Why Atari failed

Last Updated on February 1, 2022 by Dave Farquhar

Atari was on top of the world in 1982, so much so that the movie Blade Runner featured it as a dominant company in 2049. But it fell hard and fast, and several times. Here’s why Atari failed and didn’t maintain world dominance for 80 years like we once expected.

Atari’s failure happened on two fronts, the computer market and the game console market. Atari was an early pioneer in both, but its upstart competitors ultimately understood both markets better. But in all fairness, not all of the companies that understood the market better survived either.

Atari: A failure in three acts

Why Atari failed
Why did Atari fail? Because it never produced another runaway hit after the Atari 2600. Its success depended on sales volume to make up for low profit margins, and it never achieved the volume necessary for the formula to work.

Atari, like some of its competitors, actually failed more than once. Like a Greek tragedy, Atari failed on three different occasions, and not necessarily for the same reason each time.

Early failure: The Atari 2600 era

Nolan Bushnell saw that he had something big with the Atari 2600, but didn’t think Atari could get there on its own. So to get more resources, he sold the company to Warner Communications, a huge media conglomerate. Initially this worked spectacularly, giving Atari the chance to sell 30 million consoles.

Ultimately, the problem under Warner was that it didn’t understand the market and took it for granted. The failure everyone cites, so much that it’s become cliche, was the disastrous E.T. cartridge. Atari produced more E.T. cartridges than there were Atari 2600 consoles. A Warner executive predicted that people would like the E.T. video game so much, they would buy more than one copy.

This is absurd looking back, but in the context of 1982 it makes a little more sense. Warner was a movie and music company. People would go see movies more than once, and that was one of the reasons companies like Warner violently opposed the VCR and missed its potential. But even more directly, people really did buy more than one copy of their favorite music. The most famous example is Pink Floyd’s The Dark Side of the Moon, which remained on the Billboard charts more than 17 years.

But there were key differences. The first was that people bought music over and over because vinyl records and tapes wear out with repeated use. ROM cartridges don’t really do that so much. The other difference is format changes. And that’s the other place Atari fumbled.

Why the Atari 2600 fell so hard and fast

First, let’s get one thing straight. The Atari 2600 wasn’t a failure. It sold 30 million units, accumulated a library of over 400 titles, and greatly exceeded expectations. The problem wasn’t the 2600 so much as the succession plan.

The Atari 2600 fell hard and fast due to obsolescence. Console makers understand that today and plan accordingly. In the end, being a product for 1977 caught up with Atari, and Atari fumbled the hand-off. The 2600 was designed to play games like Combat, and Space Invaders really pushed the machine’s limits. Creative programming helped extend its life, but the 2600 port of the arcade hit Pac-Man showed the machine’s limits. The 2600 was capable of better, but the general public didn’t know that. What they did know was that a computer or a competing console could do something approaching arcade quality at home while the 2600 couldn’t.

Competing on two fronts

While Warner rode the 2600’s success as long as it could, Commodore was aggressively pushing home computers and flat out asking in its ads, “Why just buy a video game?” While the VIC-20 was a very limited computer, it could do more than the 2600 and Commodore aggressively cut its price, introducing it at $299 in late 1980, and by 1983, it was possible to buy it for under $100. More critical was the Commodore 64, which came out at $599 in 1982 but was selling for $249 by 1983.

Atari sold home computers too, but had to settle for lower margins to match Commodore’s prices. Atari’s home computers were really good, but Atari couldn’t compete with Commodore’s aggressive pricing and marketing. Going high-price wasn’t really an option either, because Apple had the high end of the market covered. And then there was that pesky Radio Shack, with stores all over the landscape so they could beat Atari on convenience, even if they charged a slightly higher price.

Meanwhile, Coleco launched a technologically advanced console, the Colecovision, at an aggressive price. It was capable of playing arcade-quality games, blunting the 2600’s mystique. Suddenly, the 2600 was vulnerable.

Failing to follow up on the 2600’s success

Atari had a successor to the 2600 ready in the Atari 5200, but the Colecovision was better executed. By the time Atari realized the 5200 wasn’t going to repeat the 2600’s success, it was too late. Atari designed a replacement console, the 7800, that addressed the 5200’s biggest flaws, but by the time the 7800 was ready, the bottom had fallen out of the video game market and Atari was losing money.

And crucially, Atari fumbled another opportunity in late 1983. Nintendo had designed an advanced console and wanted a marketing partner. Atari was one logical choice. But Atari had licensed the rights to Nintendo’s Donkey Kong video game on computers, while allowing game console rights to go to Coleco. Atari thought the Colecovision version of Donkey Kong running on the Coleco Adam was a license violation and refused to sign another agreement with Nintendo over it. In the end, this ended up being a fatal mistake, though at the time perhaps it looked like Nintendo needed Atari more than the other way around. Atari gave up licensing rights to the NES over a software publishing venture it abandoned after two years.

