Pod Insights SNAFU with Ed Helms From Business History: How E.T. The Extra-Terresterial Destroyed Atari About this episode I’m taking a break to share an episode of another podcast I think you’ll enjoy, Business History. Former Planet Money hosts Jacob Goldstein and Robert Smith examine the surprising stories of businesses big and small, bringing to life the greatest innovations, the boldest entrepreneurs and the craziest mavericks in the archives of commerce. They share why some company stocks soar, while other business ideas crash, and explore the ideas that shaped our economy—and the lessons behind their success and failure.
Today’s episode: how E. T. brought down Atari. Fueled by hot tubs, recreational drugs, and a love of games, Nolan Bushnell took computer games out of research labs and into bars, launching an industry. Bushnell and his engineers were pushed aside as Atari expanded and, in a desperate bid to cash in on Hollywood hype, the company concocted a wild plan for a game based on Steven Spielberg's hit, E. T. the Extra-Terrestrial. The game tanked...and brought Atari down with it.
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Transcript 0:02 Speaker 00 Hey Snapu fans, it's Ed. Today, I'm coming to you with an episode of a podcast I have been loving. It's called Business History. Hosts Jacob Goldstein and Robert Smith, former Planet Money guys, dig up the wildest, most wait, what? Stories about businesses, big and small. Like how Hitler's favorite car became the ultimate hippie vehicle. Or why Thomas Edison got mixed up in the invention of the electric chair. Every episode is a masterclass in how fascinating people built something incredible and either watched it soar or burn to the ground.
0:43 Speaker 00 Either way, it tells us something about how we run business today. Today's tale is really wacky. Fueled by hot tubs, recreational drugs, and a love of games, Nolan Bushnell took computer games out of research labs and into bars, launching an industry. His arcade game, Pong, was a monster hit, so he set up Atari to build a home games console, which became the must-have Christmas present of 1975. Atari was the name on every kid's lips, but then the investors came. And the investors brought pressure. Bushnell and his engineers were pushed aside as Atari expanded.
1:26 Speaker 00 And in a desperate bid to cash in on Hollywood hype, the company concocted a wild plan for a game based on Steven Spielberg's mega-hit, E.T. The Extraterrestrial. Developed in mere weeks, it tanked and brought Atari down with it. Which is ironic, because I remember the game E.T. on Atari when I was a little kid, and I loved it. Anyway, here's the episode. If you enjoy it, there's more tales of founders, business success, and spectacular failures on business history. Available on YouTube, Apple, Spotify, or wherever you get your podcasts.
2:21 Speaker 01 Robert Smith, here is the big question for today's show.
2:24 Speaker 02 Yes.
2:25 Speaker 01 How did Atari essentially invent the video game industry?
2:29 Speaker 02 Win the hearts of millions of young people in the 1970s?
2:32 Speaker 01 And then blow up entirely in the early 1980s, basically never to be heard from again?
2:37 Speaker 02 It's a great question.
2:39 Speaker 01 We are both of the age where we remember this personally.
2:42 Speaker 02 Yeah, I remember my dad coming home with one of the first Atari sets. It was like magic.
2:48 Speaker 01 What was it?
2:48 Speaker 02 It was Pong, which was a ping pong game, if you know, with little paddles and you'd send a little electronic ball across the screen. And it was transformative because it was the first time you could actually interact with a television set, which was sitting there in the center of your home. And to be clear, I was not an early adopter. I was not cool. Everybody had the Atari set.
3:09 Speaker 01 I'm a little younger than you, not to throw it in your face. But so for me, I don't remember Pong, but I remember the Atari 2600, it came to be called the 2600, which was like the first video game system like we know it today, where you buy it and there's different cartridges. And this was, you know, the dominant video game in the early 80s. I loved it. I had Defender, I had Journey, the game Journey, like the band. Played it for hours. And so the big question is, what happened? I'm Jacob Goldstein.
3:39 Speaker 02 And I'm Robert Smith, and this is Business History. What's it about, Jacob?
3:42 Speaker 01 History, business.
3:43 Speaker 02 Today on the show, how a company can invent something that changes the future, changes all of culture and wind up in utter failure.
3:51 Speaker 01 Like literally wind up having to bury hundreds of thousands of its own products, unsold video game cartridges in a landfill in New Mexico.
4:00 Speaker 02 I feel like today's show is like walking through my childhood. We started with Atari and our next step is?
4:07 Speaker 01 An amusement park that I initially called The Lagoon in Utah. And you pointed out?
4:12 Speaker 02 It is called Lagoon.
4:14 Speaker 01 And you know this because?
4:15 Speaker 02 Because I grew up in Utah and went there once a year and it was the best day of the year. It's an amusement park, right? You play games, there are rides, you eat a lot of fried salty foods. It was amazing.
4:27 Speaker 01 Robert, I guess you would have been going to Lagoon in the 70s. A few years earlier, it was this college kid named Nolan Bushnell who worked summers there. On the midway, like where there was games, like whatever, guess the weight of the guy and knock down the milk cans or whatever.
4:43 Speaker 02 And just in case you have an image of someone who's a carny working the, the milk jug games, this was not Nolan Bushnell.
4:50 Speaker 01 But he was a carny genius. He became king of the midway, was running, uh, running all the games when he was like 20 years old because he was really good at getting people to spend their money on the games. Like one example he gave later that is dear to my heart is this. So there, there is that game where there's these like metal milk jugs, I guess, it's like metal bottles and there's whatever, four of them or six of them, and they're stacked up.
5:18 Speaker 02 Yes.
5:18 Speaker 01 And you have a, like a softball or something and you throw it at it and try and
5:22 Speaker 02 You're trying to win a stuffed animal.
5:23 Speaker 01 Yeah, maybe a giant stuffed animal or something.
5:25 Speaker 02 Yeah.
5:25 Speaker 01 If you knock down all the milk bottles, right? And it turns out, he talked about this later, that like half of the bottles are heavy and half of the bottles are light. And so if you put the light bottles on the bottom, it's really easy to knock them down, right? If you put the heavy bottles on the bottom, it's really hard to knock them down. Physics. And so he had this move he would make when like a bunch of high school students would come, there'd be like, you know, the captain of the football team and then like the water boy kind of trailing along behind.
