The Ultimate History of Video Games: From Pong to Pokémon and Beyond—The Story Behind the Craze That Touched Our Lives and Changed the World (18 page)

Instead of asking Valentine for more capital, Bushnell held a board meeting in which he discussed other options—going public or selling the company. Their first choice was to make a public offering of Atari stock, but after taking several steps toward the offering, the board decided that the slumping stock market would not support their move.

In the end, the board decided to put Atari up for sale. Over the next few weeks, Bushnell approached MCA, parent company of Universal Studios, and Disney. Neither company was interested.

One company that was interested in Atari was Warner Communications, a conglomerate with a strong presence in film, recording, and magazine publishing. Warner was owned by Steve Ross, a hardened entrepreneur who had risen from the streets of Brooklyn. By most accounts, Ross was a brusque man who expected results and had little patience for ineptitude.

Having worked his way out of poverty, Ross had grand intentions. He expected Warner to corner every facet of the entertainment industry. Toward that goal, he hired Manny Gerard, considered the best entertainment industry analyst on Wall Street, to acquire new companies for the Warner Communications fold. The first company Gerard selected was Atari.

The process began when Gerard received a telephone call from Gordon Crawford, an analyst at Capital Management. Crawford described Atari without saying its name and asked if Warner might be interested in acquiring the company. Gerard said yes.

The next step was for Gerard to fly to California and evaluate the operation. He met with Bushnell and Joe Keenan, observed the company’s manufacturing facilities, and discussed Bushnell’s future plans. By all appearances, Atari had a strong future.

When Gerard returned to New York, he recommended the purchase to Steve Ross. Interestingly, he found Ross to be quite receptive.

At Gerard’s suggestion, Steve Ross decided to buy the company. Ross’s lawyers contacted Bushnell’s lawyers, and representatives for both sides began outlining the details of the transaction. The negotiating process took four months.

Gerard wanted to keep Atari’s management intact. He recognized Bushnell as one of the driving forces behind Atari’s success. He also respected the company’s team of engineers, whom he described as “loyal to Bushnell and very productive.” According to Gerard, the entire industry was new to Warner; without Bushnell and his team, there was no reason to attempt entering the business. He did, however, express some concerns.

In the end, Warner Communications paid $28 million for Atari. It retained Bushnell as chairman and Joe Keenan as president. The sales, marketing, engineering, and research and development departments also remained unaffected. In theory, except for a seemingly endless supply of funding—Warner invested $100 million in Atari—life at Atari would remain unchanged.

The entire deal almost fell apart, however, when Bushnell’s ex-wife, Paula, challenged it.

Warner responded by going directly to Paula Bushnell’s lawyer and disclosing the entire deal so that she could no longer claim the transaction had occurred without her knowledge. Nolan Bushnell then arranged a settlement, in which she was paid to step out of the picture.

Once Paula Bushnell was satisfied, the deal could finally be closed. The signing took place at a lawyer’s office in San Francisco in October 1976. That night, executives from Atari and Warner celebrated the event with dinner at a French restaurant.

Years after selling Atari, Bushnell confessed that selling the company might have been a mistake. The roller-coaster ride of meeting each month’s payroll had left him exhausted, and the idea of raising the capital needed to produce the
Video Computer System
overwhelmed him at the time. “I’ve often thought that if I had taken a two-week vacation and really rested and got away from the whole thing, I never would have sold the company.”

According to Gerard, Bushnell seemed elated at the signing. “The day we signed the papers to close the deal, Nolan’s comment was, ‘I’ve been telling people I’m a millionaire for years, and at last I am.’”

As was the case with Sears, the cultural clash between Atari and Warner became apparent even before the deal was signed. Gerard and Ross were very tough East Coast businessmen, unaccustomed to Bushnell’s Californian style. Gerard once took his wife to Grass Valley. When she saw that many of the engineers had long beards, she commented that they looked like “the Smith Brothers [on the cough drops box].”

Once, to try to break the ice, Bushnell took several executives from Atari and Warner for a night cruise across the San Francisco Bay on his 42-foot sailboat,
Pong.
They left from Alameda and sailed to Tiburon. An accident on the way back to port left the Warner people less than impressed.

In January 1977, RCA released the Studio II: a game system with interchangeable cartridges. Though its only competition was the Channel F, the Studio II had a major design flaw that slowed its sales—its games were all black and white. Magnavox announced it would release a programmable game system called Odyssey 2 in September. Allied Leisure and Bally also announced new systems. It appeared as if the market might be too crowded by the time Atari released the VCS.

In October 1977, Atari released the Video Computer System, along with nine game cartridges. Atari engineers had worked hard to distinguish the VCS as the best system on the market. Like the Studio II and the Channel F, the VCS had controllers with dials for playing paddle games, but it also had a new device called a joystick, a pivoting lever in a pedestal, for controlling the tank and flying games on the
Combat
cartridge.
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The VCS also had switches for selecting games, displaying games in color or black and white, and setting difficulty levels. None of these enhancements had ever been offered.

The profit margin on the VCS was low, but Atari executives planned to recoup their losses on software. It cost less than $10 to manufacture the game cartridges, which sold for $30. They set a precedent that would remain an axiom in the video-game industry: “Give away the razors so that you can sell the blades.”

Unfortunately, very few consumers bought razors or blades that year.

One of the problems was shipping. According to Bushnell, Atari was unable to get the majority of its 400,000 game consoles on store shelves in time for the holiday rush. Other problems included lack of consumer interest in home video games, confusion over the glut of new products, and the success of a new line of handheld electronic sports games from Mattel and Coleco.

After Christmas 1977, the video-game market crashed. Manufacturers like Magnavox and Atari sold inventory at reduced rates. RCA pulled out entirely.
As it looked like the video-game market was dead, tensions increased between Bushnell and the new owners of Atari.

Adding to the tension was Bushnell’s lack of enthusiasm about the business. Now that he no longer owned Atari, Bushnell seemed less interested in its day-to-day operation. He got involved in real estate, purchasing an enormous mansion in Woodside, California, from coffee-heir Peter Folger. Bushnell remarried. In a ceremony held in a courtyard on the grounds of his newly purchased mansion, Bushnell married Nancy Nino. Nearly 700 people were in attendance, including Steve Ross and Manny Gerard.

VCS sales continued at a steady-but-disappointing pace through 1978. Always wary of “the jackals” and convinced that the only way to stay ahead of the competition was to introduce new products, Bushnell wanted to discontinue the VCS and move on to the next-generation game console. Bushnell preferred moving to new technologies rather than spending time refining old ideas and letting his competitors catch up to him. He called his philosophy “eating your own babies” and said that if Atari didn’t (eat its own babies), somebody else would.

In February 1978, Warner hired a consultant to help turn the company around. Ray Kassar had extensive experience as a former vice president of Burlington Industries, the largest textile manufacturer in the United States.

A Harvard graduate, Kassar claimed to know nothing about video games. He had been with Burlington Industries for twenty-five years and distinguished himself by becoming the youngest vice president in the company’s history. This experience, he felt, could be transferred to nearly any manufacturing situation.

Most people who knew Kassar described him as autocratic but fashionable. He wore tailored suits to work, insisted on being driven in a chauffeured limousine, and demanded very lavish treatment. He ate at only the finest restaurants.