Warner lost about half a billion dollars on Atari in 1983 and again in 1984, and sold the business to ex-Commodore founder Jack Tramiel for a pittance in mid 1984.

And that was the end of Atari’s first act. Today we recognize the Atari 2600 as an icon, albeit an imperfect one. But in 1983-84, Atari was just a battered legend. It looked salvageable to some, but it was going to be a lot of work.

Jack Tramiel: Savior or villain?

Jack Tramiel is a controversial figure in Atari circles. Commodore circles tend to hold him in higher regard, but there’s no doubt Tramiel was ruthless, difficult to work for, and he wasn’t as successful at Atari as he had been at Commodore.

But having Tramiel at the helm at Atari meant not having to compete with him anymore. And at the time it looked like a good fit. Tramiel wasn’t ready to retire, and he needed a company to manufacture the next-generation computer he envisioned. Atari needed experienced industry leadership.

Of course, Tramiel wasn’t very interested in game systems. He’d just spent three years at Commodore telling the world they should buy computers, not game systems. Instead, Tramiel shifted Atari’s focus to computers. Like so many things, it seemed like a good move at the time, but Tramiel probably overestimated how vulnerable Apple and IBM were.

In the end, Tramiel and Atari failed because both Nintendo and the PC market figured out how to beat him at his low-margin, high volume game he pioneered at Commodore.

Atari’s failings as a computer company

Atari’s 8-bit computers certainly weren’t bad, and Tramiel dusted them off, gave them a bit of a cosmetic redesign and relaunched them. It gave Atari something to sell while he waited for his team of engineers, a combination of Warner-era employees and ex-Commodore employees who followed him, to build the Atari ST, a new computer based on the Motorola 68000 CPU with advanced graphics and sound.

The problem with Atari’s 8-bit line was competing with Commodore. Both companies used custom chips, but Atari had to have other companies make them, while Commodore made its chips itself. Eventually, Commodore was able to produce C-64s for $35. Atari could never get its costs down that low.

The Atari ST provided a fresh start. It was a good computer, especially for its time, providing a Mac-like graphical user interface at a price somewhere between a Commodore 128 and an IBM PC clone. The biggest problem was that Tramiel treated the ST like an oversized C-64. He didn’t fit it with expansion slots like an IBM PC or an Apple II, which limited the machine’s expansion capabilities. Apple recognized that mistake more quickly and started incorporating expansion slots into the Mac to address it. Tramiel also didn’t initially treat the operating system as something that needed the occasional refresh the way other companies did. This cut out another opportunity for revenue, and also limited the machine’s growth compared to other machines.

The ST never sold as well as the Mac, but held its own for a couple of years. Unfortunately for Atari, its sales peaked in 1987. First the Amiga eclipsed it in capability, but by 1990, PC graphics and sound and CPU power had all passed the ST as well.

The ST: Not enough on its own

The ST outsold the Apple II most years, but its margins were lower and Apple also had the Mac. Atari’s 8-bit line wasn’t much help at this point, and its PC clone line didn’t really pan out either. Mac plus Apple II sales greatly outpaced Atari ST and 8-bit and PC sales combined. Atari failed at this stage because the ST wasn’t enough on its own, and Atari needed it to be. At Atari, Tramiel tried to play the same low-margin, high-volume game he played at Commodore, but the ST never achieved the Commodore-like volume necessary for it to succeed. Atari failed because this turned into a recurring pattern.

So there’s little wonder that Tramiel decided to give video games another try. It was worth a shot, given that Atari had difficulty overcoming its reputation as a games company. Tramiel was no dummy, and always was willing to try to play the hand he was dealt.

The third act: Video games again

While Jack Tramiel was trying to take over the computer industry with the ST, Nintendo and Sega brought the video game market back from the dead. Atari charged back into the market with a new, smaller-sized Atari 2600 and the reintroduced 7800, which was in most ways the console the 5200 should have been, and the XE Game System, which was the console the 5200 should have been in the ways the 7800 wasn’t. But the 7800 had trouble competing with Nintendo.

It was too little, too late. Atari didn’t have a franchise character like Nintendo’s Mario. And by this time, Atari was separated from its old arcade division, so it couldn’t tap them for ideas either. Instead, the old Atari arcade division made games for Nintendo systems under the Tengen brand name.

