they put lights on the various things so that it was kind of a show. Yeah. And I thought to myself, okay. I've seen this before. I can do myself, okay. I've seen this before.

I can do something like this. It turns out that I was going to take my daughters to Disneyland. I was trying to get some ideas about what I could do that wasn't a wordless or theater organ, but had the same marketing. And we went to the Tiki room, and I said, oh, my engineers can do this, and we can replicate it till the cows come home. And so that became the working prototype for Chuck E. Cheese, in terms of concept. And we literally opened the first one three weeks after we closed the Warner deal.

Wow. Was it in San Jose? It was in San Jose. It was in an old brokerage house. It was 5,000 square feet. And the day we opened, we knew it was too small. You know, the typical pizza parlor was 500 square feet, maybe 1,000, you know. And this was 5,000, and yet it was way too small.

Wow. And did, did the first one have, I mean, my memories of Chuck E. Cheese are the whole elaborate system with the tickets and the prizes and all the animatronics, the show every half hour. Was that all there in the beginning? Most of it. Most of it. Most of it. I always felt that the right way to market it was we would survey the cost of a large pizza. We'd then up that by 15% and then give tokens that if valued

at 25 cents would look like we were 15 to 20% cheaper. So you would just bundle in effectively some starter gameplay with the pizza. Exactly. Oh, man. Was Atari creating the games that were in Chuck E. Cheese then? Partially.

We would buy from anybody. Yeah. Like we bought ski balls and things like that from others. Huh. But it was off to the races. Okay. You want me to tell you the deal I got from Warner?

Desperately, yeah. They said, you know, I was talking about expanding it at a budget meeting. And they said, I don't think we want that. And I said, really? It's really good business. I said, I'll buy it. They said, how much do you want to business. I said, I'll buy it. They said, how much do you want to pay? I said, I don't know.

I said, I'm going to really have to work at this. The carny wheels are turning. So I got it for half a million bucks. How many locations? $100,000 a year for five years. Oh, they let you pay it over five years. No interest. No interest.

Wow. And how many locations did you have at that point? Just the one. Oh, just the one. Okay. But that one threw off $700,000 of cash flow annually. I assume the corporate finance department at Warner didn't give this a once over. I mean, they clearly just didn't believe in it.

Yeah, they didn't believe in it. Also, you were just the king of payback periods and cash flows. Exactly. Well, when you don't have cash, you've got to think that way. Yeah. What year is this that you buy it for 500K? 77. 77, or at least it's the year that you start five payments of 100K.

So that's in 77. Over the next, I don't know, decade, decade and a half, Chuck E. Cheese has close to 300 locations that you've opened? 250. 250. 125 company stores, 125 franchises, and I sold it to Brock Hotel. To who? Brock Hotel. Brock Hotel.

What did that transaction look like? It was a bad deal for me. I'd taken the company public. I made more money on Chuck E. Cheese than I did on Atari. But I did it through selling of stock going on. But the company, 1983 was when the video games kind of did. And Chuck E. Cheese was hit by that a little bit. And so I had hired a new president of Chuck E. Cheese and started really seriously campaigning a sailboat,

i.e. screwing off. And I might add, in 1977, I got married again. And, you know, once I had sold the company to Atari, it took a little bit of the fire out of my belly. Sold Atari to Warner. Yeah. Yeah. And so I got married.

I was spending a lot of time wooing and wedding my bride. And then we'd hang out and, you know, got the big house and did a remodel and, you know, all the stuff you do when you have a lot of cash. When I was campaigning the sailboat, I won the Transpac Newport to Hawaii in 1983. That's a big sailboat race. You're talking to someone who doesn't, I'm not a big, yeah, this is like a very well-known sailboat race. It's basically longer running the America's Cup.

Huh. Wow. But it's considered to be not quite America's Cup because it's mostly downhill. What is it? The wind is always at your back or something? Yeah, exactly. Yeah.

So you want a boat that is very flat-bottomed, that can get up and surf. You fly spinnakers all day long, but it doesn't point upwind at all. You know, and the America's Cup, you have to be an all-around boat. I see. Instead of what they call, Transpac competitors are called sleds. That's great.

But anyway, I won it in 1983. Congratulations. And the minute I hit land, I get this call, we're going to miss our projections and lose money in the third quarter. And you're a public company at this point. We're a public company. What happens is when you lose money, I had a couple of lines of credit out there, and that violates covenants.

