Praise for The Ultimate History of Video Games

"This book is extraordinary, with enough quotes, anecdotes, and detail that it reads
more like a fast-moving novel than a literary tome.”

—Peter Moore, CEO of Sega

"In the game industry, like in movies, an incredible amount happens behind the
scenes. This book tells it all.”

—Mark Cerny, creator of Marble Madness and cocreator of Crash Bandicoot

"From the advent of coin-op video games, through its transition to the consumer video
games industry, The Ultimate History of Video Games tells it as it is. An enjoyably
informative bird’s-eye view of this entertainment medium.”

—Joel Hochberg, president of Rare, Inc.

" The Ultimate History of Video Games is the definitive history of computer and video
games. Steven Kent takes readers from the arcade to the boardroom and introduces them
to the men and women who have transformed gaming from a garage hobby into the
current multibillion dollar industry of technology entertainment for the new millennium.”

—Arthur Pober, president of the Entertainment Software Rating Board

"A great history of the video game industry! Steve Kent reports the inside story!”

—Howard Lincoln, former chairman of Nintendo of America,

CEO of the Seattle Mariners

"A must read for newcomers and veterans alike. ”

—Michael Katz, former president of Sega, Atari, and Epyx

"Steven Kent’s passion for the video game industry illuminates every page. Despite all my
video game industry contacts over the years, I learned something new in every chapter.”

—Richard Doherty, director of the Envisioneering Croup

"Apart from the fact that Steve Kent is one of the big authorities on this thing we call
the video game, he can also make history fun.”

—Eddie Adlum, publisher of RePlay Magazine

"I certainly wasn’t prepared for the engrossing, almost novel-like work that I discov¬
ered when I read The Ultimate History of Video Games. It was quite a pleasant surprise.”

—GameSpy

"The book reads like a text version of one of those mammoth Ken Burns documentaries,
but without all the weird and pretentious poetry. The book leaves very few historical
stones unturned.”

•Happy Puppy

"Highly recommended for any coin-op hobbyist’s library.”

—Tim Ferrante, GameRoom Magazine

"You’d be hard pressed to find a better book about the history of video games. In fact,
you can’t. It really is quite an engaging read. And you’ll find yourself rereading
sections for years to come.”

—Syzygy Magazine

"Steve Kent has created a more compelling version of gaming history, one that relies
heavily on anecdotes from the heavyweights of the gaming industry.”

—Came Informer

"A thing of precious value. Kent’s supremely exhaustive research ensures that nuggets
of insight into what went on behind the scenes leap from nearly every page. Read this
book now or forever be an unenlightened gamehead.”

—Edge Magazine

"There have been a lot of books written about the video game business. None of them
seem to get it. When people ask me about the video game business, I tell them to read
The Ultimate History of Video Games."

—Ed Rotberg, creator of Battlezone

"A fantastic account of the history of video games. Reads like a novel!”

—Lenny Herman, author of Phoenix: The Fall and Rise of Video Games

"Incredible insight into the creation of some of the biggest video games. Having been
in this business for fourteen years, I was amazed by the amount of information and
only wish the book could have been longer.”

—Ed Boon, creator of Mortal Kombat

“I found this book fascinating to read. Besides reliving the stories about the people and
the games, it goes into the inside stories and politics of the video games industry.”

—Ed Logg, creator of Asteroids, Centipede, and Gauntlet

"A nostalgic, sweeping trip down memory brick road, The Ultimate History of Video
Games is great for people who want to learn more about the early days of video games.”

—Tendo Box

j Utimaie History
of Uideo Gaines

From Pong to Pokemon and Beyond—

The Story Behind the Craze That Touched Our Lives
and Changed the World

THREE RIVERS PRESS •NEW' YORK

To Professor Alf Pratte, that rare individual
who understands the full responsibilities of journalism and teaching.

Copyright © 2001 by Steven L. Kent

All rights reserved. No part of this book may be reproduced or transmitted in any form or by
any means, electronic or mechanical, including photocopying, recording, or by any informa¬
tion storage or retrieval system, without written permission from Random House, Inc., except
for the inclusion of brief quotations in a review.

Published by Three Rivers Press, New York, New York

Member of the Crown Publishing Group, a division of Random House, Inc.

www.randomhouse.com

THREE RIVERS PRESS and the Tugboat design are registered trademarks of Random House,
Inc.

Originally published by Prima Publishing, Roseville, California, in 2001.

Originally published as The First Quarter.

Printed in the United States of America

Library of Congress Cataloging-in-Publication Data

Kent, Steven L.

The ultimate history of video games: from Pong to Pokemon—the story behind the craze
that touched our lives and changed the world / Steven L. Kent.

Includes bibliographical references and index.