5:55 Speaker 02 Okay, I was more the water boy.
5:56 Speaker 01 Sure, same, obviously. He'd get the water boy to play and he'd set it up the easy way so that it's really easy to knock them down. The water boy knocks them down, gets the big prize.
6:05 Speaker 02 Everybody cheers, yeah.
6:06 Speaker 01 And then the captain of the football team's like, oh, I'm definitely gonna just kill at this. But then Nolan Bushnell would set it up the hard way so that the, you know, football player throws and they don't fall down. He's like, okay, I'll try again, I'll try again. And he'd basically take all of the football player's money because he couldn't knock them down.
6:23 Speaker 02 He realized that games are psychology.
6:25 Speaker 01 Yeah.
6:26 Speaker 02 You know? It's storytelling and psychology and this would of course come in useful.
6:30 Speaker 01 Yeah. And he had a real sense of fun, right? Like this was fun for the water boy, not fun for the football player, but like he, he loved to party, took a lot of drugs. Uh, he was studying electrical engineering in school, but it took him like seven years to graduate. Eventually he moves to Silicon Valley, not called Silicon Valley yet, but it's becoming that, right? This is right where we were at the end of last week's show. And he's going to invent the video game industry, but he doesn't know it yet.
6:55 Speaker 02 So at the time, he works for a company called Ampex, famous for those of us in the radio business as the makers of magnetic tape.
7:03 Speaker 01 Did you use Ampex tape?
7:04 Speaker 02 Of course, my closet's filled with it still, right? It is, actually. I can't get rid of them. But Ampex was notable, not just because it was an electronics company in the Bay Area, but because it had this policy that allowed their employees to basically take stuff home and tinker with it, you know, to come up with new ideas based on the equipment. And so Bushnell starts taking stuff home, thinking about games.
7:31 Speaker 01 And in particular, he's thinking about video games, or really video game, because at this point in history, there's essentially one video game, and it was created by these guys at MIT, of course, MIT, in the early 60s, to be run on, you know, a computer, which at that time was a big machine that you had at a university that cost hundreds of thousands of dollars. The game was called Spacewar exclamation mark, great name for a game. And it was fun if you understood like Newtonian gravity, right? You're like, have a spaceship and there's a star and it's like, you know, I guess-
8:04 Speaker 02 You have to go around the sun to get velocity.
8:06 Speaker 01 The gravity goes the square of the distance, whatever. So he's thinking about Spacewar exclamation mark. And, you know, when he first played it in college, he played it at the university on this extremely expensive computer where it obviously wouldn't work anywhere else. It wouldn't work as a business because the computer was too expensive and you just did it at night for fun. But by the time he's in Silicon Valley in the early 70s, you know, Moore's Law, like we talked about last time, is cranking along, computers are getting cheaper and cheaper and cheaper and faster and faster and faster. And he's like, oh, maybe now the technology has got to a place where I could make Spacewar on a machine that I could build cheaply enough to put it in a bar next to a pinball machine and get people to put quarters in it.
8:46 Speaker 02 That's Bushnell's Law, which is basically if people have coins in a, in a place of amusement, they will spend all the coins they have on something that's new and fun.
8:56 Speaker 01 Yes. And so he starts working with this other guy from Ampex. And, you know, he- Buys a black and white TV at Goodwill. And he, he actually, interestingly, he builds essentially a computer from, from the ground up, right? Because he is optimizing for, for cheapness, right? He wants to build the cheapest functional machine he can. And he, he gets like a little coin slot like they have in, in pinball machines has like a paint thinner can for the coins to go into. And they build a functional prototype of a game that is a lot like Space War. And it looks like an arcade game, although there's not really any such thing as arcade games at this point.
9:34 Speaker 02 But it's a box in the corner.
9:35 Speaker 01 Yeah.
9:36 Speaker 02 Next to the jukebox. It stands up and has.
9:38 Speaker 01 Box.
9:39 Speaker 02 Yeah. And it has computer space on it. And you're like, oh, computers, space.
9:43 Speaker 01 There's a screen and there's controls.
9:45 Speaker 02 Yeah.
9:45 Speaker 01 And there's a place to put coins in.
9:47 Speaker 02 Yeah.
9:47 Speaker 01 Right? The three things you need. They get this company to make 1,500 of the machines, right? It's going to be a thing in the world now. It gets out into the world and, and nobody really wants to play it. Basically because it's not that fun, it seems. It's, it's violating one of the tenets you laid out in your made up Bushnell's law, right?
10:05 Speaker 02 You had to have a lot of instructions to play it is the way I understand it.
10:08 Speaker 01 Yeah, or at least like.
10:09 Speaker 02 It helps if you understood physics. You don't want to think about physics when you're playing a video game in a bar.
10:13 Speaker 01 Not in a bar, no.
10:13 Speaker 02 Yeah.
10:14 Speaker 01 And so, you know, what do you do in Silicon Valley? If you make something and it's a failure? You start your own company.
10:22 Speaker 02 Exactly right.
10:23 Speaker 01 And they call it, of course. Syzygy. S Y Z Y G Y.
10:31 Speaker 02 Really going in on the astronomical theme, which, you know, Syzygy is when like the planets line up, something like.
10:37 Speaker 01 Yeah, so I think so.
10:38 Speaker 02 Clearly a bad name, hard to say, hard to spell.
10:40 Speaker 01 And kind of a lucky break for Nolan Bushnell. It's already taken by a candle maker up in Mendocino. So they go with another name. Atari.
10:50 Speaker 02 And for those of you who have played the game Go, it's like check in chess. You say Atari when you have almost surrounded someone's stone.
10:58 Speaker 01 You're saying this like you play Go. Have you played?
11:00 Speaker 02 I have played Go.
11:01 Speaker 01 Never talked about this.
11:02 Speaker 02 Ah, yeah, yeah, Atari. And I mean, so much so that it also has.
11:05 Speaker 01 How is your Go game?
11:06 Speaker 02 It's okay.
11:06 Speaker 01 Really?
11:07 Speaker 02 Yeah.
