Atari SA (ATA), Time Warner Inc (TWX): The Dawn of Video Games and the Last Hope for a Debt-Free America

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On this day in economic and business history…

Millions of children in two successive generations — the Boomers and Generation X — first experienced “computing” technology through video games. Credit for that cultural legacy is owed largely to Atari SA (EPA:ATA), which did more to popularize the first video games in arcades and on consoles than any other company. It all began on June 28, 1972 , when Nolan Bushnell and Ted Dabney founded the company in California.

Atari SA (EPA:ATA)’s first hire, 24-year-old Al Alcorn , was assigned to work on an arcade knockoff of the Magnavox Odyssey’s tennis game, which Bushnell had seen in demonstration a month earlier. The Odyssey, despite becoming the first home game console in history when launched that August, was not a great commercial success. Atari SA (EPA:ATA)’s knockoff, however, became legendary. You might have heard of it; it’s called Pong (click the link to read more about Pong and Atari SA (EPA:ATA)).

Time Warner Inc (NYSE:TWX)

Pong established Atari as the preeminent video-gaming company in an industry it more or less created out of nothing. This early success forced Atari SA (EPA:ATA) to expand rapidly. By mid-1974, it was up to 39 employees, but employee number 40 is the one that went on to the greatest success. Al Alcorn met the kid in Atari’s lobby, and he later recounted the incident to video game historian Steven Kent :

He was this real scuzzy kid. I think I said, “We should either call the cops or we should talk to him.” So I talked to him. I figured, this guy’s gotta be cheap, man. He really doesn’t have much skills at all. So I figured I’d hire him.

And that’s how Apple Inc. (NASDAQ:AAPL) founder Steve Jobs got his start in the tech industry. Jobs would later sneak old pal Steve Wozniak in to Atari’s offices to work on the design for the Breakout arcade system. Alcorn later mused that “Jobs never did a lick of engineering in his life. He had me snowed.” Two years after Jobs started working at Atari, he partnered with Woz and Atari employee Ronald Wayne to found Apple. The rest, of course, is history.

Five years after Pong, with several arcade smash hits under its belt, Atari launched the 2600, which succeeded where Magnavox failed. Development of the Atari SA (EPA:ATA) 2600 was incredibly lengthy and expensive by the standards of the day, having begun in 1973 after the purchase of an engineering start-up and eventually costing Atari $100 million  to complete. The high development cost, paired with Atari’s worsening operating conditions in an industry already saturated with knockoffs, pushed Bushnell to sell the company to Warner Communications (now Time Warner Inc (NYSE:TWX) ) a year before the 2600 launched. Atari’s arcade division would remain part of Warner until 1985, although it divested the console division a year earlier.

The Atari 2600 launched at a cost of $199 (equal to about $750 today) in the fall of 1977. The console’s first two years on the market almost sent it the way of the Osyssey, since Atari managed to sell less than one million units by the end of 1978 . However, Fairchild Semiconductor Intl Inc (NYSE:FCS)‘s decision to abandon console gaming in 1979 (it had actually beaten Atari to market with the Channel F in  1976, but sold fewer units than the 2600), coupled with the launch of a Space Invaders cartridge for the 2600 in 1980, gave Atari a clear path to huge sales. Two years later, the 2600 had reached ten million households, and console gaming had a foothold. Atari was briefly the crown jewel in Time Warner Inc (NYSE:TWX)’s entertainment empire, but this success wouldn’t last.

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