1. Video games—History. I. Title.

GV1469.3.K45 2001

794.8'09—dc21 2001036497

ISBN 0-7615-3643-4

10

First Edition

Coiigi s

Foreword by Peter Molyneux.vii

Acknowledgments.viii

Timeline.xi

Chapter i The World Before Pong.i

Chapter 2 Forgotten Fathers.15

Chapter 3 Father of the Industry.27

Chapter 4 And Then There Was Pong.37

Chapter 5 The King and Court.49

Chapter 6 The jackals.59

Chapter 7 "Could You Repeat That Two More Times?”.79

Chapter 8 Strange Bedfellows.93

Chapter 9 The Return of Bushnell.115

Chapter 10 The Golden Age (Part 1:1979-1980).123

Chapter 11 The Golden Age (Part 2:1981-1983).151

Chapter 12 The Battle for the Home.179

Chapter 13 A Case of Two Gorillas.199

Chapter 14 The Fall.219

Chapter^ The Aftermath.241

Vi Contents

Chapter 16 Album Covers.259

Chapter 17 We Tried to Keep from Laughing.277

Chapter 18 The Seeds of Competition.295

Chapter 19 The Birth of Sega.331

Chapter 20 The New Empire.345

Chapter 21 The Legal Game.367

Chapter 22 The Year of Hardware.397

Chapter 23 Run for the Money.421

Chapter 24 The War.439

Chapter 25 Moral Kombat.461

Chapter 26 The "Next” Generation (Part 1).481

Chapter 27 The "Next” Generation (Part 2).499

Chapter 28 The Mainstream and All Its Perils.527

Chapter 29 And the Cycle Continues.557

Chapter 30 Three Horses and a Pony.573

Source Notes.592

t hen Steven Kent asked me to write the foreword to this book, I was deeply
honored and rather pleased. I then started to wonder what I would write!
These feelings made me realize that what is so useful about this book is that is
chronicles the beginnings of a new entertainment medium. Our industry’s
greatest problem has been one of identity—where, culturally, do video games
fit? They don’t fit into films, they don’t fit into books, they don’t fit into any
existing pigeonhole. Twelve years ago, when I produced my first game, my
greatest challenge was to try to get someone interested in it. After talking
with Steven, I believe he has found a similar problem with placing this book.
Thankfully, he persevered as I did.

However, now that we have this book, at last we have a faithful record on
the cultural history of what I am sure will one day be one of the most impor¬
tant entertainment mediums in the world. It is shocking to me to open the
first page and read through the first chapter and look back through the years
of my life. Each chapter unveils a new episode in the history of computer
games that coincides with my own history. What this highlights for me is that
young people today think of computer games as a natural pastime, which
was not always the case. They can’t imagine a world without computer games,
and what Steven’s book does (and it is the first to do this) is set out the history
of computer games that is both compelling and compulsive. I endorse and
encourage you to read this excellent book.

—Peter Molyneux

11 1 Igments

i n 1972, my physical education teacher took the class to a bowling alley in
Kalihi, on the island of Oahu in Hawaii. As we walked past the familiar line
of electromechanical games (Night Bomber was my favorite at the time), I no¬
ticed a game that seemed to be running on a television set or possibly a
computer. My teacher sent the other kids off to bowl while he and I dropped
a quarter into the machine and batted a square ball back and forth with rect¬
angular paddles. Obviously, the game was Pong. One hour later, as the rest of
the class finished bowling, I had a new addiction that has now lasted for nearly
thirty years.

Four years later, I found myself playing Midway’s Gunfightwixh a friend named
Ed when two of the best-looking girls from my high school class came up to
talk with us. (As anyone who knew me in high school will tell you, that was not
a common occurrence.) I really wanted to talk to them. Ed really wanted me to
talk to them, too; but every time I looked away from the game, he shot me. In
the end, Gunfight won out, and I had proven my absolute nerddom.

Researching this book gave me the opportunity to interview Dave Nut¬
ting, the man who modified Gunfight for the U.S. market, and A1 Alcorn, the
engineer who built the first Pong machine. In fact, writing this book has given
me the chance to meet most of the people who entertained me, addicted me,
and caused me to spend an evening with Ed when I might have had more fun
with Lisa. What I found out about these people was that the vast majority of
them are kind, smart, and generous. With the exceptions of three people—
Sam Tramiel, Ken Kutaragi, and Hiroshi Yamauchi—all of the people I asked
for interviews granted them and put up with the endless hours of repetitive
questions. In fact, such busy and important men as Ralph Baer, Nolan
Bushnell, A1 Alcorn, Masaya Nakamura, Minoru Arakawa, Howard Lincoln,
Tom Zito, and several others granted me multiple interviews.

Acknowledgments IX

In the end, much of this book was cobbled together from information that
I gathered from more than 500 interviews. While I would like to thank the
people who generously donated their time for these interviews, many of which
were several hours long, I feel it is equally important to thank the many people
who helped me arrange everything. For every interview that went into this
book, there was an average of two PR/communications people working to
put everything together.

While writing this book, I found myself using a few published sources as
well. One was KLOV, the Killer List of Videogames, which is located at
www.klov. com. The people who created this amazing site do not receive advertis¬
ing revenues and are not employed by the video game industry. They simply
maintain this immense site out of love for the games.

I also relied heavily upon Phoenix: The Fall and Rise of Videogames, a brilliant
book written by Leonard Herman. As I was finishing this book, a friend sug¬
gested that I call it “A Comprehensive History of Video Games.” I could not
do that. Lenny had already written the comprehensive book.

And while I am at it, on many occasions I also referred back to Game Over, by
David Sheff. While both Nintendo of America and Nintendo Co., Ltd., in Ja¬
pan, have been very generous with me, 1 have never interviewed Hiroshi
Yamauchi. I lear ned about him by reading the works of Mr. Sheff.

I also wish to thank the many people who helped me get this manuscript
knocked into shape. I am quite grateful to Lynelle Klein, who transcribed most
of my interviews.

Also, I need to acknowledge the people who took time out of their busy
schedules to help me check facts. Amazingly, A1 Alcorn and Steve Bristow
were kind enough to read the chapters about Atari for me; John Romero
helped with the modern PC stuff; Richard Brudvik-Lindner helped with the
Genesis years; and many others chipped in.

One thing I have learned while working on this project is that the gaming
community is filled with people who know an awful lot about history and
will do anything they can to preserve it. A number of people worked very
hard to help me comb out errors that had crept into my text. When they first
approached me to offer this help, I greeted them suspiciously. As we worked
together, however, I realized that these folks did not want credit. They simply
wanted to see history preserved correctly.

X Acknowledgments

But they deserve credit. First and foremost, I wish to thank a gentleman at
Colorado State who prefers to be known as “Zube.” Meticulous and with far
too much time on his hands, this fellow combed through my text and found
pages of minutia and larger errors, all wanting correction. There were mo¬
ments when I cursed Zube; but now I wish to thank him.

Then there was Tim Ferrante of Gameroom Magazine. One night, as I prepared
to send my manuscript to Prima, Tim and I did a page-by-page search through
the book. After three hours, I complained that I was tired, but he kept going.
Only later did I realize that while I was in Seattle, where it was only 1:00 a.m.,
he was on the East Coast, and it was 4:00 a.m. for him.

