Corporate Disasters: Innovation Inertia and Shifting Markets

By Gale and Cengage

Corporate Disasters: What Went Wrong and Why profiles the biggest corporate mistakes or misdeeds throughout history -- covering the people, the times, the decisions made. This volume covers Innovation Inertia and Shifting Markets. Each essay puts the business and its operators in the context of its own time, explaining the market, social, and technology forces at play, and each explores the key make-or-break decisions that led to disaster.

• Language: English
• Publisher: Cengage Learning - Gale
• Release date: Nov 3, 2013
• ISBN: 9781535821179

Book preview

Learning

Atari Inc.: An Early Video Game Pioneer

The arcade video game market was dominated first by Atari, but changes in company management and marketing redirection contributed to Atari’s losses in the marketplace. Consumer shifts from arcade games to home video games and from desktop publishing to personal computer use at home and in the workplace also shaped the market, and in the game of catch-up, Atari seemed repeatedly back in the pack.

This case was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. Information was gathered from corporate as well as public sources.

After analyzing this case study, students should be able to do the following:

Assess the importance of rewarding internal product developers

Analyze how change in management affects company focus and timing of new products

Atari, Inc., started out as a coin-operated arcade game developer, but the California-based company is legendary as a pioneer in the home video game market.¹ It launched the first cartridge-based game console in the late 1970s and developed numerous successful games. However, the fallout in the home video game industry led to new ownership by a former computer executive who turned the company's focus to personal computers (PCs). While Atari failed to achieve significant success in the PC industry, Nintendo Co., Ltd., surpassed Atari in the U.S. home video game market. Atari was unable to regain its leadership position and eventually, in the mid-1990s, ceased to be a player in the video game market. In 1982, Atari tried the PC market, but businesses tended to choose Apple II computers.

Atari Dominates the U.S. Home Video Game Market

Atari, Inc., was founded and incorporated by Nolan Bushnell in 1972. Bushnell hired Al Alcorn as the engineer to begin developing coin-operated video games. Since Alcorn had no prior experience, Bushnell had him begin working on a simple game, likely inspired by Magnavox's Table Tennis. With just two paddles and a ball, the game was easy to play. As the ball's trajectory varied depending on where it impacted on the paddle, the game was surprisingly fun. The arcade game, named Pong, was an immediate hit following its 1982 introduction. After its debut, each Pong arcade game brought in an average of US$300 per week compared to US$50 per week for a typical pinball game. Therefore, Atari was able to sell more than 8,000 units, which far exceeded the 2,500 units sold of the most successful pinball games.

In 1975, the home version of Pong began selling in Sears stores under the Tele-Games brand. The console had two dials for controlling the right and left paddles. Atari sold 150,000 home game systems in this first year. Not surprisingly, Magnavox sued Atari for a patent infringement and won. This ruling did not slow down Atari, however, which quickly signed a multiyear licensing agreement in 1976 at the bargain price of US$100,000 per year. The company also established a consumer division.

Bushnell wanted to develop a home game console that worked with video game cartridges, but he lacked the financial resources. Consequently, he sold Atari to Warner Communications, Inc., in 1976. The Atari Video Computer System (VCS) was released at the Consumer Electronic Show (CES) the following year. It was available to consumers before the Christmas season at a retail price of US$249. Bushnell wanted to begin developing a successor game console, but Warner Communications disagreed, and Bushnell was forced out at the end of 1978.

Meanwhile, Nintendo, a Japanese toy company, had secured the rights to distribute the Magnavox Odyssey in Japan in 1975. Two years later, it released its own home video game system. The Color TV Game Mach 6 included 6 games, and the Color TV Game 15 included 15 games. That year, the company hired Shigeru Miamoto, who would be the mastermind behind the wildly successful Donkey Kong game released in 1981.

Early in 1979, Atari began licensing Space Invaders from Japan-based Taito Corporation. This arcade game had been so popular in Japan that the country's mint had to increase production of 100-yen coins to cover a shortage. The game became the most popular arcade game in the United States. Space Invaders was released as a cartridge for the VCS and became the top seller. Other popular games to follow included Defender, Missile Command, and Asteroids. By 1980, Atari had secured three-fourths of the home video game market in the United States with revenues of US$415 million.

Atari Loses the Edge

Warner did not publicly credit the developers of its bestselling games for fear that competitors would try to steal its talent. The company also failed to follow through on Bushnell's plan to begin paying developers an incentive based on game sales. An internal memo circulated after Bushnell's departure showed that four developers were contributing to more than half of the company's revenues from games. David Crane, Bob Whitehead, Alan Miller, and Larry Kaplan were the four developers known as the Gang of Four. According to an article in IGN, Crane recalled thinking at the time: So we four guys making about $30,000 a year made Atari $60 million? There's something wrong here! Consequently, they left and founded Activision.

Activision began developing VCS-compatible games that most consumers considered superior to Atari’s products. As Atari's marketing strategy was to sell the console for a low price of US$199, the company was depending on game sales to make money. Atari's several attempts at suing Activision were not successful, and the competitor continued to release popular games. With US$150 million in sales, Activision was one of the fastest growing companies in the United States by 1982.

Atari was also suffering in the console business. Mattel Inc. had released its Intellivision cartridge-based console in 1980, which had better graphics and synthesized voices. Coleco Industries was producing third-party games as well as games for its ColecoVision console. Both of these systems offered an adapter that allowed former Atari system owners to continue to play their Atari games on their new ColecoVision or Intellivision game console.

