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

by Steven Kent

  Rubik’s Cube went on to be an incredibly bad disaster.

  —Steven Race, former vice president, Marketing and Communications, International Division, Atari

  The first indication of trouble came in May 1982, but no one seemed to notice. Atari manufactured 12 million copies of Pac-Man, even though the company’s research showed that less than 10 million people actually owned and used its 2600s. Atari manufactured over two million extra copies on the theory that millions of people would buy the hardware just to play Pac-Man.

  In an effort to get the game manufactured quickly, Atari contracted with a programmer named Todd Frye, promising him a royalty on every Pac-Man cartridge the company manufactured. With a deal like that, Frye made money even if the game was bad. According to industry rumors, he made over $1 million.

  Whether it was bad programming or a weakness in the hardware, Frye’s version of Pac-Man had slow, jerky animation and the ghosts flickered so badly that they kept disappearing from the screen. Atari sold seven million copies of Pac-Man; many people were so disappointed with the game that they asked for a refund.

  The first real chink in the armor, though, was Atari’s edition of Pac-Man, which was a terrible job. It was amazing that they produced such a flickery, unresponsive game. And although they sold many copies, paradoxically the more copies they sold, the more people they turned off.

  —Arnie Katz

  A few retailers canceled their orders over the summer, but no one at Atari saw any cause for alarm. The big vendors, JC Penney, Sears, and Kmart, all stayed on track. Ray Kassar may have discussed these problems with Manny Gerard, the Warner executive watching over Atari, but both men remained completely confident. Atari still garnered 70 percent of Warner’s operating profits.7

  Atari’s problems continued with the production of E.T., a game based on Steven Spielberg’s blockbuster movie. Many analysts later blamed Kassar for the disaster, but it actually began with Steven Ross, the head of Warner Communications.

  Steve Ross called me. He was very anxious to have Spielberg make movies for Warner, and he said he just made a deal with Spielberg to produce E.T. as a cartridge.

  He asked me what I thought. I said, “I think it’s a very dumb idea. We’ve never really made an action game out of a movie.”

  And he said, “Well I’ve also guaranteed Spielberg a $25 million royalty regardless of what we did.”

  —Ray Kassar

  Atari was poised for another great year when Ross approached Spielberg about licensing E.T. The Pac-Man cartridge had been a disappointment, but Kassar and Gerard still claimed that Atari’s sales would be up by 50 percent for the fourth quarter. Ross might not have known the full extent of the Pac-Man debacle and had felt confident that a game based on E.T. could be a huge bestseller.

  Ross told Spielberg that the game should be out in time for Christmas. Since they made the deal in late July, that left very little time to design and manufacture it.

  I asked Steve, “When do we have to produce this?”

  He said for Christmas of 1982.

  This was in July when he called me, the end of July.

  I said, “Steve, the lead time to produce a game is at least 6 months between semiconductor deliveries and programming and all that. It’s impossible.”

  He said, “Well, you have to do it because I promised Spielberg we’d have it on retail shelves for Christmas.”

  We had literally six weeks to produce a brand new game, manufacture it, package it, and market it. It was a disaster. I mean, the programmers hated it. Nobody liked the game.

  Then he [Ross] ordered us to produce almost five million of these games. I told him, “Steve, that’s crazy. We never make five million of a product until we have some market testing.”

  He said, “Well, it’s going to be a big hit because of Spielberg and E.T.” So we made five million and practically all of them came back.

  —Ray Kassar

  None of the VCS programmers wanted anything to do with E.T. because it came with an unrealistic deadline and high expectations. In the end, Kassar turned to Howard Scott Warshaw, a young programmer whose other games, Yar’s Revenge and Raiders of the Lost Ark, were both million-sellers.* Kassar was so anxious about this project that he forgot his normally aristocratic pretensions and called Warshaw himself.

  It was late July when they first called me up to do it, after my boss, other programmers, and everybody else told them to forget it. Ray called me up personally. Because of some other interactions I had had with Ray before, I think he just had a feeling that I would do it.

