by Steven Kent
The Transpac is a race between California and Hawaii that takes place in July. With an excellent crew and a well-designed boat, Bushnell won the nine-day race his first time out.
According to a popular electronics industry legend, Bushnell received a telegram upon docking. The message began, “BAD NEWS IN THE SECOND QUARTER, STOP.”
According to the story, Bushnell didn’t even wait to receive his trophy. Upon reading the message, he went straight to the airport and flew home on the next available flight.
The stories are absolutely true. I found out about the problems right after the race. I didn’t know about it until I called from Hawaii.
We had hired a guy to run the restaurants named George Hellick, who really screwed things up. He changed many of my operating ratios, and when I got back from the Transpac was when I had the fights with the board to go back to the same ratios that had generated the profits.
—Nolan Bushnell
In March 1984, Pizza Time Theaters filed for Chapter 11 bankruptcy protection. Bushnell retired from the company later that year.
In a strange twist, ShowBiz Pizza absorbed Pizza Time Theaters and maintained both chains for several years. In 1990, Show Biz adopted Chuck E. Cheese over Billy Bob Bear as its mascot.
Ironically, the keel broke loose from Nolan’s yacht as his crew sailed it back to California. Without its keel, Charlie drifted listlessly and had to be rescued. The same thing was about to happen to Nolan Bushnell’s career.
Big Changes at Atari
We wound up selling games to Atari. I think Ray’s [Kassar] final act at Atari was buying our games.
I went to his office and we struck a deal. We had created three VCS game cartridges and I brought them to him. I said, “Here, check it out. They’re done. We’re making them available to you.”
He said, “I’ll buy them,” and the deal was done. He said, “Come in next week. We’ll have a check for you.”
I came in next week and they had a check, but he was gone.
—Roger Hector, Videa Inc.
Ray Kassar resigned as CEO of Atari in July 1983. His last months with the company were tainted by the revelations that he had sold 5,000 shares of Warner Communications stock right before making the announcement that Atari’s profits were lower than expected. Steven Ross, the chairman of Warner Communications, never stopped blaming Kassar for Atari’s problems.
Ross’s problems did not stop at Atari’s doorstep. The financial roller coaster Atari put Warner through shook many investors’ confidence in Ross, and Rupert Murdoch, the Australian publisher baron, was poised to attempt a hostile takeover of Warner Communications.
Ross turned to Herbert Siegel, chairman of Chris-Craft Industries, for help in fighting off Murdoch’s takeover; but that placed 29 percent of Warner voting stock in Siegel’s hands. Ross needed to make Atari profitable or cut his losses. Against this backdrop, Ross hired James Morgan to replace Kassar.
Morgan was only forty-two years old, but he had already developed a big name in business circles. Before going to Atari, he worked in the tobacco-marketing division of cigarette giant Philip Morris, where he managed such brands as Virginia Slims and Merit. Morgan was a chain-smoker who openly criticized Atari’s past management team.
According to Time magazine, Morgan was promised $8.5 million over a seven-year period to move to Atari, along with performance bonuses that could raise his pay to over $25 million.5
Like Kassar, Morgan had no background in technology and knew nothing about computers. He had no idea why the average American would want a home computer and was appalled to discover that few people at Atari had any answers either. One of Morgan’s heroes was Lee Iacocca, the maverick businessman who had turned Chrysler Corporation around and made it profitable a few years earlier. Perhaps one reason Morgan accepted the job at Atari was to see if he could follow Iacocca’s example.
If Atari’s offer seemed baffling, Morgan’s acceptance was even more unexpected. By all accounts, he was on a very short list for the presidency of Philip Morris. Yet Morgan, who had previously never even listened to outside offers, resigned 48 hours after having lunch with Warner chairman Steven Ross.6
Morgan’s first order of business was to cut back Atari’s excess expenses. In his opening months as CEO of Atari, he cut Atari’s domestic workforce from 9,800 employees to 3,500 and made preparations to move manufacturing from California to Hong Kong and Taiwan.