I also owe debts of gratitude to Curt Vendel, Ken Gagne, and Lenny
Herman, a true guardian of video game history. And all the way through
this process, I frequently relied on help from my good friend, Jeremy
Horwitz—once the world’s best-connected video game player, now on his
way to a fine career in law.

I also want to thank Eddie Adlum, Ingrid Milkes, Key Snodgress, and the
rest of the staff of RePlay Magazine —the real experts on the coin-op indus¬
try—for taking the time to teach me about the workings of the arcade industry
and for lending me valuable photographs to enhance my book.

Finally, I absolutely need to thank Steve Martin, David Richardson, and
Andrew Valias at Prima. These are the guys who shine up my work, and I
am most grateful.

incline

1889

Fusajiro Yarnauchi establishes the Marufuku Company to manufacture and distribute Hanafuda,
Japanese playing cards.

1932

The Connecticut Leather Company is established by a Russian immigrant named Maurice Greenberg to
distribute leather products to shoemakers.

1951

Yarnauchi changes the name of Marufuku Co. Ltd. to Nintendo, a term meaning "leave luck to heaven.”

United States passes new laws regulating slot machines. Marty Bromley, who manages game rooms at
military bases in Hawaii, buys machines and opens Service Games (SEGA).

David Rosen, returning from service in the U.S. Air Force during the Korean War, opens portrait painting
business in Japan.

1954

David Rosen starts Rosen Enterprises and begins shipping photo booths to Japan.

1956

Rosen imports $200,000 worth of coin-operated electromechanical games to Japan and starts the
country's coin-op business.

1958

Physicist Willy Higinbotham of the Brookhaven National Laboratories in New York invents an interactive
table-tennis-like game that is displayed on an oscilloscope.

1961

MIT student Steve Russell creates Spacewar, the first interactive computer game.

1962

Nolan Bushnell enters engineering school at the University of Utah.

1964

Rosen Enterprises, Japan’s largest amusement company, merges with Service Games, which now has
jukeboxes in over 6,000 locations, to form Sega Enterprises.

1965

Nolan Bushnell gets a summer job at a Salt Lake City carnival where he is in charge of the games midway.

XII Timeline

1966

Ralph Baer begins researching interactive television games at Sanders Associates.

Sega releases Periscope, a game that becomes such a hit in Japan that U.S. and European companies
begin importing it. This is Japan’s first amusement game export. Because of the high cost of shipping,
U.S. arcade owners charge players $0.25 per play, setting what will eventually become the standard
price for playing arcade games.

1968

Ralph Baer patents his interactive television game.

1969

Gulf £ Western purchases Sega.

Nolan Bushnell graduates from the University of Utah and accepts a job in California.

1970

Magnavox licenses Ralph Baer’s television game from Sanders Associates.

1970

Bushnell begins work on an arcade version of Spacewarcalled Computer Space.

1971

Nutting Associates purchases Computer Space from Nolan Bushnell and hires him to help manufacture it.
Nutting begins shipping Computer Space, the first arcade video game machine.

1972

Magnavox begins demonstrating Odyssey in private showings. Bushnell attends a demonstration of the
console on May 24, in Burlingame, California.

Bushnell Leaves Nutting and starts Syzygy with partner Ted Dabney. Finding that the name Syzygy is
already taken, they rename their company Atari.

Atari engineer Al Alcorn creates Pong.

Magnavox releases Odyssey.

Magnavox sues Atari on grounds that Pong infringes on Ralph Baer's patents. Nolan Bushnell decides to
settle out of court.

1973

Taito, Williams, and Midway enter the video game business.

1975

Atari creates prototypical Home Pong unit and sells idea to Sears Roebuck.

Namco begins making video games.

Strapped for cash, Nolan Bushnell approaches venture capitalist Don Valentine for funding.

Midway Games imports a Taito game called Cunfight, the first game to use a microprocessor.

1976

The Connecticut Leather Company, now known as Coleco, releases Telstar, a television tennis game.
Fairchild Camera S Instrument releases Channel F, the first programmable home game to use cartridges.

Timeline xiii

Exidy Games releases Death Race, a game in which players drive over stick figures. Protests about the
game are featured on 60 Minutes.

Bushnell sells Atari to Warner Communications for $28 million.

1977

Atari opens the first Pizza Time Theatre.

Atari releases the Video Computer System, also known as the 2600.

Mattel introduces a line of LED-based handheld video games.

Shigeru Miyamoto joins Nintendo.

Bally releases the Bally Professional Arcade home console.

Nintendo releases its first home video game in Japan.

1978

Bushnell is forced out of Atari and buys the rights to Pizza Time Theatre.

Ray Kassar becomes the CEO of Atari.

Nintendo releases Othello, its first arcade game.

Atari releases Football and Midway releases Space Invaders. Both games attract record business.
Magnavox releases the Odyssey2.

Cinematronics releases Space Wars, an arcade adaptation of the Spacewars game created at MIT.

1979

Capcom is founded in Japan.

Atari releases Lunar Lander, its first vector-graphics game. Later that year, Atari releases Asteroids, the
company’s all-time bestselling game.

Atari game designer Warren Robinett introduces concept of "Easter Eggs” to video games by hiding a
room with his name in a 2600 game called Adventure.

Mattel Electronics introduces the Intellivision game console.

Milton Bradley releases Microvision, the first handheld programmable game system.

1980

Atari releases Space Invaders for the Video Computer System. The practice of selling home versions of
arcade hits is started.

Renegade programmers fleeing from Atari create Activision, the first third-party game publisher.
Namco releases Pac-Man, the most popular arcade game of all time. Over 300,000 units are sold worldwide.
Minoru Arakawa opens Nintendo of America.

Williams releases Defender.

1981

Nintendo releases the arcade game Donkey Kong.

Atari releases Pac-Man for the Video Computer System.

Atari releases Tempest.

U.S. arcades revenues reach $5 billion as Americans spend more than 75,000 man-hours playing
video games.

Xiv Timeline

Arnie Katz, Bill Kunkel, and Joyce Worley begin publishing Electronic Games, the first magazine about
video games.