  So he called me up from Monterey and said, “Howard, we need E.T.” This was like July 23, and he said “We need E.T. by September 1. Can you do it?”

  I said, “Yeah, provided we reach the right agreement.”

  —Howard Scott Warshaw, former VCS programmer, creator of Atari’s E.T.

  E.T. became infamous throughout the video-game industry for its dull play and disappointing story. The game involved leading Spielberg’s cute extraterrestrial away from various dangers as he tried to assemble an intergalactic device to phone home. The game’s graphics were primitive, even by Atari 2600 standards, and E.T. spent most of the game falling into holes.

  Riding on the heels of the Pac-Man disaster, E.T. was too much. Atari had managed to sell millions of Pac-Man cartridges, but the majority of E.T. cartridges remained in dead inventory. Atari tried to buy its way out of the hole by licensing top arcade games, often spending millions of dollars for exclusive rights.

  Basically, we’d zap them. They had last right of refusal, so we’d just come up with a bid that was wild; then, of course, Atari would be forced to beat it.

  Atari was getting it from two sides. Atari was getting it from not only the glut of the market, but also they were paying unbelievable amounts of money for these software titles. You know, the bidding on these software titles was just mind blowing.

  —Al Kahn, former executive vice president, Coleco

  Not even home versions of the latest arcade hits helped. Consumers had already begun losing interest in video arcades, and in 1983, they stopped purchasing video games. The industry that had shown such miraculous growth through most of 1982 suddenly became a black hole.

  Warner Communication’s Atari, which pioneered home video games with such classics as Space Invaders and Asteroids, has lost $356 million so far this year, dropped 3,000 employees from its payroll of 10,000 and finished moving all of its manufacturing facilities to Hong Kong and Taiwan. Plagued partly by sluggish sales of Intellivision games, the electronics division of Mattel has run a $201 million deficit in 1983, while laying off 37 percent of its 1,800-member work force. Activision estimated that it lost $3 million to $5 million in the past three months, despite scoring hits with its new Enduro and Robot Tank games. At Bally, the leading manufacturer of arcade video machines, profits are off 85 percent.8

  I think I’m responsible for some of the problem. I think Ray is responsible for a lot of the problem. Neither one of us is responsible for the fact that a market just went away in an eye blink.

  Steve Ross blamed me to some extent. He blamed Kassar. The truth of the matter is, you can’t blame me for the market imploding, but you can certainly pin some of the blame for the Atari problems on me and I in turn will tell you that you have to blame Kassar for some good chunk. He was running the show. It was on his watch and tangentially on my watch.

  —Manny Gerard, former vice president, Warner Communications

  Atari was stuck with enormous inventories of worthless game cartridges. With no hope of selling them, Atari dumped millions of cartridges in a landfill in the New Mexico desert. When reports came out that people had discovered the landfill, Atari sent steamrollers to crush the cartridges, then poured cement over the rubble.*

  By the end of 1983, Atari had racked up $536 million in losses. Warner Communications sold the company the following year.

  * Rick Tighe, a techie, suggested sticking the pinball k
nocker in the cabinet. It went off when Coily fell off the cubes, making a loud “thwack.”

  * Because Coleco owned the rights to Dragon’s Lair, RDI was unable to offer the games as one of the titles for its new system.

  * According to Neiman, one reason Vectrex remained active in European markets after disappearing in the United States was that most European homes had only one television.

  ** One of the most popular Vectrex games was an excellent translation of Star Castle.

  * Warshaw’s first game, Yar’s Revenge, was the bestselling original game Atari released for the VCS. It was about Yar of the Rassak Solar System. The joke was that Yar was Ray spelled backward and Rassak was Kassar. The game was Ray’s revenge on Activision.