It would take more than austerity to save Atari.
Commodore and the Tramiels
One major force changing the market was a new line of inexpensive home computers. Cheap and only marginally more powerful than the game consoles of the time, these stripped-down processors did word processing, played games, and cost twice as much money as an Atari 5200 or a ColecoVision.
Atari had been selling inexpensive computers for years, and IBM introduced the $699 PCjr in 1983, but it was another company—Commodore International—that broke the market wide open.
Jack Tramiel
Commodore International was founded by Jack Tramiel—possibly the most complex person ever to enter the computer industry. He was a Polish Jew, a survivor of the Nazi concentration camps who came to America and worked his way from poverty to fortune.
As a teenager, Tramiel was sent to Auschwitz, a particularly savage Nazi concentration camp. While the people around him died, Tramiel discovered a way to survive. The Germans were building the Autobahn and asked for volunteers to help with the roadwork. It was unpleasant work, overseen by guards who sometimes took pleasure in beating their workers. Even as a teenager, however, Tramiel understood that the Germans had to feed their volunteers to keep them working, so he volunteered and survived six years in Auschwitz.
After being liberated at the end of World War II, Tramiel moved to the United States and became a Horatio Alger story. He joined the U.S. Army and was sent to Fort Dix, in New Jersey, where he learned how to repair typewriters. He saved his money and in 1954 started a typewriter repair store in the Bronx.
In 1955, Tramiel moved to Toronto, where he founded Commodore International and won a contract to assemble typewriters for a foreign firm. In a few years, Commodore began manufacturing its own adding machines. Commodore ran into trouble several years later and Tramiel had to close his manufacturing plant. Rather than go out of business, he worked with Ricoh to get his products made.
As his business grew, Tramiel developed an eye for catching trends. Realizing that calculators would replace electromechanical adding machines, he set up a partnership with Casio in the 1960s. By 1969, Commodore owned its own calculator manufacturing plant.
In 1976, Tramiel purchased a small chip manufacturer named MOS Technologies for $800,000. This was Tramiel’s biggest break. MOS made the 6502 microprocessor, the chip that would become the heart of the Apple II and Atari 400 and 800 computers.7
Jack Tramiel, and later his sons, entered Silicon Valley with cutthroat East Coast business techniques that earned them enemies throughout the computer industry. Tramiel was well known for hardball business practices and notorious for purposely paying company debts late. Around Commodore, he referred to his business philosophy as “the religion.” Executives who were unprepared to practice Tramiel’s religion quickly found themselves unemployed.
This arrangement may seem a little like loan-sharking, but Commodore always knew how to make good use of other people’s money. The company’s accountants routinely crunched cash, cut costs to the bone, stretched out payables to vendors, and made dealers pay up fast.
A good example came in 1981 when the prime rate topped 18 percent. To take advantage of the high interest, Commodore practically stopped paying bills so it could deposit as much money as possible in interest-bearing accounts. That year, Commodore earned substantial interest income.8
Commodore struggled to stay solvent but lost $4 million on $56 million in sales in 1976. Jack refused to pay vendors. Why should he? He was losing his shirt. Lawsuits flew in all directi
ons.9
Commodore did its usual Jack Tramiel stunt—not paying the bill.
If your guys are dumb enough to keep shipping him product, he lets them keep shipping. Pretty soon Commodore owes them so much money that they run out of cash flow and they find themselves out of business. At that point, Commodore comes in and buys the company for a song, then forgives its own debt.
—Al Alcorn, former vice president, Atari
Tramiel had an explosive temper. He was known for pounding desks as he spoke, yelling at employees, and doing mass firings. California magazine once listed Tramiel third on its list of “Bosses from Hell.”
The darkest accusation about Jack Tramiel, however, dates back to his early days in Canada. During that time, Commodore became associated with the Atlantic Acceptance Corporation and one of the biggest financial scandals in Canadian history.
