This is the story of the death of Atari. Some would argue that Atari died when Nolan Bushnell left the company in 1978, but to me the real death of Atari began in the 4th quarter of 1982. Atari was founded in 1972 by Nolan Bushnell and Ted Dabney as Syzergy Co. They later realized that name had been used and changed it to Atari, a term taken from the game Go roughly meaning “you are about to be taken” which oddly enough was prescient about the future of Atari. Their first big success was Pong in November of 1972. Further arcade games followed until a project then code named Stella was completed and renamed the Atari VCS or as most would know it today, the Atari 2600. There was one problem: the leadership of Atari were not business oriented. They were dreamers, engineers, and programmers that were ill-equipped to handle the business Atari had grown into. Atari did not have the capital or expertise to successfully bring the VCS to market. Enter Warner Communications who purchased Atari in 1976. Warner then installed the more business-oriented Ray Kassar to oversee Atari and Bring the VCS to market. The VCS was released in November of 1977 and grew into a phenomenon that would come to not only give rise to a new industry, but also install itself as a mental fixture synonymous with the words video game for a generation. From 1978 through early 1982 Atari saw massive success and growth fueled by the VCS and various arcade hits. So, when in August of 1982 Atari secured the arcade and home video game rights to the biggest movie at the box office: E.T., it seemed to be a setup for their next big win. The game needed to on shelves for the holiday season this gave developer Howard Scott Warshaw approximately six weeks to take the game from concept to completion. He did just that, but the game was not well received. It was more complicated than expected and the game play did not resonate with the target audience of children. Atari printed far more cartridges than they were able to sell thus giving birth to one of the biggest urban legends in video games. Leading into the final months of 1982 Atari announced their earnings had fallen well short of expectations. For perspective, for the first nine months of 1982 Atari accounted for half of Warner Communication’s total earnings and in 1981 and had raked in $1.1 billion dollars. The money was still running in, just not as much as had been expected. This was a concerning sign to some of trouble on the horizon as evidenced by the charges of insider trading filed against some Atari executives including Kassar when they sold massive amounts of stock shortly before the poor earnings report. Warner’s share prices dropped and some Atari executives were released or resigned, and blame assigned, but the next and biggest problem was overlooked. In October of 1981 Atari had met with its distributors and had them commit to their orders for most of 1982. Previously Atari had struggled to meet the needs of its distributors so they had adjusted accordingly and ordered more than they thought they would need so that when the inevitable cut in delivered items happened, they would have what they wanted. Atari had enjoyed fully 80% of the market at the time so it seemed a safe bet going forward. 1982 saw the birth of a relatively new phenomenon: the third-party developer. When designing the VCS/2600 Atari had no idea any type of lockout mechanism might be needed to prevent just anyone from making games for the system. That is exactly what happened. Activision, Coleco, Imagic, Parker Brothers, and more all went for their piece of what seemed to be a nearly infinite-sized pie. While none of these companies presented a real threat to Atari’s market combined, they were able to take away enough of the market that orders that were too large to begin with became even more so. Atari had never had to deal with competition or order cancellation before and found themselves wholly unprepared. What followed was a slow build to retailers having much more product than demand and some of the smaller developers did not have the cash on-hand to handle the influx returns so many folded or moved away from video games entirely. Store owners found themselves stuck with games, systems, and accessories nobody wanted and no way to return it. Enter General Computer Corporation a small engineering company that was mostly known for creating refurbishment kits for arcade cabinets including Atari’s Missile Command. These kits would change up game play for a fraction of the cost of a new cabinet and quickly became popular with arcade owners. Atari had initially taken legal action against GCC but agreed to drop the suit if GCC agreed to an undefined development deal. GCC continued as before creating another refurb kit that would eventually become Ms. Pac-Man. Fearing a loss of new titles for the VCS after massive talent migration from the company, Atari contracted GCC to develop 7 new titles for the VCS including Ms. Pac-Man. Atari had released the Atari 5200 in 1982 as an intended successor for the aging 2600, but due to poorly designed controllers and a lack of backward compatibility with the 2600 the console was struggling to capture much market share and was being outsold by the 2600 and its competitors. Atari needed to try again, and they needed a win. By mid-1983 GCC was pitching ideas to Atari for add-ons to improve the aging 2600 and a new and improved system they were calling the 3600. By October Atari had suffered operational losses of over half a billion dollars and the losses showed no signs of slowing. They began to license their games to competing consoles in an effort to wring any money possible from their library. In May of 1984 Atari announced the renamed 3600, the Atari 7800 ProSystem at the Consumer Electronics Show in Las Vegas. A pilot market in Southern California was identified and in June the 7800 went on sale with an MSRP of $149. Knowing parents were feeling burnt by the video game industry this new console was marketed as more of a computer-to-be with a keyboard, high score saving cartridge, laser disc player, and more promised either at launch or shortly after. As an added bonus the 7800 would play all of your existing 2600 games right out of the box. Atari had hoped that by attaching it to the booming home computer market the 7800 might fare better than it would as just another console. Possibly not the best idea as home computing was experiencing its own glut of product. While in the world of video games this hit everyone and crashed the whole market the computer market had the smaller companies begin to die off while market leaders emerged. Atari itself was coming out the loser in a “race to the bottom” price war with Commodore. After 18 months of losses and attempts to turn around their fortunes Warner Communications fearing a buyout by Rupert Murdoch decided to cut their losses. In July of 1984 Atari was split into three parts one to handle the still profitable Arcade business, one to handle the telecommunications division, and one to handle all consumer products. The latter was sold to Jack Tramiel the recently departed CEO of Commodore. The deal amounted to Warned essentially giving the company to Tramiel with $240 million in long-term promissory notes (essentially the value of all of Atari’s current unsold inventory) and stock options for both parties. All projects were immediately halted including the launch of the 7800 and all inventory was warehoused. One last remnant of the 7800-project refused to be quieted though. GCC had never been paid for its work on the 7800. Warner and Tramiel both argued they were not responsible for the debt, but it was Tramiel that finally paid it. Most company operations carried on with the 2600 quietly living on and Tramiel focused his efforts on the home computer market. He would spend the next two years fighting a losing battle against the company he started, Commodore, as well as Apple and IBM. In September of 1986 Nintendo and SEGA were picking up the pieces of the shattered video game market with their Nintendo Entertainment System and SEGA Master System. The market was nothing like the 81-82 heyday, but it was growing and proving the video game might not be dead after all. Atari pulled its inventory of 7800s from storage and began selling them at what would amount to a substantial loss per unit, but since they had been written off for two years it was profit from essentially nothing. A redesigned Atari 2600 was introduced at a $40 price point with the 7800 coming in at $80, below either competing console. Eventually Atari sold through the existing inventory of 7800s and had to produce more leading to an unusual mid-life price hike on the console bringing it more in parity with the competition. Atari also lacked internal development capabilities so new games for the system were arriving in a trickle at best. No third-party developer would touch the system in fear of running afoul Nintendo’s anti-competitive agreements and retailers were hesitant to stock the 7800 as to not find their shipments from Nintendo suddenly “much smaller” than expected.