Season 5, Episode 5 Atari (with Nolan Bushnell)

Summary Notes


In this engaging episode of Acquired, hosts Ben Gilbert and David Rosenthal are joined by Nolan Bushnell, the legendary founder of Atari and the father of the video game industry. They delve into the origins of Atari, the company that pioneered home video gaming, and its cultural impact, including the creation of iconic games like Pong and the Atari 2600. Bushnell shares anecdotes from his entrepreneurial journey, from his early ventures selling strawberries and repairing TVs to his strategic moves in the amusement park business. The conversation also touches on Bushnell's other ventures, such as Chuck E. Cheese and his involvement in early computer animation that influenced Pixar. Bushnell's innovative spirit is evident as he discusses his latest project, AI-driven board games, showcasing his continuous influence on the gaming world.

Summary Notes

Introduction to Acquired Podcast Season Five, Episode Five

  • The episode focuses on Atari, the company that invented the home video game industry.
  • Nolan Bushnell, the founder of Atari and referred to as the father of the video game industry, is the guest.
  • Nolan Bushnell also started other businesses, including Chuck E. Cheese.
  • Ben Gilbert and David Rosenthal are the hosts of the Acquired podcast.

"Welcome to season five, episode five of acquired, the podcast about great technology companies and the stories behind them." "And we are talking about the company that invented the home video game industry, Atari." "As some of our listeners know, Nolan has started a swath of other businesses, one of which, awesomely, is Chuck E. Cheese, which we will get much deeper into later this episode."

These quotes introduce the theme of the episode, the significance of Atari in the video game industry, and mention Bushnell's other ventures like Chuck E. Cheese.

Nolan Bushnell's Early Entrepreneurship

  • Nolan Bushnell's entrepreneurial spirit was evident from his childhood.
  • He began by selling strawberries from his family's garden door-to-door.
  • Bushnell also started a TV repair business as a child, learning from observing a repairman.
  • He expanded into a full appliance repair business and worked for Barnell Furniture company.
  • Bushnell's ventures continued through his college years, including a loan business and a campus advertising company.

"I went home, I picked strawberries, filled the basket... and marketed them door to door." "I started marketing my skills, and at those days, a house call was $5." "I'd lend them $20, but they had to give me 25." "I'd sell $5,000 worth of advertising and it cost me $500 to print it..."

These quotes illustrate Bushnell's early knack for identifying market opportunities and capitalizing on them, setting the foundation for his future successes.

Nolan Bushnell's College Years and Jobs

  • Bushnell attended Utah State before transferring to the University of Utah.
  • He managed the games department at an amusement park, optimizing the games for higher revenue.
  • His college jobs provided him with management experience and exposure to technology.
  • Bushnell worked for Litton Industries and Ampex, which polished his digital and video skills.

"I was driving an MGA sports car, and later on I traded in for mercedes 190 sl." "I had 150 kids working for me, and I'm 20 years old..." "I continued that until I went to college at 18."

Bushnell's quotes reflect his continued entrepreneurial success and the accumulation of wealth and experience during his college years.

Influence of the University of Utah's Computer Science Environment

  • The University of Utah was a pioneering institution in computer science and computer graphics.
  • Influential figures like Alan Kay, John Warnock, Jim Clark, and Ed Catmull were associated with the University of Utah.
  • Bushnell reflects on whether his life has been a series of happy mistakes or serendipity.

"The University of Utah, which doesn't belong. But it was really Dr. Evans, the guy who later founded Evans in Sutherland." "I stand on the shoulders of Steve Russell, who did that as the MIT hobby railroad division, and he did that on a PDP-1."

These quotes highlight the significant technological environment at the University of Utah that influenced Bushnell and the early pioneers of the computer industry.

The Genesis of Atari and the Video Game Industry

  • Nolan Bushnell's experience with Spacewar, a pioneering computer game, inspired him to think about the potential of video games.
  • His background in managing coin-operated games at the amusement park gave him insights into the potential profitability of video games.
  • The combination of his entrepreneurial background, management experience, and exposure to cutting-edge computer science set the stage for the creation of Atari.

"If I had this screen with a coin slot, it'd earn a lot of money." "Managing the games department, I had a couple of arcades, so I knew intimately what a coin operated game cost and what it had to earn."

Bushnell's quotes underscore his realization of the commercial potential for video games, which led to the founding of Atari and the birth of the home video game industry.

Cost Recovery of Expensive Computers

  • Nolan Bushnell discussed the initial financial impracticality of using expensive computers for gaming.
  • The cost of computers was so high that the math for cost recovery did not work out.