1982

Coleco releases Colecovision.

Atari wins lawsuit accusing Magnavox of infringing on its Pac-Man license with K.C. Munchkin.

Atari releases E.T. for the Video Computer System.

Activision releases Pitfall for the Video Computer System.

Atari releases the 5200 game console.

General Consumer Electronics releases the Vectrex.

Midway releases Ms. Pac-Man, the biggest arcade game in American history.

When Warner Communications announces that Atari sales have not met predictions, Warner stock drops
32 percent.

1983

Nolan Bushnell opens an arcade company called Sente Games.

Yu Suzuki joins Sega.

Sega releases its first home console in Japan—SG-1000.

Cinematronics releases Dragon's Lair, the first arcade game to feature laser-disc technology.

Former Philip Morris executive James Morgan replaces Ray Kassar as head of Atari.

1984

Nintendo releases the Family Computer (Famicom) in Japan.

David Rosen and Isao Okawa purchase Sega Enterprises back from Gulf £ Western for $38 million.

Coleco begins marketing the Adam Computer.

Hisao Oguchi and Yuji Naka join Sega.

Warner Communications sells Atari Corporation to Commodore Computers founder Jack Tramiel but
retains the arcade division as Atari Games.

1985

Nintendo test-markets the Famicom in New York as the Nintendo Entertainment System (NES).

Russian mathematician Alex Pajitnov designs Tetris.

1986

Nintendo of America releases NES nationwide.

Sega releases its Sega Master System.

Atari releases the 7800 game console.

1987

Nintendo publishes The Legend ofZelda.

NEC releases the 16-bit/S-bit hybrid PC-Engine game console in Japan.

Sega unveils 16-bit Mega Drive game console.

1988

Square Soft publishes Final Fantasy.

Timeline MV

Atari Games releases unlicensed games for the NES under its new Tengen label.

Tonka acquires the U.S. distribution rights to the Sega Master System.

Coleco files for bankruptcy.

1989

NEC brings PC Engine to the United States and releases it as TurboGrafx.

Sega releases Mega Drive in the United States as Genesis.

Nintendo releases Game Boy worldwide.

1990

Nintendo and Atari go to court over the rights to Tetris,

Nintendo releases Super Mario Bros. 3— the most successful non-bundled
game cartridge of all time.

SNK brings 24-bit NeoGeo game console to the United States.

1991

Nintendo of America releases Super NES.

Sega recreates itself with a new mascot—Sonic The Hedgehog.

Galoob Toys releases the Game Genie.

Capcom releases the arcade game Street Fighter II giving arcades a needed boost.

1992

With Genesis outselling Super NES, Sega effectively takes control of the U.S. console market.
Sega ships Sega CD peripheral for Genesis game console.

1993

Panasonic begins marketing the 32-bit 3DO Multiplayer.

Atari launches the 64-bit Jaguar.

Broderbund publishes Myst for Macintosh Computers.

Id Software publishes Doom for PCs.

Virgin Interactive Entertainment publishes The 7th Guest on PC CD-ROM.

Senators Joseph Lieberman (D. of Connecticut) and Herb Kohl (D. of Wisconsin) launch Senate
hearings on video game violence.

1994

The Interactive Digital Software Association is created in response to Senate hearings.
Nintendo releases Donkey Kong Country and retakes control of the U.S. console market.

Sega releases 32X, a peripheral that increases the power of the Genesis.

Sega releases Saturn in lapan.

Sony releases PlayStation in Japan.

1995

Sega releases Saturn in the United States.

Sony releases PlayStation in the United States.

XVi Timeline

Nintendo releases Virtual Boy in the United States.

Nintendo unveils the 64-bit Nintendo 64 game console in japan.

1996

Nintendo sells its billionth cartridge worldwide.

Jack Tramiel sells Atari Corporation to disk drive manufacturer ITS.

Nintendo releases Nintendo 64 in the United States.

Nintendo discontinues Virtual Boy.

Sony unveils Crash Bandicoot.

1997

Sega discontinues Saturn.

Bandai releases Tamagotchi.

Tiger releases game.com handheld system.

Gumpei Yokoi, the creator of the Game Boy, dies in car accident.

DreamWorks, Universal, and Sega team up to form a new line of super arcades called GameWorks.
Nintendo releases Goldeneye 007 for Nintendo 64.

Square Soft publishes Final Fantasy VII for PlayStation.

1998

Nintendo releases The Legend of Zelda: Ocarina of Time for Nintendo 64.

Pokemon, a line of Game Boy role-playing games that have ignited a craze in japan, comes to American
and starts a similar craze.

1999

ITS files for bankruptcy and sells Atari properties to Hasbro Interactive.

SNK Corporation brings the NeoGeo Pocket Color handheld game system to the United States.

Sega releases Dreamcast game console in the United States.

2000

Toshiba and Samsung announce plans to sell Nuon-equipped DVD players.

Sony releases PlayStation 2 in Japan.

Microsoft unveils plans for Xbox video game console at the Game Developers Conference.

Sega launches SegaNet internet service for Dreamcast.

Sony launches PlayStation 2 in the United States.

SNK discontinues NeoGeo Pocket Color sales in the United States.

2001

Sega discontinues Dreamcast.

Sega chairman Isao Okawa dies.

Nintendo releases Game Boy Advance in japan (March) and the United States (June).

Nintendo releases GameCube in the United States.

Microsoft releases Xbox worldwide.

e Worn efo re Pong

You can’t say that video games grew out of pinball, but you can assume that video games
wouldn’t have happened without it. It's like bicycles and automobiles. One industry leads
to the other and then they exist side by side. But you had to have bicycles to one day have
motor cars.

—Steven Baxter, former producer, The CNN Computer Connection

2 The World Before Pon?

The Beginnings of Pinball

New technologies do not simply spring out of thin air. They need to be associ¬
ated with familiar industries or ideas. People may have jokingly referred to
the first automobiles as “horseless carriages,” but the name also helped define
them. The name changed them from nebulous, unexplainable machines to
an extension of an already accepted mode of transportation.

