by Steven Kent
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.
Everybody was losing interest in the digital watch and the pocket calculator, and most of the people we went to wondered why video games would be any different.5
—Nolan Bushnell
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.
I was the guy who took the trip and looked at the company and got the lay of the land. I’m the lunatic who thought it was a good idea that we acquire it. I wrote an internal memo about it, in which I said I think we ought to acquire this company.
—Manny Gerard
When Gerard returned to New York, he recommended the purchase to Steve Ross. Interestingly, he found Ross to be quite receptive.
Steve Ross had just gone to Disneyland with his kids. They went into an arcade and all they played was Indy 800, and they were really fascinated with the game. One of the reasons this transaction occurred was because Ross understood the power of this game. He’d seen it at Disneyland.
Actually, he really wanted an Indy 800 game for his apartment, but it ended up that we couldn’t get it in. It was too heavy.
—Manny Gerard
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.
I think we kind of understood Nolan, to some extent. Let me tell you what I felt about the whole management [team].
The biggest problem with the company was that you had a bunch of babies—not literally, not as a character flaw. These were young guys. If they made too much money, I didn’t know how we could motivate them. We couldn’t give them too much money because they’d go live under a tree somewhere.
Basically, they got a teeny bit of cash and the debentures of the subsidiary, which were not secured by the parent. We took the outside investors out for cash, but the insiders had to take these debentures.
—Manny Gerard
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.
If you want to know what appears to have triggered this, in the middle of all our negotiations, Nolan gets his picture in one of the San Francisco newspapers in a hot tub with his new girlfriend.
This is not a great idea to start with. More than anything, I think his ex-wife was really unhappy about the pictures.
Somehow it came up that she sued for recision of their divorce settlement. If she got recision, the deal would have been off. What the law says is, “If you buy 100 percent of the company and she gets recision, you’ve paid 100 percent of the price, you now get 75 percent of the company.” In effect, she’d still own her half of his half of the company—that’s 25 percent.
We told Nolan, “We don’t think this is a grand idea. This is not our first choice.”
—Manny Gerard
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.’”
Uneasy Partners
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.
There was this buoy, and we were up in the crest of the waves when the buoy was down and vice versa, and we never saw it. We were sailing along and suddenly we heard a loud KATHWANG as we hit the buoy—not side-swiped, but actually hit it with the point of the boat. It made a large sound, at which point the New York crowd looked a bit aghast.
Someone went front to see if there was a crack on the outside. One of us went flying down below to see if there was any water coming in.
—Steve Bristow
Oh, was that a night! We sailed from Oakland across the bay to Tiburon. They managed to … oh, was that funny! They managed to bang the boat into a buoy. By the time we got back, it was like 11:00. We were freezing and wet and cold.
That was hardly a win over. Yes, we took the boat. If that was perceived as a way to win us over, I can tell you … it wasn’t too successful. I’m laughing because I remember that night. It was wonderful. It was a comic opera.
—Manny Gerard
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. I
t 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.* 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.
[One thing] I think what I wasn’t prepared for is that after we bought [Atari], basically Nolan and Joe [Keenan], having some money, went off and did their real-estate investments. They stopped paying attention to the business. That, I will tell you, I did not anticipate. They just refocused on something else.
—Manny Gerard
After I sold the company, I did take a couple of vacations and I think that was something that bothered Manny a little bit. It was just one of those things where I needed a certain amount of time.
As it became clear that some of the things that were going on were things that I really disagreed with, it was harder and harder for me to really climb in and be as enthusiastic as before.
—Nolan Bushnell
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.
There was endless pushing and shoving. I’d go to meetings and Nolan, who kind of disappeared, would turn up and say, “This is what we’re going to do.” His own people were getting crazy with him.
I used a phrase over and over with Nolan. “Nolan, you can’t rule the company by the divine right of king. You’ve got to be here, you have to pay attention. You can’t just come in…. ”
—Manny Gerard
The Czar
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.
I came in as a consultant for Warner, but my title in the company at the time was general manager of the consumer division, which was, at that point, doing terribly.
I mean, there was no infrastructure. They had no financial person. They had no marketing. They really had nothing. It was a disaster.
—Ray Kassar
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.