"o a half a million dollar or a million dollar computer, the math didn't work." "You're never going to recover the cost of the machine itself." "But I went through the math and I said, maybe someday."

These quotes express the initial skepticism about the financial viability of using expensive computers for gaming, highlighting the concern that the costs were too high to justify the investment.

Evolution of Chip Technology

  • David Rosenthal mentions the impact of outsourcing chip fabrication to Asia on the cost of chips.
  • The price drop in chips was significant, going from $2 a chip to 20 cents.
  • Nolan Bushnell saw this as an opportunity for the math to work for gaming.

"And national semiconductor, which we talked about on the skoy episodes of national, then pioneered outsourcing, fabrication of chips to Asia. And that dropped the price of chips hugely." "And they went from $2 a chip to 20 cents a chip. Wow."

These quotes highlight the drastic reduction in chip costs due to outsourcing, which played a pivotal role in making the economics of computer-based gaming more feasible.

Personal Interests Influencing Career

  • Nolan Bushnell became a Go player, which led to connections in the tech world.
  • His involvement in the Go community introduced him to people at the Stanford AI lab and reacquainted him with the game Space War.

"Coincidentally, that Wednesday night in the Bay area, I became a go player." "And there was a Buddhist church in San Francisco that had a parlor." "...Stanford had a go club that met every Wednesday evening." "...he says, hey, do you want to play Space War? I said, holy shit, I haven't played it since I was in college."

These quotes depict how personal interests can influence professional opportunities, as Bushnell's hobby led him to connections that would influence his career trajectory in gaming.

The Birth of Atari and Its Early Strategy

  • The original plan for Atari (then called Syzygy) was to be a game design studio and earn royalties.
  • Bushnell's encounter with Nutting Associates led to a licensing deal and a job offer as chief engineer.

"And so the original plan was that we were going to be a studio, and we would design games for manufacturers and get a royalty." "And I went up and showed them the game, and they said, yeah, I think we'd be willing to license this."

These quotes explain the initial business model for Atari, which was to design games for other manufacturers rather than produce and sell games directly.

Entrepreneurial Spirit in Silicon Valley

  • Silicon Valley's environment, where many have seen acquaintances succeed financially in startups, was a motivating factor for Bushnell.
  • Bushnell felt he had an edge over Nutting Associates, seeing them as underperforming and lacking ambition.

"One is that almost everybody knows intimately somebody that went off, started something, and made a gobsmack full of money." "But then I had a real advantage with Nutting, because Nutting put the first computer space in, and all of a sudden, you start noticing and saying, these guys are bozos."

The quotes reflect the entrepreneurial culture in Silicon Valley that inspired Bushnell and his perception of Nutting Associates as not being the right partner for his ambitions, leading to his decision to start his own venture.

Formation of Atari and Its Growth

  • Bushnell and his team at Atari aimed to innovate and dominate the game design space.
  • They created a competitor company, Key Games, to secure distribution channels and avoid competition.

"So I decided to create my own competition." "We had the world nailed."

The quotes show the strategic thinking behind Atari's expansion, where they created a controlled competition to secure a larger market share and avoid external competition.

Development of Pong and Atari's Iconic Branding

  • The game Pong was initially a test project for engineer Al Alcorn, but its success led to it becoming a flagship product.
  • The Atari logo, designed by George Opperman, became an iconic symbol, though its connection to the game Pong is a misconception.

"And I'll be damned if in two weeks he didn't have a working pong machine." "That was done by George Opperman, who was a brilliant, brilliant graphic designer."

These quotes discuss the unexpected success of Pong as a simple test project that became a hit and the creation of the iconic Atari logo, which contributed to the brand's lasting legacy.

Innovative Business Practices and Expansion

  • Atari demonstrated innovative business practices, including creating their own competition and securing lucrative licensing deals.
  • The company's growth was fueled by the success of Pong and strategic partnerships.

"And in those days, there wasn't the Internet and all that, but we knew that you couldn't keep it secret forever." "And so Bally was really noble by saying, hey, instead of just knocking us off, they took a license and paid us 5% royalty."

These quotes illustrate how Atari navigated the business landscape with savvy practices to maintain control over their products and secure financial gains through strategic partnerships.

Changing Industry Business Practices

  • Nolan Bushnell revolutionized distributor exclusivity in the coin-op business.
  • Atari gained an 80% market share in the industry by 1975.
  • They disrupted the norm by giving both product lines to all distributors, eliminating the need for exclusivity.

"So now we gave both lines to both distributors."

