ColdFusion - From $2 Billion to Nothing - The Rise and Fall of Atari

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Starting point is 00:01:05 In the early 1980s, a new technology called the video game was changing the face of American business. The biggest name in the industry was Atari. In only three years, their annual revenue had gone from $75 million to $2 billion. This made Atari the fastest growing company in the history of the United States. But today, Atari is nothing more than a shell of its former self, existing basically in brand name only. So what went wrong?

Starting point is 00:01:35 In this episode, we'll take a look. Back in the 1960s, a young electrical engineer by the name of Nolan Bushnell was attending the University of Utah, and here he came into contact with a machine called Space War. Space War was a combat video game developed in 1962 by Steve Russell on a DEC PDP1 computer. Nolan's University also had a PDP1, so it didn't take long for the game to arrive on his campus. When Nolan Bushnell first played the game, he immediately realized the potential for a coin-operated incarnation. It was, by all definitions of the word, an epiphany. Right.

Starting point is 00:02:26 And I went into the lab, and there on a screen was the game Space War. But I'd never heard of it, and I saw it then. And coincidentally, I was manager of the games department at Lagoon, a local amusement. Park, Summers, and that was one of the ways I was putting myself through college. And I knew that if I had that screen in my arcades, it would make money. I knew it. But then you do the math and a million dollar computer and 25 cents a play, and the math didn't work. But I knew the cost of computing was constantly coming down, and I knew that the curve

Starting point is 00:03:09 was going to cross at some point. And it did. In 1972, Nolan, along with his friend Ted Dabney, would start a company to realize this dream. They incorporated the company under the name Atari, a term similar to Checkmate in the ancient Chinese board game, Go, which they were both fans of. Atari's first product was the world's first commercially available video game arcade called computer space. But unfortunately, it didn't bring them much success.

Starting point is 00:03:47 Next, the pair hired Al-Aqorn as the design engineer, who created the game Pong. The first Atari Pong machine was completed by August of 19. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result?

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Starting point is 00:04:50 Luxury sales claim based on S&P Global Mobility, Canadian New Vehicle Total Registrations for calendar year 2025 for the Cadillac definition of luxury. 172, and placed in a bar in Sunnyvale, California. Alcorn would receive a call just a few days later. The machine had broken. This looked like a terrible start for Atari. They couldn't even build a machine that worked for more than a few days.

Starting point is 00:05:11 The problem, as it turned out, was actually that the coin mechanism had been flown. flooded with coins because so many people wanted to play. In other words, the game was actually too successful. And from here, Atari was off to the races. It's a big party time at Atari. It's a lot. All the executives were in their late 20s, early 30s. You're at what age at this time? 30.

Starting point is 00:05:36 Okay. Most of the employees were 20 to 23. Wow. Pong was so successful that by 1974, 8,000 Pong machines were installed. in restaurants, amusement parks, and bars across the world. However, soon after starting the successful enterprise, Dabney and Bushnell started having their differences, which ultimately led to a falling out and Dabney selling a stake and moving out. By 1975, Atari, now led by Nolan Bushnell alone, was planning to bring video gaming to consumers

Starting point is 00:06:07 at their home. The company developed the Atari Video Computer System, a cartridge-based home console. It used the newly available. 8-bit microprocessor, the MOS technology 6502. Sadly, Atari lacked the scale to manufacture the console for commercial use. This led Bushnell to make a decision that would forever change the course of Atari. He sold Atari to the entertainment conglomerate Warner Communications in 1976 for a whopping $28 million. While all of this was going on, a series of events would set in motion the foundations of Apple Computer.

Starting point is 00:06:44 What was the first time that you met Steve Jobs? Tell us about that experience. Do you remember that? Yeah, Steve Jobs found Atari. He was hired by Al Alcorn. And that afternoon, he came into my office as though that was the right thing to do. First day. First day.

Starting point is 00:07:05 I said, hi, what's up? He says, I think you've got a really awesome company. Awesome. He uses that a lot. and he said, I think that everything is pretty good, but I've seen your soldering connections, and they're really crappy. It's widely known that Steve Jobs worked for Atari before starting Apple. But did you know that it was at Atari where the foundations of Apple's success was first laid?