11:07 Speaker 01 It's okay. So now they have a company and a name. One key thing they're missing. A game that people want to play. Yeah, minor thing. It's 1972, and one day Bushnell hears about a thing happening at a hotel in, I think, Sunnyvale, somewhere in Silicon Valley. Magnavox, the TV company, they're working on their own video game. This is actually going to be one not to put in a bar, but to play at home, right? Their idea is they're going to have this machine that'll help them sell more televisions. Yeah. And so they have a prototype of this machine, and you know, there's like a special preview for insiders. And so Bushnell's like, I gotta see this thing. And so he drives over there, and he does not say- I'm a competitor. No, he doesn't.
11:50 Speaker 01 He says, oh yeah, I work at the Magnavox store, whatever, over down El Camino, or whatever it is. Corporate intrigue. Corporate intrigue. Easier to get away with a lie, I guess, in 1972, right? They're not going to look him up on the internet. And he gets to go in and see what this product is. And it kind of sucks, so he's relieved, right? To him, it's clearly made by somebody who doesn't understand games. And one thing about Bushnell is he really understands games, because they're just not that fun to play. But there is one game that has some spark of promise to him. And it's essentially like a simple tennis or ping pong game, where there's like two rectangular sort of paddles or rackets, and then like a square ball, and it goes back and forth, and there's two players.
12:32 Speaker 01 But there's no score in the game, there's no music, like, it's just a weak version, but that shows some promise to him. And for those of you who have played Pong, what he is about to develop, it does have this amazing sound. Doink, doink. Which is just so, like, I can hear it in my brain right now, right?
12:58 Speaker 01 So Bushnell goes back to the office, and there's this engineer who's just started that day, and he's like, you know, make this, make this kind of ping pong game, but make it fun, make it do all these fun things. And the engineer does a great job, and, you know, a few weeks later, they have this prototype of an arcade-style game that they call Pong. They just want to see how it does, right? It's a prototype. So there's this bar nearby, it's called Andy Cap's Tavern. Named after a cartoon character from the newspapers of the 1970s. Too hard to explain. Who is basically what we would call today an alcoholic. He had a problem, yes. And they say, can we just put this machine in the corner here at Andy Cap's Tavern? Like, you know, like a pinball machine.
13:43 Speaker 01 And the guy at the bar says, sure. And so they put the machine there and it's, you know, it's really simple. It's called Pong. It has two knobs, one for each player. And unlike computer space, it has beautifully simple instructions. Avoid missing ball for high score. That's it.
14:03 Speaker 02 Love it. Just a few words.
14:04 Speaker 01 Yeah.
14:04 Speaker 02 Yeah.
14:05 Speaker 01 Three plays for one quarter. They plug it in and they go back to the office. And a few days later, like three days later, they get a call from the bar. And the guy at the bar who's calling him says, yeah, the machine's broken. I don't know what's going on. It's not working. And like, whatever. It's a prototype, you know, it's a new kind of computer. Of course it's going to break. Somebody from Atari goes down there to check it out. And it turns out it is broken because the coin box is full. It's broken because people have put too much money into the machine.
14:36 Speaker 02 It's too good.
14:37 Speaker 01 It's too good.
14:38 Speaker 02 Yes.
14:38 Speaker 01 You know, Nolan Bush, now that his colleagues have built a machine that people just cannot help themselves put money into.
14:45 Speaker 02 We're gonna need a bigger coin box.
14:47 Speaker 01 We're gonna need a bigger box. People love to put quarters into a new thing.
14:50 Speaker 02 Well, to see the new technology and to tell everyone about it, right? That is the, that's one of the first insights of the technology. And then it's got to be worth playing a second time, which is what he also had. He had the two pieces.
15:01 Speaker 01 It's super fun. It's a new thing and it's super fun. Now he's got a scale. Very classic startup problem. You have a thing, people want it. But remember, he essentially stole the idea from Magnavox.
15:14 Speaker 02 Yeah.
15:15 Speaker 01 By the way, lawsuit, they settle out of court, whatever. Lots of people now, you know, it's Silicon Valley. People are coming by Andy Cap's Tavern who are engineers who are like, we can do this. And so he's got to get video games out into the world fast.
15:28 Speaker 02 Gonna need money.
15:30 Speaker 01 He's gonna need money. Nobody's gonna give him money yet, right? He's just some stoner with one video game in a bar.
15:36 Speaker 02 Yes.
15:36 Speaker 01 So he makes a move that has already come up a few times on our Young Show. Your favorite? Negative cash conversion cycle. The negative cash conversion cycle. He's able to sell games before he has to pay for the parts. So the parts to make a game cost Atari like $300. But crucially, they don't have to pay for those parts on delivery, right? They have like a month. So the parts come in, Atari doesn't have to pay anything. They put them together and sell the machine for $900. And then a few months later, they have to pay 300. But meanwhile, they got the money from that machine. They're growing, they're off and running. Now, other problem, classic scale problem, hiring. And then one day, this like 19 year old hippie kid walks in and he says he won't leave until
16:21 Speaker 01 they give him a job. And the receptionist calls the head engineer and she goes, yeah, we got a hippie kid in the lobby, says he won't leave until we hire him. Should we call the cops or let him in? And the engineer says, bring him on in. It's 1970s, Silicon Valley, and this guy wanders in and he is... Whenever you tell a story like this, you know who it is. It's Steve Jobs. It's Steve Jobs. So fun, it's so delightful. And perfectly, Steve Jobs is very good at his job. Yes. And very unpleasant to work with. Classic. Completely unsurprising. He tells Bushnell that like everybody's soldering wrong, right? They're actually putting together the hardware, soldering the hardware. He's probably right. And Bushnell's like, yeah, he was right. Yeah. He keeps calling his manager a dumb shit. Probably was. Not kind.
17:06 Speaker 01 Yeah. Not necessary. Bushnell winds up putting Jobs on the night shift, partly so he won't bother so many people and partly because he knew that Jobs liked to hang out at night with his buddy, Steve Wozniak, who was a great engineer. It would be great to have hanging around Atari. And in fact, Jobs and Wozniak helped to make Breakout, a great Atari game. Remember Breakout? Yes, of course. You're trying to knock down the bricks in a wall. There are still games like that, where you got a little paddle at the bottom and And there's a moment when it goes through the wall and then goes... Oh, ah, so satisfying. It's so good. So Jobs worked at Atari for a little while and then decided he wanted to go off to India to find his guru. Perfect. And it asked Atari to pay for the trip.