This quote signifies the strategic decision by Atari to provide both of their product lines to all distributors, which was a significant change from the industry's standard practice of exclusive deals.

Innovative Business Model and Just-In-Time Inventory

  • Nolan Bushnell is proud of Atari's business model, which was built with minimal capital investment.
  • Atari operated on a just-in-time inventory system, allowing for a rapid inventory turnover rate.
  • They maintained positive cash flow by selling products before the payment was due for the materials.

"So we were able to essentially sell a product and have 60 days to pay for the merchant."

This quote explains Atari's financial strategy, where they sold products and had a 60-day window to pay for the components, thus maintaining positive cash flow.

Venture Capital and Don Valentine's Involvement

  • Venture capital was not well-known during Atari's early years.
  • Don Valentine of Sequoia Capital became interested in Atari due to their impressive business model and financials.
  • Valentine's investment came after Atari had already achieved significant sales figures.

"Capital hadn't really been invented yet."

Nolan Bushnell reflects on the lack of familiarity with venture capital in the early days of Atari, highlighting how the concept was not as established as it is today.

Overcoming Production and Financial Challenges

  • Atari faced a crisis when a critical chip was backlogged, leading to financial strain and lawsuits.
  • To manage cash flow during this period, they used multiple bank accounts to keep operations running.
  • Nolan Bushnell negotiated with creditors and secured a new credit line from AMD to resolve the situation.

"We almost went out of business because there was a chip that we needed to get, and it was on backlog for three months."

This quote describes the severe supply chain issue that Atari faced, which nearly led to the company's collapse.

Atari's Culture and Manifesto

  • Atari's culture was influenced by the prevailing ethos of the 1970s, focusing on fairness and equality.
  • They created a company manifesto that included principles like equal pay for equal work.
  • Bushnell believes this progressive culture attracted talented individuals to Atari.

"And we actually created this company manifesto or constitution."

This quote emphasizes Atari's commitment to creating a fair and equitable workplace, which was formalized in their company manifesto.

Steve Jobs and Steve Wozniak at Atari

  • Steve Jobs worked at Atari and brought Steve Wozniak in to work on projects unofficially.
  • Wozniak's technical prowess was highly respected by Bushnell, who saw him as instrumental to Apple's success.
  • The breakout game was designed by Wozniak and became a significant hit.

"Wozniak never worked for me. He was always working at HP."

Nolan Bushnell clarifies that while Steve Wozniak contributed to Atari projects, he was not an official employee but collaborated due to his friendship with Steve Jobs.

The Deal with Warner and Selling Atari

  • Atari needed significant capital to launch the 2600 console and considered going public before seeking a corporate partner.
  • Warner Communications showed interest in acquiring Atari and impressed the founders with a lavish experience in New York.
  • The acquisition by Warner allowed Atari to secure the resources needed for their next phase of growth.

"We knew that we had to, one, build a new factory. Two, that it was going to be highly driven by fourth quarter sales."

Bushnell discusses the strategic considerations that led to the decision to sell Atari, highlighting the need for capital to scale up production and meet seasonal demand.

Atari's Business Size and Offer from Warner Communications

  • Nolan Bushnell, founder of Atari, recalls the company's revenue being close to $40 million.
  • Atari was involved in both the arcade and home gaming sectors, with products like Home Pong before the Atari 2600.
  • Warner Communications proposed a deal to acquire Atari, which included a $28 million offer, not entirely in cash, but also with debentures for tax reasons.
  • The deal also had a 10% bonus pool for the Atari team, providing them with a significant financial benefit from the company's success.

"You can recall it's probably close to 40,000,045 in revenue. In revenue."

This quote specifies the scale of Atari's business during the time of the acquisition talks with Warner Communications, indicating a substantial revenue figure.

"It wasn't all cash. There were some debentures involved. And that was done as much for tax reasons as anything, because you wouldn't have to pay tax on it all at once."

This quote clarifies the nature of the acquisition deal, highlighting that it wasn't a straightforward cash transaction, but structured to be tax-efficient.

The Founding and Development of Chuck E. Cheese

  • Nolan Bushnell used funds from Atari's success to start Chuck E. Cheese, a family entertainment center and pizza restaurant.
  • The concept was developed to capitalize on the profitable coin-operated game market without competing directly with Atari's existing customers.
  • The first Chuck E. Cheese location opened in San Jose, California, and was an immediate success, generating significant cash flow.
  • The initial business model bundled gameplay with food purchases, creating an attractive value proposition for customers.
  • Bushnell bought Chuck E. Cheese from Warner Communications for $500,000, paid over five years with no interest.