In 1965, a financial firm named Atlantic Acceptance collapsed, leaving behind millions of dollars in unpaid loans. A four-year investigation into the collapse revealed fraud on the part of C. Powell Morgan, the president and controlling stockholder of Atlantic Acceptance, who was also the chairman of Commodore.10 The investigation also showed that Atlantic Acceptance had made large loans to Commodore.
What was wrong with that? The Canadian report said there had been heavy insider trading of Commodore stock for the apparent purpose of bolstering share prices. It also stated that Commodore issued misleading financial statements and letters to shareholders. The report said Tramiel and his partner had created two companies “with nominal capital and no assets,” borrowed from Atlantic and re-lent to Commodore at a higher interest rate, pocketing the difference. The report went on to say that Powell Morgan had paid a “notoriously fraudulent stock promoter with established links in the world of organized crime” to tout Commodore stock in Europe through a financial newsletter, with Tramiel’s knowledge and consent.11
Tramiel was never indicted, and C. Powell Morgan died before the commission investigating the Atlantic Acceptance collapse concluded its work. He later moved his headquarters back to the United States.
Tramiel made up sayings that were bandied about his company. One of his sayings was, “We need to build computers for the masses, not the classes.”* Making computers for the masses meant finding a way to sell a low-cost, fully functional computer. To do this, Tramiel bullied his engineers to find cheaper ways to manufacture components and stripped costly luxuries from products.
He also saved money through vertical marketing. Owning MOS Technologies provided him with an inexpensive source for computer chips. Years later, when he wanted to sell dot matrix printers with his computers, Tramiel purchased a printer manufacturer and was able to market printers at stripped-down prices. When Commodore unveiled the Pet Computer in 1977, it was the first home computer to retail for under $1,000.
In 1980, Jack Tramiel survived a mid-flight airplane fire while entertaining two important software developers on his corporate jet, which was jokingly referred to as the Commodore “Petjet.” During the flight, the wiring on a coffeemaker caught on fire while the jet was headed from Chicago to Commodore’s California headquarters.
They didn’t smell the smoke until it was too late. They grabbed the fire extinguishers, but they didn’t work. Within minutes, the entire right side of the jet was engulfed in flames. The jet shot through the sky like a Roman candle. Only the thin air and altitude kept the whole thing from exploding in mid-air. Smoke began to fill the cabin.
Most horrifying of all, no airports in the area could handle their landing.12
By skill or by luck, the two men flying the jet managed to keep it together until they reached an airport in Des Moines, Iowa. With the electrical system destroyed, the pilot had to stop manually. The jet skidded past the end of the runway, but all of the passengers were able to walk away from the scene.
Tramiel later told an employee that the near-fatal incident was God telling him “not to fly so high.”13
In 1981, Commodore released a home computer called the VIC-20 that sold for under $300. The VIC-20, which came with 5K of RAM and 16-color graphics, was a pricing coup for its time. Backed by commercials with William Shatner* as its spokesperson and sold through regular retail outlets instead of computer stores, the low-end machine was a major success. While Atari began faltering in 1982, Commodore sold over 800,000 VIC-20s worldwide.**
In August 1982, Commodore launched the Commodore 64 (C64), a personal computer that company executives claimed rivaled the $1,000 Apple II in power but sold for $600. By the following January, Commodore was shipping 25,000 C64 computers per month.14 The Commodore 64 went on to become a turning point in the history of home electronics, propelling Commodore into practically unheard of financial success.
People lucky enough to have purchased 100 shares of the [Commodore International] stock in 1977 for under $2 a share would hold over $70,000 worth of stock [as of 1983].15
The public’s interest in video games seemed to have been replaced by a fascination with home computers. Atari, Mattel, and Coleco now scrambled to find ways to compete.
The Demise of Coleco
Though 1982 was a banner year for Coleco, the crash of the video-game market made Coleco CEO Arnold Greenberg nervous. Going into the future, he wanted something more than ColecoVision. Greenberg’s drive took his company in two directions.