17:50 Speaker 01 Nobody ever said he lacked moxie. And, and wound up making a deal with Atari where they, they'd pay him to go part of the way there. There was, they had exported some games to Germany and there was some kind of problem with the games in Germany. And they're like, we'll send you to Germany to fix the games and then you can get the rest of the way to India from there. And that's what happened. And, you know, the Germans said Jobs was terrible to work with, but he fixed the games.
18:14 Speaker 02 You know, there's an alternative history where we're carrying around Atari devices in our pocket.
18:19 Speaker 01 It's true. And, you know, there is something, right? I was thinking about like the link between Atari and Jobs and what did he learn there? And it felt like maybe a little over determined, but I do think, you know, clearly he had this profound sense of aesthetics and of delight. Right? Like, think of the Macintosh, right? This breakthrough Apple machine in the eighties, it was round and instead of squares, it was rounded. And it cost them more money, but it was beautiful and it was fun and you were engaged with it like a game.
18:47 Speaker 02 It almost looked a little bit like an arcade game with the curves.
18:50 Speaker 01 Yeah.
18:50 Speaker 02 But more than that, I think that especially at Silicon Valley at the time, when they were dealing in actual silicon, right? If you're making chips for somebody, you're thinking about the future and the computers. You're not thinking about the psychology of the customer because the customer was another electronics company, right? And so Atari and the strength of it was really the first time where they're just like, how will a regular human being who has no training whatsoever interact with technology?
19:15 Speaker 01 Yeah, yeah, with a computer, right? Like what they are making is gonna become essentially the first widely adopted home computer. The first computer that ordinary people, literally children, can just plug in and turn on and interact with.
19:28 Speaker 02 But the insight Bushnell had is that it wasn't labeled a computer.
19:32 Speaker 01 Yeah.
19:32 Speaker 02 It was a fun game.
19:33 Speaker 01 Yeah.
19:34 Speaker 02 Yeah.
19:34 Speaker 01 So Atari now, mid seventies, they're selling all the machines they can make. They're growing. They need more space. And so they rent an abandoned roller rink. They stencil Atari on the window and they turn it into this office slash video game factory.
19:53 Speaker 02 I'd been 10 years older. I would have loved to have worked in a roller rink video game factory. Yes.
19:57 Speaker 01 Everybody smoked weed.
19:59 Speaker 02 Yeah.
20:00 Speaker 01 There was a hot tub. There was a pool party where everybody ended up naked in the pool. And Bushnell himself looked back on it later and said, if that isn't a horror show for any HR person today, I don't know what is. But it was the 70s. It was a weirdo startup. I'm guessing they didn't have an HR department. I don't know. This is a company that's making games, right? And so you need engineering brains, but you also need a sense of play, of fun, of freedom, right? And clearly, Bushnell was deliberately trying to create that. You know, he, he had this culture that was free and creative. His office door was always open.
20:43 Speaker 01 And right next to that open door was a keg of beer. So Atari is doing well. You know, Pong is a huge hit. But Bushnell knows the big opportunity, the hockey stick, will be if they can make a home video game, you know, like Magnavox was trying to do, but that nobody has cracked yet. All they have to do is get rich people into a roller rink with a hot tub and some beer, and it's all going to work out.
21:08 Speaker 02 Yeah, they need money.
21:09 Speaker 01 And in order to get money, he's going to have to convince people that this is going to be a global phenomenon. After the break.
21:42 Speaker 01 Okay, that's the end of the ads. We're going back to the show.
21:45 Speaker 02 1974.
21:47 Speaker 01 Atari, Nolan Bushnell, has dreams of selling a version of Pong that people can play at home. We know it's going to work because you played it.
21:54 Speaker 02 Young Robert Smith's waiting.
21:56 Speaker 01 How are they going to get the money to do it?
21:59 Speaker 02 Well, at this point, as we learned in the last show, like venture capital is just starting to be a thing. Rich people on the East Coast are starting to realize that there's a bunch of geniuses who can make money on the West Coast and are starting to at least shop around that money. But there's not a whole system for it.
22:14 Speaker 01 There's not a whole system for it. The culture hasn't caught up that much. You talked about the culture shift last time. And so, you know, a few VCs do go by Atari, and they see that it's a roller rink. Full of weed smokers and like, this is not the business we're in. But one day, a venture capitalist named Don Valentine walked in. Valentine had worked at Fairchild Semiconductor, that company that was at the heart of the birth of Silicon Valley that we talked about last time. Valentine was the sales manager there. And Fairchild was like this fountain of startups. They called them the fair children. Somebody from there started AMD, still one of the biggest chipmakers in the world. And Valentine, because he had worked with these guys, knew them, had invested out of
22:59 Speaker 01 his own pocket in some of the companies, understood what was happening in technology. And he started in the early 70s, a venture capital firm called Sequoia.
23:10 Speaker 02 Little bit famous, right? They invested in Apple, Google, Nvidia, Instagram, WhatsApp.
23:15 Speaker 01 Yeah, like one of the, you know, maybe two or three biggest, most important VC firms. But at this time, it was Valentine and he went to visit Atari. He smelled the weed smoke. He said it was enough to knock you to your knees. At some point, he took a meeting in the hot tub. And so he was like, yes, this is obviously super sketchy. But also, he was like, oh, these guys are on to something. This could be a way to get the computer into the house, this giant transformative thing. And so he offers Bushnell this interesting deal. He says, I'm not going to give you money to start with, but I will help you. I will help you, you know, find a partner essentially, so that you can get to the next level.
23:59 Speaker 01 And if you don't screw it up, then I'll give you money.
24:02 Speaker 02 Yes.