  Warshaw told a friend in the marketing department that the name was a secret joke between him and Kassar and that Kassar loved it, even though Kassar had never heard about it. He asked his friend not to tell anyone, because he didn’t want anything to influence getting the name approved. The friend immediately made sure the name stuck. Warshaw’s next game was Raiders of the Lost Ark.

  * This was not the first time Atari destroyed unwanted cartridges. The practice had gone on for years. According to several sources, the concrete slab under Atari’s Borregas Street warehouse is filled with crushed cartridges.

  The Aftermath

  I went to visit Nolan at this small toy company he owned called Axlon. I walked in and asked to see him and was told, “Mr. Bushnell’s in a meeting.”

  About three minutes later a door bursts open and Nolan comes through with a big smile on his face. He says, “Manny Gerard, the man who fired me from Atari.”

  I said, “Right, Nolan. And the guy who made you a millionaire.”

  Nolan stopped in his tracks and said, “I guess you’re right.”

  —Manny Gerard, former vice president, Warner Communications

  “My name is Nolan Bushnell, but I’m not God,” he told them. “I need to build factories.”

  If not God, then Prometheus—about to be unbound. At midnight on September 30, 1983, a seven-year noncompete agreement, which Bushnell had signed when he sold his pioneering Atari Inc. video game company to Warner Communications Inc. in 1976, was due to expire, and a grand party had been organized to celebrate his release.

  —Steve Coll, “When the Magic Goes,” Inc. Magazine

  The Rich and Famous

  With the unlikely and unqualified successes of Atari and Chuck E. Cheese, Nolan Bushnell became a Silicon Valley legend and a world-renowned high roller. He purchased two personal jets, bought mansions, took up yachting, and developed a taste for the finer things in life. When he decided that Northern California needed a truly fine restaurant, he had one built—the Lion and Compass.

  Bushnell mingled with the biggest names of his time, entertaining actors and politicians and doing frequent interviews with financial publications. He even considered making a bid for a seat in the United States House of Representatives.

  I met Nolan in the late 1970s. I was a reporter at the Washington Post. My recollection is that I met Nolan at a party at Bob Woodward’s house. Bob was his next-door neighbor in Washington.

  Nolan used to own a Learjet and he loaned it to George Bush when Bush was Ronald Reagan’s vice presidential running mate, and he sort of got interested in politics that way. And he got put on some Presidential commission as a result of what he did.

  —Tom Zito, former reporter, the Washington Post

  In 1981, Bushnell founded Catalyst Technologies, an incubator firm that housed and funded several high-tech start-up companies. In exchange for building space, access to office equipment, and funding, Bushnell received a piece of each company.

  The companies he selected reflected his tastes. Through Catalyst, Bushnell became involved with companies working on high-resolution television monitors, cable television, and robotic toys. For him, the Catalyst building was a kind of dream factory that was funded by the ever-growing success of Chuck E. Cheese and Pizza Time Theaters.

  In the three years since Bushnell had started Pizza Time Theaters, the company had opened 204 restaurants, and he expected that number to grow to 277 by the end of 1983. Behind the scenes, however, Bushnell’s empire faced a previously unforeseen danger in the form of a new restaurant chain that would challenge Chuck E. Cheese. The chain, ShowBiz Pizza, was nearly identical to Chuck E. Cheese.

  Like Chuck E. Cheese, ShowBiz restaurants served pizza in a cafeteria-like theater, in which customers watched musical reviews performed by robotic animals. Chuck E. Cheese had a streetwise rat, ShowBiz had a bear named Billy Bob leading a band called the Rock-a-Fire Explosion. Both chains featured large arcades in which patrons played video games and children rode coin-operated rides while waiting for their orders.

  The similarity was no accident. ShowBiz Pizza was founded by Robert Brock of the Brock Hotel Group—the largest Holiday Inn franchise in America at the time.1 Brock first became aware of Pizza Time Theaters in 1978, shortly after Bushnell opened his second location in San Jose. He contacted Bushnell the following year and inquired about opening a chain of 200 Chuck E. Cheese restaurants in the Midwest.