After much anticipation, the popular arcade game Pac-Man was released for the VCS in 1982, but it was a failure. With 10 million VCS units on the market, the company manufactured 12 million copies of the game, assuming everyone would buy it and many new consoles would also be sold. However, Atari only sold seven million copies, and its next release, E.T.: the Extra-Terrestrial, was also a flop. Instead of spending six months in development, E.T. was rushed out in time for Christmas. The game was poorly designed, and most copies were returned.

Atari Enters the Computer Business

As the PC market was taking off, Atari formed a computer division and developed two 8-bit PCs in 1979: the Atari 800 and Atari 400. The 800 offered a standard keyboard, and its 8 kilobytes (KB) of random access memory (RAM) was upgradeable to 48KB. The 400 had only a flat keyboard and less memory, so it retailed for US$550. Neither included a display. The computers had good graphics and sound, but they were perceived to be game computers. More business software companies were developing applications for the Apple II, which was far more popular for general and business computing. Atari dropped the price of its machines, but it was too late. Software companies did not see the payoff in converting their programs to work on Atari's machines.

In 1982, a new 8-bit PC, the Atari 1200XL, was released. With 64KB of RAM standard, it had significantly more memory than the Atari 800, but serious problems with the operating system caused sales to lag behind the Atari 800. In the same year, the computer-based Atari 5200 was released to the replace the VCS (renamed the Atari 2600).

Consumers were more focused on buying PCs than video game consoles, so Atari continued to keep in step with the latest computer technology, releasing upgraded PCs and continuing to expand its video game library for the PC. In 1983, the Atari 800XL and Atari 600XL were released. The 800XL fixed the problems with the 1200XL, while the 800XL was a less costly PC with only 16KB of RAM.

Atari Opens the Door to Nintendo

In July 1983, Nintendo released the Famicom home video game system in Japan. Priced at approximately US$100, the cartridge system sold half a million units in the first two months. However, it was determined to have a faulty chip, and this resulted in a recall costing US$500,000. Since Nintendo lacked experience with the U.S. market, it wished to distribute the Famicom through Atari. The Famicom would be marketed under the Atari brand on a worldwide basis (excluding Japan). Not only would Nintendo receive a royalty for each console sold, it would remain the exclusive developer of games for the system. However, Atari refused the deal.

Warner Communications lost US$580 million in 1983 when sales were cut in half, and Warner's stock price plummeted from US$60 to US$20 per share. This prompted Warner's CEO Steven Ross to begin looking for a buyer for Atari. In July 1984, Atari's game console and home computing divisions were sold to Tramiel Technology Limited, which had been founded by Commodore Business Machines Inc. founder and former CEO Jack Tramiel. The acquired company was renamed Atari Corporation. (Warner sold the games arcade division of Atari to Namco Limited in 1985.)

Tramiel put his three sons in charge and cut back Atari's 5,000 workers to 1,500. Costs were reduced by cancelling leases on 33 buildings, but the warehouses were full of 8-bit computers that were now obsolete. The Apple Macintosh, Commodore Amiga, and IBM PC had been introduced with 16-bit technology. With a background in PCs, Tramiel responded quickly with the release of the 16-bit Atari 520ST in 1985, which used a proprietary operating system. It was competitively priced at under US$800 with a monochrome display (or US$1,000 with a color display).

The company continued its plan to target the low-end desktop publishing market with the release of the Atari 1040ST in 1986. It offered 1MB Ram (compared to 512KB on the 520ST) and an internal floppy disk drive for the price of US$999. The inclusion of two musical instrument digital interface ports led to the 520ST carving out a niche for itself in the music industry. Although the 520ST had graphical user interface (GUI) and the option of a color display, the monochrome Macintosh continued to dominate the desktop publishing industry. The 520ST did, however, experience some success as an inexpensive desktop publishing computer, especially in Europe.

Nintendo Overtakes Atari

Atari had been poised to release its new Atari 7800 game system just before the acquisition by Tramiel Technology. The system would have offered significant advancements, such as a 256-color palette, the ability to save a player's high score, and more on-screen animation. In addition, it was compatible with Atari 2600 game cartridges. However, Tramiel wanted to renegotiate licensing agreements and halted the rollout of the 7800. While Tramiel seemed more focused on competing with Commodore, especially with the state of the video game industry in disarray, it was not until two years later that the 7800 was released. Unfortunately, the window of opportunity had closed.

Famicom was released as the Nintendo Entertainment System (NES) in four test markets in the United States in 1985. The game console and 15 games were rolled out nationally in 1986. Popular games like Metroid helped the game console outsell competing systems in the United States and Canada. The release of games like The Legend of Zelda in 1987 and Super Mario Bros. 2 in 1988 continued the success of the NES. Nintendo learned from Atari's mistake in releasing a glut of low-quality games and maintained strict control over third-party licensing. Game developers were not allowed to release more than five games per year. Popular third-party games for the NES included Final Fantasy and Contra.

The Atari 7800 had superior graphics to the NES, but the sound was using outdated technology from the Atari 2600. When the 7800 was released, only three games were available for it. Lackluster marketing and limited distribution also prevented Atari from effectively competing against the NES. Atari made another attempt with the release of the Atari XE Game System in 1987. It was essentially its 8-bit computer repackaged to look like a video game console. It was compatible with both existing Atari game cartridges and Atari PC games, but the has-been technology failed to entice gamers to purchase it. Atari's revenues peaked at US$452 million in 1987.

Atari had no more success in the handheld game console market. It released the Atari Lynx with color graphics in 1989, but a shortage on parts prevented a nationwide rollout in time for Christmas. Nintendo released the Game Boy handheld game console at the same time. Although it had grayscale graphics, it was cheaper, had a longer-lasting battery, and was widely available for Christmas shoppers.

Early in 1989, Atari filed a US$250 million lawsuit that