24:03 Speaker 01 And, you know, the key thing Valentine wants to help Atari with at this point is, how do you get this little stoner video game company connected with a big national retailer to distribute their first consumer product across the country? So they're working on this together and Toys R Us turns them down. Radio Shack turns them down. Ah, they're waiting for the big Tandy computer they were gonna sell years later. Shout out the TRS-80. They go to the New York Toy Fair, nobody's interested. And this is partly because the Magnavox Odyssey, it was called, the game that Bushnell saw under development from Magnavox, had come out. There was a, you know, somebody tried a home video game and it had done badly. But it turns out that's because it was a bad game and Magnavox just thought of it as a way to sell TVs.
24:49 Speaker 01 Classic incumbent mistake, right? They're just thinking about their old product. Eventually, Valentine does get Atari a key break. He sets up a meeting with Sears, which of course was the biggest retailer in the country at this point, as we talked about a few weeks ago. Gets in this meeting to pitch Home Pong, right? Pong for the home. Valentine sent Bushnell to Sears headquarters in Chicago for a meeting, told him to wear a suit, or at least that's Valentine's version of the story. Interestingly, Bushnell has a different version. According to Bushnell, Atari cold called Sears, got put through to a buyer who was immediately interested and came out to California right away. And I actually love these two different stories. I think there's like a little in...
25:34 Speaker 01 Stop looking at your computer. I'm sorry, I'm playing Pong. You're going, yes. It's addictive. Yes, go on. And I actually think there's, there's something interesting in the fact that these two guys remember this so differently because it speaks to this divide between venture capitalists and founders that persist today, right? And the question is, what is venture capital really doing? A lot of founders will say, oh, they're just putting up the money. And most of the venture capitalists will be like, no, no, these are guys who don't know what they're doing. We're putting up the money. We make introductions, right? We help guide your decisions. Yeah, yeah. And so, I don't know what happened in this case, but whatever was the case, a buyer from Sears did come out to Atari one day in April of 1975, showed up at 8:00 AM.
26:19 Speaker 01 And of course, nobody from Atari is in the office yet. But eventually, Bushnell and the others show up. They let the Sears buyer play with their Pong prototype. It's fun, you know? Bushnell gives him a sales pitch. Bushnell's a great salesman. And the Sears guy wants in. And he asks Atari, how many of these, you know, home video game devices can you make for this year's Christmas shopping season?
26:45 Speaker 01 It's April, right?
26:46 Speaker 02 Yes.
26:47 Speaker 01 At this point, Atari has made zero of these home machines.
26:50 Speaker 02 Yes.
26:51 Speaker 01 Not even really this prototype because it's a fake prototype. It's this wood box painted to look like it's plastic and like glued to whatever, a coffee table. And it's got a hole underneath it and there's wires running down to like a much bigger essentially computer they've jerry-rigged in like an apple crate hidden under the table.
27:09 Speaker 02 And then an eight-year-old moving the pixels around.
27:11 Speaker 01 Yeah.
27:12 Speaker 02 Right.
27:12 Speaker 01 It's the mechanical Turk hom pong. So the Sears guy asks, you know, how many can you make for Sears, the biggest retailer in the world, I believe, still at this point? And Bushnell's like, um, give me a minute to talk with the team. And he goes out and he talks to his head of manufacturing. And, you know, they've been making at this point, big arcade games where a big run is 5,000 machines. The head of manufacturing is like, how many can we make, you know, in a few months to get them in time? We can make 25,000, 25,000. So Bushnell goes back in with the Sears guy and he says, for this year, we can make you 75,000.
27:48 Speaker 02 Just multiply it by three. That's a good, that's a good CEO move.
27:51 Speaker 01 They asked him how he did it. He didn't even say multiply by three. He's talking about it later in an interview. He said, quote, "I was just pulling it out of my butt." Also a good CEO move.
28:00 Speaker 02 Sears guy here, 75,000 and thinks, we're Sears. Come on.
28:07 Speaker 01 Come on, what, 75,000? What do you, you think you're talking to JCPenney here? Montgomery Ward?
28:12 Speaker 02 Come on, Radio Shack? 150,000 is what they order.
28:16 Speaker 01 And Bushnell says, okay, I have a few months to do it. Now Bushnell really does need that capital, but he also has a huge order from the biggest retailer in the world, much easier to get funding. And Valentine Sequoia comes through with the money. Atari becomes Sequoia's first ever investment.
28:37 Speaker 01 And Sears now does the Sears thing that we talked about on the Sears show, right? They help this little company figure out how to scale really quickly, right? They get Bushnell set up with the Sears Bank, which is cool and like nerdy finance way. They create this bonded warehouse so that now when Atari makes this, you know, one Home Pong game, they don't have to wait to get money for it. They can get 80% of the value of it right as soon as it goes into the warehouse. Clearly, a roller rink's not going to work to make 150,000 home video game consoles. So they get a, you know, a kind of real factory with a conveyor belt where Bushnell loves to ride around in a box on the conveyor belt. The guy loved to play, right? He loved, he loved to play, which is essential. Actually,
29:20 Speaker 01 one day, some Sears execs in suits show up and Bushnell is in fact riding on the conveyor belt in a box. They're like, okay, whatever, just keep making the games. And they do. Atari that year shipped over 150,000 units. They exceeded that 150,000 number for the 1975 Christmas season. And Sears sold all of them. Pong was the hit game of the year. Merry Christmas, Tiny Robert Smith. Happy ending. There are no happy endings in technology. Nope. There are only happy middles, right? You do not get to make Home Pong and then coast on it forever. It is not Barbie. It is not Monopoly, right? Because of Moore's Law, essentially, every year, people are going to make better video games, right?
30:05 Speaker 01 This is clear to anybody in Silicon Valley. It's clear to Bushnell. And in fact, the year after Atari wins Christmas in 1976, our old friend Fairchild, Fairchild Semiconductor. Yes. They start selling a home video game console that is not just one game like Pong, but it allows you to buy different cartridges and swap in different games. It's called Channel F, like Fairchild, but also Channel Fun. As I was reading that, I was also like, remember channels? I don't think my kids know what a channel is, I guess. I mean, then there were six of them. They were free and they sucked. So now Atari needs to make its own cartridge-based game.