Starting point is 00:07:35 It all started when Nolan Bushnell came up with the concept for the breakout game, but couldn't find any engineers willing to design the game's prototype. The task then went to Steve Jobs, a low-level technician back then working night shifts at Atari. I didn't see the bad Steve Jobs, but he caused enough problems that I sort of... At Desjardin Insurance, we know that when you own a nail salon, everything needs to be perfect from tip to toe. That's why our agents go the extra mile to understand your business and provide tailored solutions for all its unique needs. You put your heart into your company, so we put our heart into making sure it's protected. Get insurance that's really big on care. Find an agent today at Dejardin.com slash business coverage.

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Starting point is 00:09:02 and Nolan Bushnell offered Steve Jobs a $100 bonus for every chip he managed to eliminate from his concept, and it was at this moment that Steve Jobs did something pretty dishonorable here. Jobs would rope in his friend Steve Wozniak, who was then employed at Hewetab, Packard. Wozniak was going to help him create the prototype in just four days. Fortunately, Wozniak was able to complete the prototype in four days, sacrificing his sleep. Jobs was paid a $5,000 bonus, but Wozniak, who had done all the work, was only paid $375 by Jobs. Breakout was launched in April of 1976, just a few days after Jobs and Wozniak founded Apple Computer. Wozniak had one dream though. He wanted to play a version of Breakout, written completely,

Starting point is 00:09:46 in the programming language basic. Their first computer, the Apple One, couldn't do this, so Wozniak wanted to create a new computer to achieve this goal. He incorporated features such as color graphic commands, circuitry for pedal controllers, and a speaker. This computer would be called the Apple 2, and it was an instant success, and as we know, the rest is history. Interestingly, the Apple 2 actually originally sold

Starting point is 00:10:12 with two pedal controllers to play breakout. Quote, A lot of these features that really made the Apple 2 stand out in its day came from a game. That game being breakout, of course. Meanwhile, back at Atari, Nolan Bushnell developed differences with the Warner Company and left Atari in 1978. The next year, Warner hired Ray Kazar to take over the reins as CEO of Atari. Now backed with the money of Warner Media, the company would create the Atari-2600 console. The 2600 featured joysticks and interchangeable game cartridges, and thus,

Starting point is 00:10:47 Thus, kicked off a new error in the video gaming industry. With Warner Communications at the helm, the focus of Atari went from creativity to marketing. The R&D department was downsized and replaced with mostly marketing staff. The move did pay off though. The sales of the Atari 2600 started to pick up. In 1979, it reached 1 million sales, and then 2 million in the subsequent year, and ultimately leading to 10 million in annual sales in 1982. The Atari 2600 was the best-selling game console of the time.

Starting point is 00:11:20 Atari's revenues comprised a huge 70% of Warner's income. Before we continue, today's Atari news segment is brought to you by Morning Brew. Later this month, Atari plans to build a virtual casino inside DeCentraland, a crypto-based virtual world. The casino will be based on Ethereum and will include Atari-themed games and an Atari NFT. It comes during an effort to modernize the company. If you want to read more stories like this

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Starting point is 00:12:55 You can get up to date with all the latest breaking news in just five minutes and it's news delivered in a fast and fun way. Go to morningbrew.com slash cold fusion or click the link below to subscribe to Morning Brew today. It takes just 15 seconds to sign up and it's free. By the early 1980s, the video game market was booming and Atari was the undisputed king. Video games were making insane amounts of money and there had been nothing like it before. in any industry, but it was beginning to grow too quickly to be sustainable.

Starting point is 00:13:29 The actual business of gaming was still very young and nobody was really sure what audiences wanted or how to properly monetise products or how to even reward their employees properly. But for now, all the video game market saw was money and more companies jumped on board. The Atari 2600 was dominant but it was also competing against numerous home consoles, like the Magnovox Odyssey, CalicoVision and Mattel in television. As the money poured into the industry, it wasn't only electronics and toy companies that were in the market. Soon, companies would switch industries just to make a quick buck. And then, the market became completely oversaturated with consoles, and yet still more kept coming. Meanwhile, all of these game consoles suddenly found themselves

Starting point is 00:14:15 competing against another brand new technology, the personal computer. PCs had more utility than game consoles, they could be business machines as well. Personal computers also featured long-term memory, which meant that games could be saved instead of starting again from scratch every time. As computers became affordable, there was a realization that buying a home computer would make more sense. This would hurt the appeal of game consoles. Back then in the video game industry, it wasn't uncommon for a single programmer to create an entire game. For their efforts, programmers would be unrecognized by Atari. Credits weren't to allowed at Atari because Atari wanted to be the only creator associated with any work done