Although video games are a relatively new phenomena, they benefited from
a close relationship with the well-established amusement industry. The amuse¬
ment industry, in turn, has long suffered from a lack of legitimacy. As it turned
out, however, legitimacy would never be much of an issue for video games.

The beginnings of pinball can be traced back to Bagatelle, a form of bil¬
liards in which players used a cue to shoot balls up a sloped table. The goal of
the game was to get the balls into one of nine cups placed along the face of the
table. Abraham Lincoln was said to have played Bagatelle.*

No surviving records explain why the cue sticks in Bagatelle were replaced
with a device called a “plunger,” but for some reason the evolution took place
and the game transformed into a new sport called “pinball” before the turn
of the century.

If one event paved the way for today’s computer and video game industry,
it was David Gottlieb’s Baffle Ball. The founder of D. Gottlieb and Company,
David Gottlieb was a short, stocky man with a full head of brown hair and an
ever-present cigar in his mouth. A showman and an inventor, he once made a
living by taking carnival games to oil workers in remote Midwestern oil fields.
He understood the balance of chance and skill that made games fun and had
a talent for refining ideas to make them more fun. In 1931, Gottlieb created a
game called Baffle Ball.

Baffle Ball used no electricity and bore little resemblance to modern pinball
games. It was built in a countertop cabinet and had only one moving part—
the plunger. Players used the plunger to launch balls onto a plane set at a
7-degree slope and studded with pins circling eight holes or “scoring pock¬
ets.” Each scoring pocket had a certain point value attached to it. For a penny,
players could launch seven balls.

* Whether or not Lincoln did in fact play the game, an old political cartoon shows him
playing it during his presidency.

The World Before Pongi 3

Baffle Ball did not have flippers, bumpers, or a scoring device. Players kept
track of scores in their heads. Once they launched the ball, they could control
its course only by nudging the entire Baffle Ball cabinet, a technique later known
as “tilting.” Sometimes they tilted so forcibly that the entire Baffle Ball cabinet
could slide several inches during a single game.

At first Baffle Ball sales grew gradually, but within months, Gottlieb’s game
became a major success. By the time the game reached peak popularity,
Gottlieb shipped as many as 400 cabinets a day.

Gottlieb, the first person to successfully mass produce pinball cabinets in a
factory, became the “Henry Ford of pinball.” His competitors worked out of
their garages and couldn’t compete.

Imitators popped up immediately, more or less. I mean everybody got in¬
volved in the business, and, like I said, there were a lot of people building
them in their garages.

Gottlieb machines were a little more expensive. I think it was $16.50 for
the machine, and that was $1.00 or $1.50 more than the competitors. But my
grandfather used a better quality of walnut; I think the pins were a higher
quality metal. He wanted it to be the Cadillac of pinball machines.

—Michael Gottlieb, grandson of David Gottlieb

Once Gottlieb proved money was to be made, imitators followed. David
Rockola created several successful pin games* before establishing his com¬
pany as one of the most famous names in jukeboxes. Ray Moloney’s first pinball
machine, Ballyhoo, sold so well that he changed the name of his company from
Lion Manufacturing to Bally.

Gottlieb’s chief competitor was Stanford-educated Harry Williams. Having
studied engineering, Williams brought a deeper understanding of mechani¬
cal workings to the industry. He entered the business as a West Coast distributor
selling other companies’ amusement machines but discovered he could pur¬
chase used pinball games and refurbish them with playfields of his own design
for much less than it cost to buy new ones.

* Pin games is a slang term that members of the amusement industry often use to describe
pinball machines.

In 1932, Williams decided to make pinball more challenging by limiting
the amount of “body English” players could use. He designed a table with a
device that contained a metal ball on a pedestal in its base. If players nudged
the machine enough to knock the ball off the pedestal, the game ended. He
originally called his device “Stool Pigeon,” but when a customer complained
that the machine had “tilted,” Williams decided to call it a “tilt” mechanism.
He tested this innovation in a game called Advance.

Williams later refined the “tilt” mechanism by replacing the ball and plat¬
form design with a pendulum device, which has been present in nearly every
pinball game made since.

In 1933, Williams built Contact —the first “electric” pinball machine. The
name Contact referred to its electrically powered scoring pockets (called “con¬
tact holes”), which knocked the ball back into the playfield to continue scoring
points. Like the “tilt” mechanism, electric scoring pockets became a standard
for pinball that is still used today.

Previous to Contact, the skill for the player was to send the ball up on the
playfield, have it roll around, and hope that his aim was such that the ball
would somehow magically weave its way around through the pins that were
nailed into the playfield.

With the contact hole, you still needed to have some precision to get the ball
into the cup, but getting the ball into the cup gave you something back. There
was a sound, there was motion. Part of the fascination people have with pinball
comes from those opportunities where the game takes over and does things.

—Roger C. Sharpe, author, Pinball!*

Pay-Outs

Though he was well aware of Harry Williams’s innovations, a different de¬
velopment frightened David Gottlieb more. Slot-machine manufacturers

* Readers interested in learning more about the history of pinball and seeing its color and
pageantry should look for Pinball !by Roger C. Sharpe (E. P. Dutton, 1977).

The World Before Pong J

began making pinball-like machines called “pay-outs,” which combined pin¬
ball and gambling.

Gottlieb saw these machines as a threat to the entire industry. Pay-out ma¬
chines first appeared in the crime-conscious 1930s, and Gottlieb suspected that
politicians would outlaw the new machines and anything associated with them.

Yes, there was a certain amount of skill involved, but basically the law looked
at it as a gambling device. Pay-outs started out legally in many states and
eventually ended up being operated mostly illegally in places where the po¬
lice would look the other way, such as New Orleans. They were nickel games,
by the way. They paid off in nickels. So it was a little gamble, but neverthe¬
less it was gambling.