30:44 Speaker 01 And they need much, much more money than they needed for HomePong, right? Like Sears Bank funding them isn't going to do it. The capital costs are just too high. Venture capital isn't big enough at this point to fund that. They consider going public, but it doesn't work out. So in 1976, Bushnell and Valentine decide that they need to sell. They need to sell Atari to get the capital to take the next step. And they look around at, you know, big incumbents who might buy them. And one possibility is Warner Communications. Based in New York, it owns- Movie studios, record labels, getting into cable TV at this time? Yeah, it's a media company, essentially.
31:26 Speaker 01 Big media company, run by a guy named Steve Ross, who coincidentally had recently taken his kids to Disneyland, where they spent a long time putting quarters into an Atari video game called Indy 800, a driving game. So he- Had a steering wheel? Had a steering wheel, I'm sure, yeah. So good. Remember the one where you could sit in it and it would go around you? Yeah. It was rad. So Ross sends the Warner jet out to California to pick up Bushnell and Valentine to discuss a possible acquisition. On the way to New York, the jet stops in Sun Valley, Idaho, to pick up Clint Eastwood, who was starring in a Warner Brothers movie at the time. And they get to New York and Ross puts him up in this beautiful suite at the Waldorf Astoria, invites him over to his, you know,
32:11 Speaker 01 penthouse on Fifth Avenue for a screening of the Clint Eastwood movie that's not out yet. This is a whole different league and a whole different business coming into video games. Yes, and Bushnell loves it. Here's what he said later, looking back on this experience. Were we impressed? Yeah. Were we smitten? Yeah. Did he warm us up and, you know, ready for the kill? Yeah, yeah. I mean, when I think about it, you just have to really hand it to somebody that's a bigger con artist than you are.
32:46 Speaker 01 I love this guy Bushnell. He's so good. Yeah, he knows. He knows what's happening. At least he knows in retrospect and he respects it. It's like the midway, right? It's like Steve Ross is like the carny and and Bushnell is Is the rube. Is the rube. He's getting played at a much higher level. Respect. Respect and he respects it. So the next morning, the morning after the screening, Bushnell agreed to sell Atari to Ross, to Warner for $28 million. And Bushnell stayed on, kept running the company as he had been. And now he has the capital to work on this console that, you know, we will eventually know as the Atari 2600. It had the stick of joy.
33:28 Speaker 01 Had the literal stick of joy. One joystick, the orange button, one button that you usually would fire or jump were the things it would do. A million times. Yeah, so fast. Not just a knob. Now there's a button. Comes out in 1977 and it does, it does like, okay, does pretty well, but it does not do amazingly well. It is not the success that we know it will come to be. And the executives in New York at Warner decide the hippies out in California need a grown up to help them become a real grown up company. Classic moment.
34:07 Speaker 01 Very. And Warner brings in this guy named Ray Kazar to work with Atari. Not a tech guy. I'd been an executive at a big textile firm, started his own shirt company. Oh, shirts. Kids love shirts. And, you know, initially, Kazar is kind of consulting, whatever. But after a few months, the executives at Warner tell Bushnell that he can stay on as chairman, but Kazar is going to be the CEO of Atari. And Bushnell says, no, no, this shirt guy is not going to be the CEO of Atari. And Warner says, yeah, we own the company. He is going to be the CEO. And if you don't like it, you're fired. And Bushnell says,
34:52 Speaker 01 No, I'm not. You can't fire me. I quit.
34:55 Speaker 02 Ah. Expect something a little more creative from Bushnell, but maybe he made it. Maybe he was the first guy to say this.
35:01 Speaker 01 It is definitely on Bushnell's kind of cowboy brand, right? He doesn't need the money, made a bunch of money selling Atari. And interestingly, he has this little side hustle at this point. A place he started in order to collect all the quarters that people were putting into the Atari arcade games. A place called Chuck E. Cheese's Pizza Time Theater.
35:22 Speaker 02 Oh.
35:22 Speaker 01 Yeah, he had started as part of Atari. And then when Warner bought Atari, they were like, we don't want to own a pizza place. So he bought it from them for $500,000. So Bushnell is, you know, riding off into the sunset on an animatronic.
35:37 Speaker 02 Singing rat.
35:38 Speaker 01 Rat.
35:38 Speaker 02 Yeah.
35:38 Speaker 01 Yeah. He's done at Atari.
35:41 Speaker 02 But luckily, the geniuses at a giant media company know how to run a video game company, right?
35:46 Speaker 01 That's after the break.
36:12 Speaker 01 We're back from the ad break.
36:15 Speaker 01 Bushnell is out and Kazar, the shirt guy, is in at Atari. And the next thing that happens is really surprising.
36:25 Speaker 01 This East Coast businessman who doesn't know anything about video games or engineering turns the Atari 2600 into a smash hit. Turns out, he's a really good marketer, has a sense of what's going on, and he has the good sense to license a hit arcade game that was not made by Atari. A game called Space Invaders. I'm sure you remember well.
36:46 Speaker 02 Of course.
36:47 Speaker 01 Beautiful game. He licenses it for Atari to develop for the 2600. And it is a huge hit.
36:54 Speaker 02 And this is a smart thing that a big media company can do, recognize basically franchises, right, that are popular at the pizza place, which is where I played it, Red Banjo Pizza in Park City, Utah, and then get that into a home game, right, make money off of the name, and that's great.
37:11 Speaker 01 Yes, and remember, they're in the console business, right? Console business is not doing great. The console business needs its killer app.
37:18 Speaker 02 Yeah.
37:18 Speaker 01 And Space Invaders becomes the killer app, and the popularity of this piece of software drives the sales of the hardware, right? Everybody goes out and buys a 2600 so they can play Space Invaders. So revenue at Atari before Kazar got there, it was less than 100 million. And after he'd been running Atari for a few years, revenues are over a billion, right? He has 10x'd it more. And now it's the early 80s, and America is going bananas for video games.
37:51 Speaker 02 Pac-Man Fever.
37:53 Speaker 01 I don't know the name of it. Pac-Man Fever. It was an actual hit song.
37:56 Speaker 02 It was an actual hit song, yeah.