Starting point is 00:14:59 on the game. Any of the work that individuals did was just their part of being a Kogunah machine. A programmer would typically only make $20,000 to $30,000 a year, even if the game went on to sell millions of copies. A few years earlier in 1979, a few programmers had had enough. That year, David Crane, Larry Kaplan, Bob Whitehead and Alan Miller all left Atari to start their own company. which they called Activision. Atari and others sold their consoles for cheap, but expected to make the money back on game sales. But now with Activision,

Starting point is 00:15:34 when one of their games was sold for an Atari console, Atari wouldn't see a cent. Instantly, Atari's business model was shattered, so of course they sued Activision, but luckily for consumers, Atari lost in court. Real Canadian Superstore has everything you need this back-to-school season. Save on lunchbox savers, like Ziggy's sliced Ellie Me products,

Starting point is 00:15:54 for always 375 and get Life Brand Pure Vita shampoo or conditioner for $8 each. At Real Canadian Superstore, when you're ready, we're ready, with a whole world and more. Get your tickets now for the dog stars. It's no surprise how fast civilization can disappear. Go!

Starting point is 00:16:14 Out there, it's kill or be killed. Jacob Alorty. There are people out there? They need our help. Josh Boulin. Shoot first and inquire afterwards. Margaret Qualie. Okay, tough guy. And Guy Piers. Arm up!

Starting point is 00:16:27 The Dog Stars, directed by Ridley Scott, in theaters August 28th. Get tickets now. Now, the door was open for anyone to make games for home consoles. This would be the rise of third-party development, and boy did the floodgates open. Once again, everybody jumped on the bandwag. So not only was the market saturated with different consoles,

Starting point is 00:16:48 but now it was absolutely flooded with game companies that had no entertainment experience whatsoever. At one point, Quaker Oates and Purina, yes, the pet food company, started making video games because it was an endless gold mine. Soon, more programmers would leave their parent companies to make it on their own. Atari's best programmers would leave to join the action. As more games were made, the quality dropped. Atari, keen to keep making money, acquired the license to the arcade sensation of the year, Pac-Man.

Starting point is 00:17:22 Executives wanted a version of Pac-Man for the Atari 2600, and this seemed like a great idea. but there was one problem. Atari only got the license late in the year, but still wanted the game out by Christmas. This gave the programmer almost no time to make the game. On top of that, they contacted an outside freelancer, and they agreed to pay him a royalty fee for every unit manufactured. Not every unit sold, but manufactured.

Starting point is 00:17:47 Atari forecast 12 million sales, so they'd already promised to make 12 million copies for this guy. So the lucky programmer was already guaranteed a giant paycheck, before he even had started the game. This didn't give him much incentive to make a good game, especially because he didn't have enough time to make a good game anyway. The result was an absolute, unmitigated catastrophe. The game was slow, ugly, buggy,

Starting point is 00:18:23 and barely resembled the original game that people fell in love with. Atari made 12 million copies and sold 7 million. So in the end it did sell well, but they still had 5 million unsold cartridges sitting in a warehouse. Apparently, they didn't learn from their lesson. The business executives signed another deal this time with Steven Spielberg to make an ET game. ET promised to be one of the biggest movies of the year, and it was thought that a game based on it would sell well.

Starting point is 00:18:50 Again, this was a good idea. But once again, Atari screwed up. They gave their programmer almost no time, six weeks to design, quality test, manufacture, and ship. An absolutely insane schedule. When the game went on sale, Atari thought consumers would see the name ET and rush into buy the game. But after their experience with the Pac-Man dilemma, audiences waited to see if the game was any good.

Starting point is 00:19:16 It wasn't. I'm not exactly sure what's going on to understand why this is the worst game. Oh, come on. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales. Using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result?

Starting point is 00:19:53 Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Real Canadian Superstore has everything you need this back-to-school season. Save on lunchbox savers like Ziggy's sliced deli-meat products for always 375. And get life brand pure vita shampoo or conditioner for $8 each. at Real Canadian Superstore, when you're ready, we're ready, with a whole world and more. The E.T game became known as one of the worst pieces of interactive entertainment ever. The game was the Christmas gift that everybody wanted, but nobody liked.