And it just starts to create a shitstorm. So to get out of that, I ended up selling. Wow. Not for a lot of money, but it's okay. There was another company. I mean, you've started so many companies in the years since and continue to. But there was one more company we want to talk about before we move on to acquisition category here that came out of Chuck E. Cheese that you ended up selling to George Lucas. Can you tell us a little bit about that?

Yeah, I had a project called Cadabroscope. And what I wanted to do is create computer-aided animation. And I felt that doing tweens and things like that, that the technology was good enough. And we created some pretty good software, but the computers were so crappy in those days. I mean, it was taking 48 hours to render a complete frame. I mean, you know, and half the time the computer had bombed but before it finished so you know if you got one frame a week you were really rocking and this

was with a vax 780 which was the go fast scientific computer at the time and these frames are 640 by 480 or no they were they were um no they were they were 640 by 480. Yeah. One a week. One a week. Wow. And there's not a business there. Imagine Toy Story in one frame a week. I'll imagine it in like 2065.

Yeah. So I ended up selling my software to George Lucas when Chucky got into trouble. I was scrambling for cash. And so in some ways I like to joke and say I founded Pixar, technically. But George Lucas took it and did it. And while at Cadabrascope, I showed Steve Jobs. He came over and he was very fascinated.

Wow. And I told him about some of the problems we were having. And so he came to me when he was offered Pixar. And I said. From George Lucas. Yeah. And I said, the big key is render time. If you can solve the render time problem, it's a good deal.

And what I hadn't realized is he'd figured out how to do a render farm. So where you basically atomize the problem and get a whole bunch of different computers to work on it. That was the first render farm that ever existed. Wow. Wow. Anyway. That's so cool. There's fun acquired history too because Pixar was our first episode. I think we dove into the

research and we were excited to find out that Steve Jobs' Pixar came from George Lucas at Lucasfilm. What a cool story that was. And here we are 100 episodes later, getting the even deeper origin story. It's just really cool yeah wow super cool all right let's go into our section after history and facts and this is an illustrious amazing history and facts what we tend to talk about now is what would have happened otherwise and and the way that i want to frame this on this episode is what if atari was never started how do you think this crazy enormous video game industry that we have today i'm sure you've thought about this before like there's one view of it that's it wouldn't exist at all and that you know probably probably not true there's

another view that is uh it would be no different than it is today which is also probably not true so what do you think is the the middle? I think that there's a 90% probability that there would have been a video game post the 6502 microprocessor. I think that the technology had progressed point where it was pretty simple. The secret sauce that I provided is to figure out how to do it with state machine technology, which wasn't an obvious thing to most engineers. And I think that was my unique contribution that is far enough out of the mainstream

that it may never have happened. Or it may have. You just never know. There's a lot of of i would say that we're running down the hallway of a of a uh of a hotel and you're checking all the doors and sometimes you know there's a broom closet and some most of the time it's a regular room but every once in a while there's a there's a ballroom and and you're not there alone there are many people running down those same streets yeah and uh i think it's extremely arrogant to think that uh you were definitive in something i read somewhere i don't know if it's true i think this was after you left atari the acquisition, that there was potentially a deal on the table for Atari to be the U.S.

manufacturer and distributor for the Nintendo Entertainment System, for the Famicom. Can you say, do you know anything about how that? I just know that that was an opportunity and it was turned down. Wow. That would have been a very different history. Very different scenario. So I want to add one thing about the Transpac

because another important thing happened. Over the chart table, 4 in the morning, we did the rough for eTech, which was the foundation for navigation systems. If you have a mapping system in your car on your iphone it's all based on the technology we created wow and uh i think i remember reading in the research that at etac which is one of the companies you created that did navigation technologies uh you had a an arrow based on the space invaders that? That's correct. For the car. And still to this day, any navigation,

you know, Google Maps, whatever, like you're an arrow if you're the car. And it's because of that, right? Yeah. It's kind of fun stuff. That's awesome. Pretty cool. What happened to ETAC? Sold it to News Corp. Who sold it to Sony? Who sold it to

Tele Atlas or Navtech? Tele Atlas. Yeah. Wow. Oh, how these things find their way throughout history. We covered Google Maps earlier this season, so it all comes back around. One other question before moving on is Atari pioneered video games in so many senses, but is not relevant today. How could Atari have traversed the waves that came over the next few decades and been what Nintendo became, especially in the United States? to management. The company never had a strong sense of self. In fact, I think Atari is maybe

the only company in the world in which the market leader abandoned its market. Can you imagine that? But it did. And the sale to Jack Tramiel, you know, it was just a total cluster. This is Warner sold it off? And the sale to Jack Tramiel, you know, it was just a total cluster. This is Warner sold it off? Yeah. Huh. They just didn't have a feeling for it. I mean, the executives they put into Atari were all record guys.