It might surprise you that the 7800 sold somewhere between 3.5 and 3.8 million units. Meanwhile, Nintendo, the partner Atari shunned, sold 30 million units between 1985 and 1991, so it outsold Atari almost 9 to 1. The larger problem for Atari was the profit margin. Atari only made $22 per unit sold. That’s a tepid comeback for a company that was big enough to lose a billion dollars in 1983-84.

The revamped 2600 sold surprisingly well as a budget system but with a retail price of $49, didn’t provide much in the way of margin either. The XE Game System only sold 100,000 units, so it was a comparative flop. It helped Atari blast out its remaining inventory of 8-bit computer components, which was probably the goal. But if Atari was hoping for it to be a sleeper hit, the XEGS fell short.

Regardless of how you view the XEGS, it was a good showing considering all Atari had to work with was leftovers. Atari failed because the 7800 ended up being a high water mark, when it needed to be a stepping stone to something greater.

The Lynx

Nintendo’s handheld Gameboy turned out to be a hit, but Atari had a way to one-up it in two ways. Why not try a color 16-bit handheld? Originally developed by two Amiga engineers working at game publisher Epyx, Atari saw potential that Sega and Nintendo didn’t. The problem was Epyx was near bankruptcy, which was why it sought out a partner rather than producing the console on its own. Epyx went bankrupt soon after the console was released in 1989, leaving Atari without a software developer. There were also rumors of Atari not being able to get enough color LCD screens early on. Atari produced some games for the system on its own and lined up some other developers, but sales tailed off after 1991, when Sega released the Game Gear, a competing color console.

In the end, the Lynx sold around 3 million units, while Nintendo’s technologically inferior Game Boy outsold it 5 to 1. Nintendo had a better software library. The Game Boy had 1,049 titles available in the end, compared to just 76 titles for the Lynx.

The Lynx was hardly a flop, but it certainly was a disappointment. It looked like it would be a hit in 1989 and instead it finished third. In order to not fail, Atari needed to finish higher than third sometime.

The Jaguar: One last attempt at a big splash

After sitting out the 16-bit home console generation, Atari tried to make a big splash in late 1993 with a 64-bit console. Atari also planned a 32-bit console named Panther. But since the 64-bit Jaguar was ready sooner than expected, Atari cancelled the 32-bit project.

The Jaguar received good reviews, but Atari’s reputation was in tatters by this time, having earned a reputation for being hostile to developers and having poor customer service. In spite of the good reviews and being technologically ahead of its competition, sales were slow.

It didn’t help that the Jaguar had technical difficulties. It had some design flaws developers had to program around, and the technical documentation was incomplete. Between all that, it only had 50 titles available. So even though the Jaguar beat the Sega Saturn and Sony Playstation to market by more than a year, they quickly eclipsed Atari in sales.

It took two years for Atari to manage to sell 125,000 units, and at the end of 1995, Atari had about 100,000 unsold units in inventory. Arguably the ST computer, 7800 console, and Lynx handhelds were disappointments. But in the end, Atari failed with a flop in the Jaguar.

In April 1996, Atari merged with JTS, a maker of budget hard drives, and exited the computer and game console business.

Atari today

Atari exists today as something of an undead brand. But it’s a shadow of its former self and has changed hands multiple times.

Atari could have done some things differently, but in the end, Nintendo, Sega, and Sony were too hard to compete with in the video game market, and the IBM PC and Amiga and Mac were too hard to compete with in the computer market. That meant Atari never replicated the huge success it enjoyed with the 2600 in the late 1970s and early 1980s.

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One thought on “Why Atari failed

  • September 5, 2020 at 1:50 pm

    A couple of corrections to the article.

    You state that Commodore later released machines with expansion slots. That is correct, but Atari also released machines around the same time with slots of their own — the MEGA ST series. One of the most popular expansion boards for the MEGA was the Crazy Dots video card.

    I also am sure the Amiga played much of a role in the demise of the ST; Commodore went under and the Amiga disappeared in 1994 — Atari was still selling Falcon030 computers that were considerably better than the comparable priced Amiga 1200s that Commodore was flogging up to liquidation.

    Both Atari and Commodore had difficulty keeping pace with the updates to the Apple and (especially) Wintel worlds.

    Atari actually did a better job than Commodore in many fronts. There were two ST portables/laptops; Commodore never managed to make an Amiga laptop. The VIDEL video chipset of the Falcon was a quantum leap ahead of both the STs and Amigas of previous eras and ran circles around the Amiga as well as consumer-priced 68K Macs of the era.

    The problem with the ST (and Amiga and almost Mac) came down to people wanting a single platform to develop for and use. Tech loathes diverse platform ecosystems; just as the later smartphone market would go from a dozen players to just Android and iOS, the PC market shook out the ST, Amiga, Acorn, and other platforms to land on Windows and Mac as the dominant players.

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