According to Kassar, his first assignment was to determine whether Warner should liquidate Atari. After testing the VCS, Kassar was impressed and decided not to abandon it. He reported to Steve Ross that with some changes, Atari could be a profitable company.
My plan was to stay in California for as little time as possible. Warner really thought I was going to go out there and liquidate the company. That’s what they wanted me to do. They were looking for me to give them a recommendation.
Believe me, there’s only one person who knows the full story and that is me. Even Manny Gerard doesn’t know the full story ’cause he was sitting in New York. I was there. I was running the company.
—Ray Kassar
Predictably, Nolan Bushnell and Ray Kassar found very little common ground. Kassar, who routinely arrived at work at 7:30 A.M., did not approve of Bushnell’s “work smart, not hard” attitude. He was bothered by the stories of drug abuse among Atari’s employees and felt that Bushnell’s laid-back style did little to discourage it. He disagreed with Bushnell about the future of the VCS and wanted to use it as the lead product in Atari’s Christmas lineup.
The first or second week I was there, Nolan invited me to a management committee meeting. I arrived at his office at 3:00. Everybody was sitting around in jeans and T-shirts. In fact, when I first arrived at Atari, Nolan was walking around the company in a T-shirt that said, “I love to screw.”
Anyway, I arrived at this so-called management committee meeting and there were about six or seven of them drinking beer and smoking marijuana.
They offered me a joint.
I said, “No, I don’t do drugs.”
And Nolan said, “Well, why don’t you just relax? We’re just kind of … ”
I said, “Look, are you having a meeting? If you’re having a meeting, I’ll stay. If you’re not, I’m leaving.”
He said, “No, we’re just going to drink some beer and wine.” So I left.
—Ray Kassar
The final battle came at a Warner Communications budget meeting held in New York City in November 1978. Atari had been mildly profitable, but Steve Ross was not satisfied. Bushnell’s solution was to close down the pinball division and abandon the VCS.
In Bushnell’s mind, the only way Atari pinball could succeed was to make specialty tables. Standard pinball playfields were 22 inches wide; Atari’s first three tables were 29 inches wide. If Gerard insisted on making standard tables, Bushnell wanted to close down the division all together.
Gerard said that Bushnell also proposed discontinuing the VCS, but Bushnell said he only wanted to cut its price. Either way, his suggestions were in direct opposition to those of Gerard and Kassar. The battle lines were drawn.
The ultimate parting with Nolan came at the budget meeting of Warner in 1978. Nolan came to the meeting, got up at the meeting, and everybody sat there in stunned amazement as Nolan said, “Sell off your remaining inventory of 2600s. [2600 was another name for VCS.] You’ve saturated the market. The market is saturated at the top. It’s over.”
Remember, there were a lot of Warner people who didn’t know nothing about nothing. And nobody in the room could figure what the hell
Nolan was talking about.
—Manny Gerard
I said, “If, in fact, you guys are bound and determined to do regular pinball machines, I think we should close the division down because you aren’t going to make any money.”
The battle was really over pricing the VCS. I felt that the strongest position would be to price the hardware lower and the software higher.
—Nolan Bushnell
By this time, it was too late to make changes in the Christmas lineup. If Bushnell was right, Warner faced another holiday bloodbath.
The meeting erupted into a shouting match. Bushnell felt that Gerard and the entire Warner team had no feel for the electronics industry. Gerard claimed that Bushnell was no longer taking the business seriously. He said that Bushnell’s decisions were erratic. Not only had Bushnell’s recommendations caught the Warner people off guard, they even surprised Atari’s executive team.
The day after the showdown, Gerard had a private meeting with Steve Ross, in which they discussed Atari’s future. Ross wanted to know what Gerard thought would happen over the holidays. Gerard said that Atari had not saturated the market with the VCS and that he expected the system to sell well.
The next day I got called into Ross’s office, and he basically goes nuts, and I mean nuts. He says to me, “Oh my God, what do we do?”
I said, “Look Steve, there are only two possible outcomes.” It’s now December 10th or thereabouts, and I said, “Steve, in my opinion, on December 26th there’s going to be a game in every home in America, in which case we’ve got one of the biggest businesses you ever saw. If I’m wrong, we’ve got us a big problem. But what the hell, all we have to do is do nothing for two weeks, and we’re going to know. Okay.”