Greenberg’s pet project was the Adam Computer, and he abandoned the ColecoVision to manufacture it. Adam was a complete computing solution. It came with a master console that contained an audio cassette–like high speed data recorder and a slot for playing cartridge games, a letter-quality printer, and a 75-key keyboard, all in one box. The complete Adam setup sold for $600, but Coleco also built a partial Adam kit that could be plugged into a ColecoVision, which retailed for $400.
Coleco unveiled the Adam computer in 1982, promising to ship 500,000 units in 1983. Production took longer than expected, however, and less than 100,000 Adams reached store shelves that year.
No one had a word-processing package at that time. This was the first one that was bundled…. You had the printer, the computer, and the CPU and everything, including the software at about $600, so it was an unheard of price for that kind of equipment.
Basically, there was no one out there really competitive in terms of price, and we had done a terrific marketing job and everybody wanted one.
Arnold was convinced that Adam was going to be a billion-dollar business, so he decided to make two companies out of Coleco. He was going to make a toy company on one side and an electronics and computer company on the other side.
—Al Kahn, former executive vice president, Coleco
Coleco also ventured into the toy business.
In 1982, Greenberg heard about a small toy company near Cleveland, Georgia, called Appalachian Artworks. Xavier Roberts, the 28-year-old owner of the company, was a dropout from nearby Truett-McConnell College, where he’d studied sculpting. Before dropping out, Roberts had created a line of pudgy baby dolls that he called “Little People.”
Roberts’s Little People were so popular that he left school and set up a business selling Little People out of an old clinic that he called Babyland General Hospital. Roberts’s dolls were not manufactured at Babyland General, they were “delivered.” Employees dressed like doctors and nurses (i.e., assembly workers) brought them into viewing rooms in beds of cabbage.
Instead of selling his dolls, Roberts put them up for “adoption.” Adoption rates ranged from $125 to $2,000, depending on the doll. The more expensive adoptees came with furs or diamonds. One thing Roberts stressed was that each doll was unique and had its own name and identity. They even came with adoption papers and birth certificates. More than 250,000 people had adopted Roberts’s handmade dolls by the end of 1983.
Greenberg heard about the dolls and decided to introduce Babyland General Hospital to the world of mass production. Coleco licensed Roberts’s concept and renamed the dolls “Cabbage Patch Kids.” Unde
r the direction of Al Kahn, senior vice president of marketing, Coleco manufactured 2.5 million Cabbage Patch dolls in 1983. Kahn and Greenberg had grossly underestimated the appeal of their pudgy little dolls.
Cabbage Patch Kids sold out as quickly as Coleco could ship them. Stores ran out of stock as Christmas rolled around, and shoppers sometimes broke into near-riot frenzies as they tried to grab the dolls wherever they could find them. Even stores that jacked up the price of the dolls from $25 to $50 sold out, and many enterprising scalpers found that they could resell the dolls for over $100. According to Kahn, Coleco hoped to do $1 billion in Cabbage Patch sales in 1984.
The news was not as positive on the electronics side of Coleco’s operations. Committed to meeting his 1983 shipping date, Greenberg pushed the Adam into production before it was ready. More than half of the computers Coleco shipped in 1983 were returned as defective.
Dave Rosen [the founder of Sega] tells me that he went to see the Adam at the CES show. When Eric Bromley explained what was inside the Adam, Dave said it became clear to him that Eric didn’t have a clue what he was talking about, and he knew it was time to sell his Coleco stock because it was about to drop 20 points.
—Michael Katz, former executive, Coleco
He [Arnold] didn’t really think the toy company was going to mean much because he was really banking on Adam being the big slam dunk.
It certainly was marketed beautifully. Everybody wanted Adam, but it wasn’t ready to ship. It had glitches in the programming, etc., which certainly should have been fixed before the machine was released.