—Eddie Adlum, publisher, RePlay Magazine

Gottlieb’s fears proved accurate. Politicians saw pinball as inextricably as¬
sociated with gambling. When states passed laws prohibiting pay-out games,
they usually outlawed all forms of pinball.

The most celebrated attack on pinball came from Fiorello LaGuardia, New
York City’s flamboyant mayor. As part of his ongoing crusade against orga¬
nized crime, LaGuardia petitioned local courts for a ban against pinball. After
six years of petitioning the courts, LaGuardia’s request was granted. A Bronx
court ruled pinball an extension of gambling and made it illegal.

LaGuardia celebrated by having the police confiscate pin games from around
the city. He held a press conference in which he demolished several machines
with a sledgehammer. The event was even shown on newsreels in theaters
around the country.

There was a gaming [gambling] connotation to the coin-operated amuse¬
ment business. There was a photograph I remember very clearly—Fiorello
LaGuardia, the mayor of New York City, by the waterside breaking up all
these "games of chance” and throwing them into the sea to dispose of them.

Today he’d have had an even greater problem with environmentalists.

—Joel Hochberg, president, Rare and Coin It

6 The World Before Pony

Within three weeks of the Bronx court’s ruling, the New York Police De¬
partment confiscated and destroyed more than 3,000 pinball machines. Mayor
LaGuardia donated the metal scraps to the government to support the U.S.
war effort against Nazi Germany. In all, he donated more than 7,000 pounds
of metal scraps, including 3,000 pounds of steel balls. New York’s ban on pin¬
ball remained in place for nearly 35 years.

Once New York City banned pinball, neighboring counties followed. The
trend spread quickly.

The Battle for Legitimacy

Gottlieb believed that the only way to legitimize pinball was to prove that it
involved more skill than luck. Years passed before he found proof.

In 1947, one of Gottlieb’s engineers, a man named Harry Mabs, added an
innovation to the game—six spring-powered levers that players used to pro¬
pel the ball back into the playfield before it rolled out of play.

Gottlieb called them “flipper bumpers” and said that they proved that
Humpty Dumpty, his latest pinball cabinet, was not just a game of chance be¬
cause players scored most of their points by knocking the ball back into play
with flippers rather than relying on luck and gravity.

The flipper bat was quite a breakthrough because it gave the player a true
means of exercising and developing skill. You could aim at targets now,
rather than in the old days when you popped the ball up and just shook the
shit out of the table and hoped that it went in the right hole or hit the right
thing. The use of the flipper bat is probably the greatest breakthrough
ever in pinball.

—Eddie Adlum

It [the introduction of the flipper] not only changed the basic landscape of
the games themselves, but specific to the players, it really changed how they
interacted with the games. It was a totally different entertainment form than
it had been.

More important, it was a remarkable change for the game designers and
developers. What had been the prescribed way of doing game development

for the previous decade had to be altered dramatically. No longer was it a
situation of a person passively interacting with the game; now there was
true influencing and greater control from the standpoint of the player.

—Roger C. Sharpe

Gottlieb’s “flipper games” became the salvation of pinball. Pushed on by a
desperate need for respectability, other pinball manufacturers and distribu¬
tors imitated Humpty Dumpty s flipper bats and called their cabinets “flipper
games.” In France, where pinball has a long and popular history, pinball ma¬
chines are simply referred to as “le flipper.”

After years of complaining about competitors stealing his ideas, Harry Wil¬
liams found himself imitating rather than innovating, as he joined the growing
number of pinball manufacturers adopting the Gottlieb flipper. Williams’s
first flipper game was called Sunny. By this time, Harry Williams owned his
own Chicago amusement company, Williams Manufacturing Company,
which he founded in 1942.

Though Harry Mabs created the first flippers, it was Steven Kordek, an en¬
gineer from a company called Genco, who discovered the best use for them.
Kordek replaced Humpty Dumpty s six flippers—two at the top, two in the cen¬
ter, and two at the bottom—with two flippers along the bottom of the playing
field. Kordek’s innovation was introduced in a game called Triple Action*

I worked for a small company and I was always told to save money—and
there was no way in the world that I was going to use six flippers.

—Steve Kordek, former pinball designer, Cenco

Most pinball machines created in 1947 had six flippers. When Kordek’s two-
flipper design was demonstrated in a trade show in January 1948, it caused an
immediate stir. The industry has followed his basic design ever since.

Even as Gottlieb sought to legitimize pinball with flippers, Bally intro¬
duced Bingo machines—flipperless pinball machines with rows of pockets.

* Years later, Harry Williams hired Mabs as his chief designer. Mabs later recruited Kordek
to work for Williams.

8 The World Betore Pony

Bingo re-opened some of the wounds caused by pay-out games. Though pin¬
ball remained legal, most states outlawed Bingo machines permanently.

People tried to operate Bingo machines legally and treat them as regular
pinball machines, but because they were gambling devices, my grandfather
didn’t want to have anything to do with them.

—Michael Gottlieb

Flippers were enough proof that pinball was a game of skill for some legis¬
lators. Satisfied by flippers and free-game rewards for high scores, some states
relaxed their laws governing pinball. New York continued its ban into the 1970s.

A Growing Industry

There were five game manufacturers in the beginning. It was Gottlieb mak¬
ing pinballs. It was Williams making pinballs and novelties. It was Bally’s
making pinballs, novelties, and slot machines, although the major industry
didn't use those. It was Chicago Coin making pinballs and novelties. It was
Midway making novelty games—target rifles and so on.

There was a sixth, United Manufacturing. But just about the time I joined
the industry in 1964, United was purchased by Williams, so that put it back
down to five.

—Eddie Adlum

The coin-operated amusement industry has two tiers of companies. The first
tier includes companies like Gottlieb and Williams, which manufacture amuse¬
ment equipment. The second is made up of local distributors and operators
who place equipment in stores, bus stations, bars, restaurants, and bowling
alleys and set up routes to maintain it.

Though flipper machines and other games have long represented a steady
source of income, the jukebox defined the industry in the early going. During
the 1940s and 1950s, jukeboxes were an integral part of the fabric of American
society and the main source of income for amusement companies.