37:56 Speaker 01 I've got a pocketful of quarters and I'm headed for the arcade. I don't make a lot of money, but I'm spending everything I make. I didn't look it up. I remember it, and if I'm misremembering it, you can tell me. Business history at pushkin.fm. Everybody's getting into the video games business now. Toy companies in particular are looking at this and being like, oh, this is a toy. So Mattel, Barbie, you know, they make the Intellivision. Coleco, which around this time is making Cabbage Patch Kids, another 80s shout out. Coleco makes Coleco Vision, but Atari is, is winning. They are dominant. They have something like 80% market share. Incredible. And this is the peak.
38:36 Speaker 02 This is the moment.
38:37 Speaker 01 We have finished the rise, and now we begin the fall. The fall starts with Pac-Man, interestingly, this huge hit game, this huge hit arcade game. Atari doesn't make it, so they license it, figure like, worked for Space Invaders, it'll work for Pac-Man.
38:55 Speaker 02 Yep.
38:55 Speaker 01 They make 12 million cartridges of Pac-Man, despite the fact that only 10 million people own Atari 2600. They think this game is going to be so popular that everyone with an Atari will buy it, and 2 million more people will buy Atari consoles to play it.
39:15 Speaker 02 Doesn't happen.
39:17 Speaker 01 The game kinda sucks, just technically doesn't play as well.
39:20 Speaker 02 Because part of the Pac-Man appeal was that it was a very fast-moving game. Like, you had to turn on a dime, you had to like, like, you had these whole systems you had when you played in the arcades, and you wanted to use those systems at home. And if there's a little bit of a lag, it doesn't really quite work as well.
39:35 Speaker 01 Yeah, it's not fun enough, right? There is this thing where a video game has to be really fun to be a big hit. And Pac-Man for the 2600 is not fun enough. So it's starting to get bad, and it's gonna get worse. And the reason it gets worse, which I love, is E.T., the Extraterrestrial.
39:54 Speaker 02 Wait, E.T. never made anything worse. It was so adorable.
39:59 Speaker 01 It's not his fault.
40:00 Speaker 02 Ouch.
40:01 Speaker 01 So E.T. comes out in the summer of 82. It's a giant hit. Holds up, by the way, at least it held up. I watched it, I don't know, eight years ago with my children.
40:09 Speaker 02 Made Reese's Pieces a big hit, too.
40:11 Speaker 01 Beautiful movie.
40:12 Speaker 02 Yeah.
40:12 Speaker 01 Was not distributed by Warner Brothers. It's not distributed by Warner, the company that owns Atari, right? And Ross, the guy running Warner Brothers, really wants to work with Spielberg. Of course you want to work with Spielberg. You're running a movie studio, you want to work with Spielberg. And so he thinks that turning E.T. into a hit game would help entice Spielberg to come work at Warner Brothers. So he makes this deal with Spielberg in the summer of 82. First of all, he pays a ton of money to license the game. And he tells Spielberg, "We will have a great version of E.T. for the Atari 2600, out in time for the Christmas season."
40:54 Speaker 01 The problem with this is, it takes like, five or six months to make a new video game. But to have the game in stores in time to sell it for the Christmas season, this is the summer already.
41:06 Speaker 02 Yeah, yeah.
41:06 Speaker 01 And they have to, you know, produce the games. They're gonna have to write this game in like, five or six weeks, instead of five or six months. And people at Atari are like, "No, we can't do it. You can't make a good game that fast. It's just not the way it works." Kazar, who's running Atari, is like, "No, whatever, it's Spielberg. What, are you gonna say no to Spielberg? You say no to the CEO? No."
41:25 Speaker 02 We can make a shirt. We can make a shirt in like, three hours.
41:27 Speaker 01 You know how many shirts we could make by Christmas? You're just gonna make one game. So they eventually find an engineer to make the game. A good engineer, a guy who made Yar's Revenge, I don't know if you remember that one. It was a hit game at Atari. He gets it done in a matter of weeks. Atari makes 5 million copies.
41:45 Speaker 01 Gets them on the shelves in time for the Christmas season. And the game is bad. The game is not fun.
41:53 Speaker 02 You just like, you move them along and he like falls into holes.
41:56 Speaker 01 The falling into holes is a big thing.
41:57 Speaker 02 And he makes it like, ah, it's like, yeah.
41:59 Speaker 01 I'm gonna, I'm gonna read you a couple of reviews from the time. One from a publication called Joystick, no C. ET has nothing to phone home about.
42:09 Speaker 02 What?
42:10 Speaker 01 Another review from Electronic Games. If ET does call home, please don't tell them about this.
42:17 Speaker 02 Oh, I see a theme.
42:19 Speaker 01 So, A, there are millions of unsold copies. The engineer who made the game ends up leaving Atari, leaving the business. Eventually becomes a therapist, I think it was a lot for him to deal with. And Atari sucks now, right? Now the thing is like, oh, I went, I paid a lot of money for this game and it sucks.
42:40 Speaker 02 It's interesting, right? Like, the thrill of a new invention only lasts so long. Right? You know, the very first movie of, of, you know, people moving around a garden. Everybody's like, oh, my God, it's amazing. You know, three weeks later, they're like, eh, the plot kinda sucks. Maybe an explosion or something, right? You know, probably the same with Gutenberg, right? Yeah, that's amazing.
43:02 Speaker 01 Yeah, I read the Bible. You got another book for me?
43:05 Speaker 02 What's the second book?
43:06 Speaker 01 Was it Johannes? I think it's Johannes, but don't know. Business history at pushkin.fm. End of the 82, actually Warner announces earnings, right? They're a public company. They're way worse than expected. The stock crashes. And as we go into 83 now, it's not just Atari. The whole video game industry collapses. There is this incredible glut of consoles. All these different companies are selling consoles of games. There's a lot of really bad games. There's like third party companies are selling games. Apparently Chuck Wagon Dog Food. There's like a Chuck Wagon Dog Food video game. And on top of all that now.
43:48 Speaker 01 You have home computers, real computers like we would think of as computers with keyboards. You know, there's the Commodore 64 is coming out at this time. At my house, we had the lesser known Texas Instruments TI 994A, which I remember for its cassette deck instead of a disk drive. So Atari is now losing hundreds of millions of dollars. Kazakh, the CEO, he gets accused by the SEC of insider trading, of selling shares just before that bad earnings announcement at the end of 82. He leaves the company in the summer, says he didn't do anything wrong, but he's out. Warner replaces him with a marketing guy from Philip Morris, who helped come up with the Marlboro Man.