Starting point is 00:20:28 At one point, things got so bad that out of 4 million copies of the game shipped by Atari, 3.5 million of them were returned. These were added to the pile of Pac-Man games sitting in the warehouse. So, Atari was making horrible games and selling them at full price. Meanwhile, competitors were also making horrible games but selling them at cheap prices. Basically, the market was starting to become obliterated. It all culminated in December of 1982 with Atari's earning statement. They told shareholders that due to all these incredibly negative factors, the company

Starting point is 00:21:04 would still grow by 10 to 15%, and that sounds great. But the problem was, before the announcement, they told shareholders that they expected 50% growth. It was a huge shock to Wall Street, and this earnings report collapsed the market. Sales of both consoles and games in this oversaturated market crashed across the board. For many decades, rumour had it, tens of millions of unsold Atari game cartridges were all sent to a landfill in New Mexico and a bulldozer buried them and covered them up with cement. These reports were actually proven to be true only in 2014 when the New Mexico site was dug up.

Starting point is 00:21:45 Atari had been the banner of the gaming revolution and was once the fastest growing company in American history, but now it was $500 million in debt. Analysts predicted the end of the gaming industry. They told investors and retailers alike that they should look elsewhere. But this new little technology called video games struggled on on PCs and slowly continued to get stronger. Atari too continued on. After entering the PC business, they became moderately successful in Europe. with their Atari ST computer.

Starting point is 00:22:17 Released in 1985, it was praised as an amazing tool in the electronic music scene. This was largely thanks to the Atari ST's MIDI capabilities, a feature only found an expensive recording studios at the time. The Atari ST computer was used by music producers like Fat Boy Slim, Tangerine Dream, and Darude. Though, competing with the Commodore Amiga and Macintosh, Atari didn't end up gaining much market share in the end.

Starting point is 00:22:59 In 1993, Atari wanted to stun the world with its Jaguar console. It promised to be a 64-bit gaming console, and with five different processes, it was going to be a beast. But in reality, it had average performance, was expensive, was hard to code games for, which meant less games for consumers. And lastly, the controller was poorly received. All in all, the failure of the Jaguar console essentially spelled the end for Atari's hardware business. Before we finish up, let's take a look at a few facts about Atari. Even though Atari couldn't maintain its position as the market leader for video games, their contribution was so immense and so iconic that in 2007,

Starting point is 00:23:42 the Atari 2600 was added to the National Toy Hall of Fame in New York, sharing the honour with the likes of the Rubik's Cube and Lego. Apart from having an Apple connection, Atari also has a Microsoft connection. Atari hired Bill Gates to program Basic onto one of Atari's computers. Bill Gates kept missing deadlines and eventually had to be fired. It's a well-known fact that after the decline of Atari, Japanese game company Nintendo took its place, with the Nintendo Entertainment System replacing the Atari 2,600.

Starting point is 00:24:14 However, little do people know that the NES almost became an Atari product. Prior to the crash, Nintendo approached Atari. They wanted to release a console under the Atari brand. In the end, fortunately for Nintendo, the deal fell through. So many of you may be wondering, what happened to Nolan Bushnell after he left Atari? Well, it turns out that he went on to start Chucky Cheese. He thought that a pizza restaurant would be a simple business to start. Interestingly, when he had bought the costume for his mascot,

Starting point is 00:24:44 Nolan thought that it was a coyote. But when the costume turned out to be a rat, he decided to name the restaurant, Rick Rats Pizza. But the marketing team thought that a rat would have bad connotations for a pizza restaurant, for obvious reasons. And with that, that concludes the rise and fall of Atari. Thanks for watching. If you did enjoy this video, be sure to head over to the Discord after this video. I'll be hanging around for the first 30 minutes after I published this video,

Starting point is 00:25:12 so I can have a chat with you all. If you're interested in taking some Atari Cold Fusion merch home, I've done a new limited line that you can pick up. I just love these designs, and I'm really happy with how they turned out. So if you want to support the channel, head over to the merch links in the description below. So my name is Degogo, and you've been watching watching Cold Fusion and I'll see you again soon for the next episode. Cheers guys. Have a good one. Cold Fusion. It's new thinking.

ColdFusion - From $2 Billion to Nothing - The Rise and Fall of Atari

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