The World Before Pon? 9

Known as music operators, these distributors placed jukeboxes and games
in bus stations, restaurants, and ice cream shops. In exchange for permission
to place their equipment in businesses, operators paid location owners a por¬
tion of jukebox and game receipts. They established routes and hired teams of
technicians to maintain their equipment, empty the coin boxes, and place
new records in jukeboxes. Keeping current with the latest music trends was
essential to earning a good income and keeping location owners satisfied.

It was a competitive business. The music operator’s entire livelihood de¬
pended on keeping customers happy. If a location owner thought he had
received inferior equipment or old records, he could make arrangements with
a new operator simply by picking up the telephone.

In the mid-1960s, Gottlieb was the recognized leader [in pinball]. Bally was
the recognized loser. In fact, I knew a salesman named Irv Kempner in New
York City who worked for Runyon Sales Co. They were distributors of both
Rowe jukeboxes and Bally pinballs, and one of the guys said the reason
"Kempy” was the best salesman was because he had the worst pinball and
the worst jukebox to sell.

Today, Rowe is number one in jukeboxes, and Bally owned the pinball
machine industry in the late 1970s and early 1980s.

—Eddie Adlum

novelty Games

If you go to an old penny arcade, some of the equipment we consider an¬
tique today was quite popular in the days that I started [in the industry]. It
makes me feel old.

—Joel Hochberg

Historically, the oldest coin-operated amusement machines were known as
novelty games. Before making Baffle Ball, David Gottlieb manufactured a nov¬
elty machine called the Husky Grip that tested a player’s strength. By the 1940s,

10 The World Before Pon^f

companies had already invented mechanical baseball games. Other games
simulated horse racing, hunting, and Western gunfights. Over the years, the
field has grown to include hockey, soccer (known by many as foosball), fly¬
ing, and even building construction.

One of the most popular themes was the shooting arcade. Taverns began
carrying mechanical pistol games in which players shot tiny ball bearings at
targets on the other side of a small glass-enclosed cabinet. Larger shooting
galleries with rifles became staples at arcades.

We had some wonderful ideas like the Seeburg Bear Cun, a classic that old
timers still remember. You took an actual rifle that had a cable attached to a
console about 6, 8 , io feet away, and the bear moved from left to right. He
had light-sensitive targets in his stomach and on each side. As you shot, he
would rear up and growl and turn in the other direction, and you just kept
shooting until you ran out of bullets. It [Bear Cun] was a huge, big hit; a lot
of people had it.

We also had the Six Cun game where you had a great big mannequin
dressed like a cowboy. He stood at one side and challenged you to a gun
fight, and you stood on the other side and had a pair of guns mounted in a
little stand-up frame. He would challenge you to draw, like a 1-2-3, and you
would pull your gun, and he would lift his arm. If you got him, he would say,

"You got me,” and if he got you, he would say, "You lost. You’re dead,” that
kind of thing.

The Six Cun game was built like a Russian toilet so that it would last for¬
ever. And it did.

By and large, you didn’t go into an arcade in those days to play a specific
game. You went into the arcade to go into the arcade. You went in there, got
change for your dollar (of course, some games in those days were still on
nickel play), and you just looked around to see what there was to play. You
put a couple of nickels in here and put a couple of nickels in there until your
dollar was used up.

—Eddie Adlum

By the 1960s, novelty games had become quite sophisticated. Black lights were
built into the cabinets to make objects glow against dark backgrounds. One game,

The World Before Ponj It

Chicago Coin Speedway, had a projection screen for a background. Players steered
a race car in front of the screen, dodging the projected images of other cars. If
the player came too close to a projected image, the machine made a banging
sound to simulate a crash and the player went to the back of the pack.

These were the direct ancestors of modern video games.

Birth of a Visionary

If any one person has worked at every level of the amusement machine indus¬
try, it is Joel Hochberg. A jovial, quiet man with a self-effacing sense of humor,
Hochberg entered the industry to remain near his ailing mother. He never
imagined that years later he would help reestablish a multibillion dollar com¬
pany and change the evolutionary path of the entire industry.

Born and raised in Brooklyn, New York, Hochberg earned an associate de¬
gree in electronics from the New York Institute of Technology. “I never wanted
to find out how to make things tick; I wanted to know how to make them
tick better.” He got his degree in 1956 and began the selective interviewing
process at Burroughs Corporation.

One Saturday, a neighbor who worked for Master Automatic Music asked
Hochberg to help him repair a jukebox.

He [Hochberg’s neighbor] worked for one of the larger companies in the Jive
boroughs area. He asked me one Saturday morning if I could help him. There
was a very prominent location that was without music and would have been
without music until Monday because the distributor was closed. It [having
the jukebox shut off] would cost the company a lot of money, but I think
more than the money was the lack of the entertainment required for the week¬
end in that location.

—Joel Hochberg

It is nearly impossible to understand the impact that jukeboxes made on
businesses in the 1950s. At that time, not having a jukebox meant that cus¬
tomers went elsewhere.

Though he had studied electronics, Hochberg knew nothing about juke¬
boxes. He opened the machine and found a problem with the amplifier. The

12 The World Before Pon?

jukebox worked within a few hours. Hochberg later found out that his neigh¬
bor had never really expected him to be able to fix the problem.

Harry Siskind, then president of Master Automatic Music, was impressed
that Hochberg had fixed the jukebox and asked to meet him. Siskind didn’t
have a job to offer at the time but told Hochberg that he should consider
working in the music operators business because he had the “ability to take
things with a technical approach.”

Accepting a job at Burroughs would have meant Hochberg moving to Penn¬
sylvania, which, because of his mother’s dire illness, he was unwilling to do.
“My mother was deathly ill, and I really had no idea as to what the prognosis
was. She was basically terminal, but I didn’t know it. At least I didn’t believe it.”