44:30 Speaker 01 And a few months later, in the second half of 83, Atari actually has so much unsold merchandise, so many video games that nobody wants to buy, that they actually go and supposedly dump hundreds of thousands of unsold cartridges in a landfill, in a pit in Alamo Gordo, New Mexico, and cover it up.
44:55 Speaker 02 It's heartbreaking.
44:56 Speaker 01 It's heartbreaking. And isn't even true. Delightfully, I don't know, 10 years ago or so, they made a documentary where they actually went and dug up the landfill in Alamo Gordo. And in fact, they found ET cartridges there and other video games. This is really the end for Atari. And it's a perfect, obviously metaphorically, right? Like, it's a burial. They are burying video games. And, you know, Atari is going to have this sort of shambolic afterlife as brands do, as companies do. They get acquired and acquired and whatever. So let's go back to the question we asked at the beginning and try and answer it, right? Like Atari, practically speaking, invented video games. They changed culture, they changed business, they brought the computer to the home.
45:39 Speaker 01 Video games continued to be this giant thing. Atari disappeared. Why? Like, why did that happen? And I think there are a few answers that it's worth going through, right? One, one is just timing. One is just kind of bad luck, right? Like, the crash of 83, the video game crash of 83 was...
46:00 Speaker 01 Brutal, and it took out everybody, right? It took out Atari, but it also took out Coleco, which was making ColecoVision. It also took out, you know, Mattel gave up on Intellivision.
46:09 Speaker 02 And so as the incumbent, Atari had more money invested. They had, they were further out over their skis when the crash came.
46:17 Speaker 01 Yes, yes.
46:18 Speaker 02 And Huge warehouses, employees, engineers, the whole thing.
46:22 Speaker 01 Hundreds of thousands of cartridges.
46:23 Speaker 02 Yeah, and they have to keep, you know, putting out these things to support their legacy systems, right? It's a classic, classic incumbent problem.
46:30 Speaker 01 Yeah, and, and the glut goes on for a few years through the mid 80s. And, and, you know, retailers themselves don't want to stock video games anymore. They were left with them. And in fact, when the next video game revival comes, it's driven notably by a game that doesn't call itself a video game, calls itself an entertainment system, the Nintendo Entertainment System, classic. So, you know, maybe anybody would have got wiped out. Maybe there was nothing Atari could have done. But I do wonder, you have to wonder, right? What would have happened if Bushnell had managed to hold on to the company? If he'd managed to say, go public to not have to sell to Warner?
47:10 Speaker 01 Because clearly Bushnell was the perfect guy to run a video game company, right? He was the amusement park carny genius who knew what fun was, who knew what games were, who was also an engineer, who also created this culture where engineers could come and play and be creative. And when he sold, he sold to an entertainment company. It's not about the engineering for them, which is why they sent a shirt guy to run Atari, right?
47:40 Speaker 02 He knew logistics, he knew selling, he knew how to get things into stores, sure.
47:44 Speaker 01 But it does seem like he thought the engineers were just employees on an assembly line. And that was a key mistake. And, and there's one story that I want to end with that I think really reveals this fact, what a mistake that was, and that's this. Not long after Kazar took over, a few of the engineers, the game designers, the guys actually creating these games, realized that they had created games that were making the company millions of dollars and they were, you know, staff employees making like $20,000 a year or something. And so they went to Kazar to ask for a better deal. They were like, look, we're making these games. They're making all this money. Give us a better deal. And Kazar said, no. He's like, anybody can do that. You know, you
48:28 Speaker 01 guys are just cranking out these things. And so these game designers left and they started their own video game company, not to make hardware, just to make games, which was not a thing yet, right? They are inventing the standalone video game company and they create a company called Activision. And Activision survives the crash of 83 and goes on to become one of the biggest video game companies in the world. They create Call of Duty, this gigantic franchise. They eventually merged with another company called Blizzard. And in 2022, Activision Blizzard gets bought by Microsoft for $69 billion. Nice.
49:12 Speaker 01 So, you know, when you look at the video game industry over the long arc, what you see is the companies that wind up dominating it are not media companies, right? Basically, Nintendo, Sony, Microsoft, these are all companies with very deep roots in electronics. They are all at some level, technology companies. And once Bushnell left Atari, I think at a deep level, it wasn't fundamentally run like a technology company anymore. And that is why Atari failed.
49:46 Speaker 02 I disagree. I think Bushnell had his moment. He changed the world. But as we often see with technology companies, the person who founded the company might not be the person to take it all the way. You know, he was using it as a game company and it would eventually become a multimedia, you know, essentially movies in a box, a huge technological innovation. And I'm not sure he could have done. And we see this across other industries, right? The first mover advantage is usually not an advantage, right? Because you have to spend all this money solving problems that other people can come and just take from you. But also, you have a certain arrogance, right? You are the successful leader. Everyone wants an Atari.
50:31 Speaker 02 Everyone has an Atari system. So you don't really have to innovate to make a better Atari system. You just have to get them to just keep buying cartridges. And yes, Atari did try and come up with a new system and it was okay, right? It just didn't work that well because I think they were like, the world will always have Atari. Atari will always be number one. You can't conceive of a world without Atari. And then it happened.
50:57 Speaker 01 We live in a world without Atari. If you're into video games, there's a good chance you have thoughts about things we got wrong on today's show.
51:05 Speaker 02 And I don't take it to Reddit. Take it to the email systems.
51:09 Speaker 01 Write to us at [email protected] or leave us a comment. I will read all the emails in the comments because frankly, we don't get that many yet. And I want to get more and I want to make the show better. Tell us if you listen to the show, if you watch the show, what do you want to hear? What do you want to see? We want to make shows that you like. We're very grateful that you're listening and tell a friend if you like it. Today's show was produced by Gabriel Hunter Chang. It was engineered by Sarah Brugger and it was edited by our showrunner, Ryan Dilly, who told me that if you had told him in 1982 that he could play E.T. at home and have a Coca-Cola, he would have thought it was the greatest thing in the world.
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