"The idea before Warner was there is I felt we were selling these coin operated games for $2,000. And in their life, they'd do 30 to 50,000 in coin drop."

Bushnell explains the rationale behind creating Chuck E. Cheese, identifying the opportunity to capture more value from arcade games.

"So I got it for half a million bucks. How many thousand dollars a year? For five years."

This quote details the terms under which Bushnell was able to acquire Chuck E. Cheese from Warner Communications, highlighting a favorable deal structure for him.

Expansion and Sale of Chuck E. Cheese

  • Chuck E. Cheese expanded to 252 company-owned and 125 franchise locations before being sold to Brock Hotel.
  • The video game crash of 1983 affected Chuck E. Cheese's performance, leading to a less favorable sale for Bushnell compared to Atari.
  • Bushnell's personal life and other interests, such as winning a prestigious sailboat race, took precedence after selling Atari, which influenced his business decisions.

"252, 5125 company stores, 125 franchises. And they sold it to Brock Hotel."

Bushnell recounts the scale of Chuck E. Cheese's expansion before its sale, indicating the brand's growth under his leadership.

"Not for a lot of money, but it's okay."

This quote reflects Bushnell's sentiment toward the sale of Chuck E. Cheese, suggesting it was not as profitable as he would have liked but was still acceptable.

Early Computer Animation and Sale to George Lucas

  • Bushnell started a project called Cadabrascope to develop computer-aided animation, which faced technical challenges due to slow render times.
  • He sold the software to George Lucas, which indirectly contributed to the founding of Pixar.
  • Steve Jobs consulted with Bushnell before acquiring the technology from Lucas, leading to the development of the first render farm.

"So I ended up selling my software to George Lucas when Chucky got into trouble, when I was scrambling for cash."

Bushnell shares the circumstances under which he sold his animation software, which became foundational for future developments in computer animation.

"The big key is render time. If you can solve the render time problem, it's a good deal."

This quote highlights the crucial technological challenge that needed to be overcome to make computer animation viable, which Jobs later addressed with the render farm concept.

The Speculative Impact of Atari Never Starting

  • Bushnell speculates that video games would likely have emerged even without Atari, due to technological advancements.
  • He credits his unique contribution to using state machine technology for video gaming, a non-obvious approach that may not have been discovered by others.
  • The discussion also covers missed opportunities, such as Atari potentially partnering with Nintendo, which could have altered the company's trajectory.

"I think that there's a 90% probability that there would been a video game post the 65 two microprocessor."

Bushnell assesses the likelihood of video games becoming a reality without Atari's influence, attributing it to the progression of technology.

"The secret sauce that I provided is to figure out how to do it with state machine technology, which isn't an obvious thing to most engineers."

This quote emphasizes Bushnell's key technical innovation that enabled early video game development, setting Atari apart from potential competitors.

The Downfall of Atari and Management Issues

  • Bushnell critiques the management and corporate culture changes at Atari post-acquisition by Warner Communications.
  • He believes that the lack of understanding and misalignment of values between Atari's original culture and Warner's management led to Atari's decline.
  • Bushnell emphasizes the importance of egalitarian principles and shared experiences in building a successful company culture.

"And Reykasar totally screwed up the corporate culture."

Bushnell bluntly criticizes the changes in corporate culture after Warner Communications took over, attributing it to specific leadership decisions.

"We went from not allowing executives to have reserved parking spots, because I felt that, hey, having the workers pass an empty slot with vice president was just an us versus them trope."

This quote illustrates Bushnell's philosophy on maintaining a flat organizational structure to promote unity and avoid creating divisions within the company.

AI-Driven Board Games and Future Ventures

  • Bushnell is currently working on AI-driven board games, leveraging smart home devices like Amazon Echo as gaming platforms.
  • He introduces Saint Noir, an interactive murder mystery board game that combines physical components with AI-driven storytelling and gameplay.
  • Bushnell sees potential in combining gaming with trends like true crime podcasts to create new entertainment experiences.

"AI driven board games. I did a deep dive on the Amazon Echo and the Google home system and the AI under it, and became mesmerized."

Bushnell discusses his latest venture, which merges traditional board games with modern AI technology to create a novel gaming experience.

"We're not on Google home. We will be after the first of the year. And you can play a murder mystery in which you're in the creepy town of St. Noir, and there are twelve creepy people, one of which is a murderer."

This quote details the concept of Saint Noir, showcasing Bushnell's continued innovation in the gaming industry by integrating AI with physical board games.

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