As Pong's popularity started to decline (coupled with the introduction of the Fairchild Channel F, the first system to have programmable "ROM" cartridges), Atari realized that the market for home videogame consoles that could only play one game was fading fast. So, in 1976, Atari frantically started working on project "Stella," a new cartridge-based home videogame system.
As the project drew nearer to completion, Atari realized that they didn't have the money to finish the project and get it into production. Nolan Bushnell (founder of Atari) needed capital, so he sold the company to Warner Communications for $28 million in October 1976. Warner wanted Atari to rule the videogame world, so they enthusiastically sunk over $100 million into their new acquisition. Warner expected Stella (now dubbed the Video Computer System, or simply VCS) to be a huge success, since they knew Atari could make lots of money selling software for the new system.
The VCS, unlike most other home videogames of the time, had a CPU and enabled users to play different games simply by sticking in another cartridge. The actual game was stored on the cartridge's ROM, not in the system itself. This meant the VCS was able to play an unlimited number of different games, unlike the limited Pong-style consoles.
VCS sales were boosted by the deal Atari had already set up with Sears & Roebuck to distribute its Home Pong units. Under this continuing arrangement, Sears sold its own version of the VCS called the Sears Video Arcade, and VCS cartridges under its "Tele-Games" label. Atari, in turn, was able to get tremendous exposure for its console since Sears had hundreds of store locations nationwide.
In October 1977, the VCS was released with a retail price of $200. Nine games were available for its launch, and despite the Sears deal, initial sales were disappointing. This was partially due to the large numbers of inexpensive handheld electronic games, such as Simon, that were flooding the market.
Bushnell began to clash with Warner management by 1978. Warner began to replace Atari's loose, unstructured (and fun) "hacker" culture by introducing dress codes and time cards. That, combined with Warner's decision to start up a computer division which Bushnell did not approve, led Atari's founder to leave the company. Bushnell signed a five-year agreement not to compete with Atari and bought his Pizza Time Theater restaurant (later to become the "Chuck E. Cheese" franchise) back from Warner.
Invaders to the Rescue!
VCS Space Invaders
Videogames started to become increasingly popular in 1979, but the VCS wasn't exactly breaking any sales records. That is until 1980, when Atari became the first company to port an arcade game to cartridge. The game? Space Invaders. Space Invaders for the VCS hit the shelves in January, 1980, and was a huge hit. Many people bought the VCS just to play Space Invaders at home, as Warner had predicted. The future of Atari looked bright.
But that same year, a group of high-profile Atari programmers, disgruntled over Atari's policy of giving little or no credit to game creators, left the company. David "Pitfall" Crane, Larry "Combat" Kaplan, Alan Miller, and Bob Whitehead (creators of many Atari sports games) left Atari to form Activision, a company which later developed some of the VCS's best games. Atari wasn't very happy about having to deal with this new competition (as Atari was the sole producer of VCS games prior to Activision's formation), and at the time they didn't realize that this was the beginning of the end of their software dominance. Other companies such as Games By Apollo, Parker Bros., Telesys, and Spectravision started to join the fray, and soon more and more VCS titles (of varying quality) appeared on the shelves.
Throughout 1981, Atari ported more arcade hits to the VCS, like Missile Command and Asteroids. Videogames continued to rise in popularity, but with the Mattel Intellivision gaining followers and the next-generation ColecoVision console looming on the horizon, Atari decided to release its own high-powered machine in 1982. The Atari 5200 Supersystem was named for its part number in the Atari catalog, CX5200. Following this trend, Atari renamed the VCS the 2600. The company continued to support both consoles, but was soon disappointed by the 5200's comparatively poor performance in the marketplace. The failure of the 5200 was partly due to its inability to play 2600 games, as well as its shoddy controllers. Also, many gamers simply preferred Coleco's console.
The 2600 got a shot in the arm in 1982 with the release of Pac-Man. Even though it wasn't a very faithful port, department stores around the world promoted the new cartridge to death, holding Pac-Man contests and the like, and kids loved it. Critics pointed out that Atari probably threw the game together quickly and didn't care about its quality, since a home version of the arcade smash would have sold well no matter what. This didn't stop people from purchasing Pac-Man in huge numbers, although some customers may have had their faith in Atari shaken after experiencing this terrible translation of the game. Atari made a bigger mistake later that year with the release of the E.T.: The Extra-Terrestrial videogame. While E.T. was one of the most popular movies ever, the game was horribly frustrating and poorly designed (the programmer, Howard Scott Warshaw, offers some explanations here). While the game sold over a million copies, over 5 million sat unsold in warehouses. Atari paid $21 million to license E.T., and needless to say, they lost a lot of money.
Competition and the Videogame "Crash"
Regardless of some of Atari's mistakes, the 2600 had become so popular and had such a large user base that competitors Coleco and Mattel both released add-on modules to allow their systems to play 2600 games. Coleco even sold a stand-alone 2600 clone called the Gemini, which included two controllers that incorporated both sticks and paddle knobs. Atari initially threatened clone producers with lawsuits, and actually sued Coleco over its 2600 module and Gemini clone. However, since the 2600 contained no patented material and was made up of all "off-the-shelf" hardware (and no copyrighted software), the company evidently realized litigation was futile. Coleco and Atari settled out of court, and many other companies quickly came out with their own 2600 clones, some of which are still made to this day.
In 1983, Atari's competition continued to heat up. With the 2600 rapidly becoming obsolete, plans were made to upgrade the system by turning it into a home computer. Atari proposed their "My First Computer" add-on; Entex proposed the "Piggyback"; Unitronics pushed "The Expander"; and Spectravideo came up with "Compumate." They all failed miserably (or weren't even released), and were crushed by competing home computers and console systems. The 2600 started to fade away rapidly and the 5200 wasn't picking up the slack.
In 1984, the videogame market collapsed under the weight of cheap, poorly designed software from companies like Data Age and Mythicon. That didn't stop Atari (because the 2600 had been steadily declining anyway), and they kept trying to push the 2600 with promotions and low prices, emphasizing the vast number of games available. Even in 1989, Atari was pushing the Atari 2600 Jr. in its "The Fun is Back... Under $50" campaign. As if anyone wanted twelve-year-old technology when the NES was ruling supreme and the Genesis was starting the 16-bit revolution. Some of the best 2600 games were programmed in this era, however, including Solaris and Midnight Magic.
The Atari 2600, despite its shortcomings, was the most popular pre-crash system, selling over 25 million units. It produced large numbers of enduring classics, increased the popularity of videogames, and helped establish the home videogame console market. Later Atari consoles like the 5200, 7800 and Jaguar never came close to achieving the glory the 2600 enjoyed.
At the peak of 2600 popularity, "Atari" was a household name making millions and millions of dollars and employing over 10,000 people. But it declined, and the company effectively died in July 1996 when it was purchased by JTS (a hard drive manufacturer) who sold off most of Atari's remaining assets. Atari was then brought back to life in February of 1998, when JTS sold Atari to Hasbro. Hasbro tried to bring back some of the Atari magic, reviving games from Atari's vast library of classics and updating them for a modern audience, producing titles like Pong: The Next Level and Breakout: The Great Escape. In December 2000, French entertainment company Infogrames acquired Atari, along with several other Hasbro properties. Only time will tell what Atari's future will bring.