  Brock decided against licensing Chuck E. Cheese, however, when he met Aaron Fletcher, an inventor manufacturing robotic characters similar to the ones in Chuck E. Cheese that looked better and cost less. Instead of buying Bushnell’s franchise, he decided to compete against it.

  Two weeks after returning to [his corporate headquarters in] Topeka, Brock no longer wanted to be a franchisee; he wanted to be a franchiser. Brock demanded that Nolan tear up the contract. Nolan refused. Brock went ahead anyway and negotiated a contract with Fletcher. Nolan sued Brock for breach of contract, and Brock countersued Nolan for misrepresentation.2

  Bushnell successfully demonstrated that Chuck E. Cheese had been a unique idea and that ShowBiz was an imitation, and the courts ruled in his favor. Although he was not successful at shutting Brock’s chain down, Bushnell received a percentage of the annual revenues from the first 160 ShowBiz restaurants.3

  ShowBiz wasn’t the only problem. More concerned about robots and video games than food, Pizza Time executives had their restaurants serving cheap pizza at premium prices. With poor quality food and the popularity of video games evaporating, people had no reason to go to Chuck E. Cheese, and the company’s revenues began falling by the end of 1982.

  Pizza Time Theaters was operating in the red by the middle of 1983. The company’s repeat business fell off,4 and one-time business was not enough to cover the costs of running the restaurants. Amazingly, Bushnell claims that he was unaware of the problems. A professional management team ran the company while he developed Catalyst industries and traveled.

  I was aware that some store sales were dropping in certain parts of the country where we had built too many operations. The professional managers were the problem, not the solution.

  The rap that really pisses me off is being characterized as an inept manager. I believe that the real story of Atari was one of real sound financial management because I don’t believe that there are 100 people, certainly not any of the people who are so critical of me. Not one of them could have built that company with no cash.

  —Nolan Bushnell

  Adrift at Sea

  Nolan bought a yacht. He built a special yacht and he entered that big race, but he wasn’t a great sailor. No matter what you say about Nolan, he is one colorful dude.

  —Manny Gerard

  As far as Nolan Bushnell was concerned, Chuck E. Cheese was doing well, his Catalyst companies were going to pay off, and the end of the noncompete agreement Warner Communications had him sign before purchasing Atari was at hand.

  Behind the scenes, Bushnell had already reentered the video game industry. In January, eight months before he could officially enter the business, he closed a deal to purchase Videa Inc. for $2.2 million. Videa was a game company founded by three of Atari’s brightest alumni—Roger Hector, Howie Delman, and Ed Rot
berg.

  Hector, who had worked with Al Alcorn on Cosmos, was a natural leader and had experience working with holographic images. Delman, a brilliant engineer, built Lunar Lander, Atari’s first vector-graphics game. (Atari’s later vector-graphics games were also built around Delman’s hardware.) Rotberg, widely considered one of Atari’s best game programmers, was the man who designed Battlezone.

  Nolan purchased Videa about 18 months after Rotberg, Dilman, and I started it, then changed the name to Sente. We had actually put together a really good group of people and were working on laser discs.

  —Roger Hector

  The name Sente held a special significance for Bushnell—like the name Atari, Sente came from a Japanese strategy game called Go. In chess terms, Atari meant “check,” Sente meant “checkmate.” In Bushnell’s mind, naming his new company Sente was a way of telling the world that he was going in direct competition with Atari.

  Bushnell purchased Sente as a subsidiary of Pizza Time Theaters. He hoped to distribute the games he made throughout the restaurants, possibly releasing them to Chuck E. Cheese restaurants first, as a way to draw new customers.

  As he waited for the moment in which he could begin working with Sente in the open, Bushnell took up yachting and entered the Transpac Yacht Race. By this time, he had amassed a fortune estimated to be over $200 million dollars; he could afford a hobby like yachting. Bushnell invested a lot of money into hiring a top crew and constructing a special yacht, which he christened Charlie.