They didn't realize they were record player guys as well. And so they were. Well, they were an East Coast company. I mean, like we covered in our last episode, it was just like Fairchild, like an East Coast corporation running a West Coast technology firm in that day and age. It's just wrong. It just didn't work. Yeah. It just didn't work. And they, and Ray Kassar totally screwed up the corporate culture.

Hmm. We went from not allowing executives to have reserved parking spots because I felt that, hey, having the workers pass an empty slot with, you know, vice president was just an us versus them trope. Totally. And I said, I want this, I want us to be as egalitarian as possible and yeah i'm going to make a little bit more money but you know i've got more responsibility and you know da da da da but we all are in the same cafeteria we're all hanging out together you know when we have a beer bust on the back dock we're all there you know and we went from that to a private dining executive dining room by a four-star chef to, you know, limos and reserve parking spots and all kinds of us versus them tropes that was just not Atari. The irony is now in Silicon Valley, there's a private dining room with four-star Michelin chefs for everybody. And everybody takes Uber Blacks to work and the

company pays for all of it. That's as it should be. Yeah. Well, our next segment that we typically do is acquisition category. So we decide, and there's very clear cut and easy episodes where the company bought it either it was a people acquisition, technology, product, business line, it was for an asset. In this case, I think what's coming out is Warner didn't really know why they bought it. And then that led to some of the kind of falling apart later. How would you characterize why they bought the company and what it was for? I've often thought that Steve Ross, who was suffering from prostate cancer, had a very clear idea of what Atari was. When he got sick, I think the record guys didn't, you know, in a very significant way. And that's where it kind of came off the rails. All right.

Well, normally here, after category, we would go into grading. Nolan, we will take your color on everything so far, both on Warner buying Atari and you buying Chuck E. Cheese back from Atari and growing that into what it was.

We will take your color there as our grades and finish up here. Nolan, thank you so much. You know, before we close up, I got to tell you what I'm doing now. Please. Please. AI driven board games. I did a deep dive on the Amazon Echo and the Google Home system and the AI under it and the speech recognition and everything and became

mesmerized. And I thought to myself, this is a game platform that nobody knows about. And so let me do some board games that you can talk to and that will answer. And so now we have St. Noir, which you can go into at Amazon right now, buy the board game, then download the St. Noir app from your Amazon Echo. We're not on Google Home. We will be after the first of the year. Yeah.

And you can play a murder mystery in which you're in the creepy town of St. Noir and there are 12 creepy people, one of which is a murderer. Oh, that's fun. And the townspeople have to tell the truth. Oh, it's like mafia or werewolf. Kind of. Yeah. But the perpetrator lies.

Oh, that's great. And so the game is interviewing everybody and finding out where they were on the night of the murder and who they saw and what they did and various things and find out who's. Is it a, is it a multiplayer or single player or both? I always play with three or four people and we decide and talk about things, but there's the board game and it's gorgeous. And I suggest that everybody that's listening to this should buy six or seven, particularly for Christmas. Absolutely. If only you could figure out how to put a quarter slot on the Echo, then

that would be perfect. When you sell a bunch of paper for 40 bucks, that's almost as good. Maybe even better. Well, there's one other trend here that you're on that I think is brilliant.

I mean, of course, AI-driven is interesting. Next-generation gaming is interesting. But the most popular emerging podcast category is true crime. And this notion that sort of like you could have interactive gamified true crime is really cool. We're actually working on one of those. Oh, awesome. Cool. Not to mention board games.

Yeah. I'll accept. When you say True Crime, I'm not sure that it's going to be true. Yeah. Nolan, thank you so much. My pleasure. It was fun.

This has been a true honor. We're so glad you joined us. And what a great moment in Acquired's history, too, to bring it full circle with Pixar, our very first episode, to be talking about the origins of Silicon Valley. And, you know, you guys played such an incredible part in that. So thank you so much for sharing the stories with us. Well, I appreciate it. We want to thank our longtime friend of the show, Vanta, the leading trust management platform.

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