Anxious to stay near his mother, Hochberg took a job at Tri-Borough Main¬
tenance. “ We did Brooklyn, the Bronx, Queens and Manhattan. We probably
did all five boroughs, but it was called Tri-Borough because I think the indi¬
viduals who formed the company came from three different boroughs.” For a
salary of $55 a week, Hochberg worked long hours six days a week and pro¬
vided his own car. He began by repairing jukeboxes and pool tables.

At this time, New York distributors carried novelty games as well as juke¬
boxes—pinball was still banned. For the most part, novelty games represented
only a small part of the business. The popular novelty themes of the times
included shuffle alleys—indoor tabletop bowling lanes on which players used
metal pucks to knock down miniature bowling pins. Other popular themes
included racing, baseball, and shooting galleries. In New York, where pinball
was still illegal, novelty games often turned a good profit.

The biggest part of our business was shuffle alleys and ball bowlers. Remem¬
ber, I came from the city [New York], and these were legal items. Every bar
and grill, every tavern had a shuffle alley.

Baseball was a very popular game. It used a bat and pitching mecha¬
nism. In some cases, lights on the playing field [were used to show bases
with runners], and in other cases, men rotating on a motor carriage. You had
some moving targets, some escalation ramps. You had home run areas that
were predetermined, and of course, sometimes [home run] ramps came up
and if you were able to hit them, your ball went out of the park.

■Joel Hochberg

The World Before Pon? IJ

Wall boxes were another popular item in the industry. These were tabletop
cabinets that linked booths and tables to a central jukebox. Each box had a
song list, coin slot, and buttons for ordering songs. Restaurants, diners, and
malt shops placed wall boxes on tables and in booths so that customers could
select and order songs more conveniently.

.. . and wall boxes were great for the industry because the machine would
play a record once. It’s conceivable if a record was popular, that four, five,
or six people would select that record—but it would only play it once. The
same situation holds true today, jukeboxes don’t dedicate songs to an indi¬
vidual; they just deliver the requirement to play.

—Joel Hochberg

Always the innovator, Hochberg found a way to improve the system. He
was the first engineer in his area to place volume switches behind bars and
counters so that bartenders and restaurant managers could make the music
louder upon request. Location managers welcomed the change. Before this,
the only volume control was a knob hidden on the back of the jukebox so
that customers couldn’t get to it.

Though his mother died shortly after he started work at Tri-Borough, Hochberg
continued working for New York amusement companies until 1961. This was dur¬
ing a period in which working within the amusement industry had its hazards.

I’ve also had a situation where a gentleman who played the game after [l re¬
paired it] lost a lot of money. So he was angry. He said, "If you didn’t repair
this game I wouldn’t have lost.” And he wanted to do a number on me.

I’ve seen a man carrying a gun in his hat. I’ve had a shot fired at me. Let’s
change that. . . . Not fired at me directly but fired into the location while I
was working on a United Baseball game.

—Joel Hochberg

Once, when Hochberg showed up at a bar early one Sunday morning to
service a machine, he was attacked and beaten. An investigation into the inci¬
dent revealed that he’d been mistaken for the bartender.

14 The World Before P 0115

The next thing I knew, I was being brutalized by a couple of people who were
very aggressive because they didn’t know who to beat up. The indication
was, he’s in the bar on Sundays before the bar opens, so there were two
people in the bar. They didn’t ask what my name was or what the other
gentleman’s name was. They just came in there. It seems that there was some
kind of local area issue, something that had something to do with a relative
of one of the people. The bartender’s wife was the sister of one of these fel¬
lows, and the bartender was mistreating the sister.

—Joel Hochberg

Hochberg also remembers that many people liked him for what he did.
Sometimes while working his route, he’d have to run outside to put money
in a parking meter, only to discover that people had recognized his car and
fed the meter for him.

In 1961 Hochberg took a job with New Plan Realty, which was opening the
Cavalier, one of the world’s first restaurant/arcades. Built in a new shopping
center in Philadelphia, the Cavalier was an enormous endeavor with a 10,000-
square-foot dining area and 2,500-square-foot arcade. Hochberg was hired to
help build and manage the arcade.

The same year that Hochberg moved to Philadelphia, a group of socially
awkward college kids began an experiment that would eventually change
Hochberg’s life.

Fori non athers

There’s some question about how you define a computer game. Two interactive pro¬
grams existed before Spacewar, in which you interacted with switches on the computer
and you changed a display on the screen, depending on what you did with the switches.
But they weren’t particularly designed as games. And they weren’t very popular be¬
cause, as games, they weren’t very good.

■Steve Russell, creator of Spacewar

l6 Forgotten Fathers

he members of the Tech Model Railroad Club (TMRC) at the Massachusetts
Institute of Technology (MIT) had their own language. They called bro¬
ken equipment munged . 1 They called rolling chairs bunkies. They called garbage
cruft. And they called practical jokes and impressive feats hacks.

Like most colleges, MIT had several campus organizations. The Tech Model
Railroad Club appealed to students who liked to build systems and see how
things worked. These were not typical college students. Many of them were
short and most were unathletic. Some wore thick glasses. In the late 1950s
and early 1960s, years before the invention of the pocket calculator, these were
the kids who carried a slide ruler.

These strange college students, with their funny jargon and nerdy ways, did
more to start the computer revolution than any Silicon Valley engineering team.
Naturally curious, these MIT students had devoted their lives to intellectual
tinkering. They believed in a cooperative society and imagined themselves liv¬
ing in a utopian world in which people shared information—sometimes without
regard to property rights. Once they discovered computers, they became known
as “hackers.” Before that, they were simply nerds.

Some members of the TMRC explored MIT at night, looking for machines
to examine. One night in 1959, Peter Samson opened a door in the Electronic
Accounting Machinery building and found an IBM 407, a machine capable of
creating and reading punch cards. To Samson, finding an unguarded com¬
puter was as exciting as discovering a new law of physics.

The IBM 407 was not a full-fledged computer. In order to make it work, Samson
and his friends needed to “kludge” a plug board. They didn’t mind the challenge—
they’d joined the TMRC because they loved jury-rigging systems. Soon the IBM
407 became a major focal point in the lives of many TMRC members.

The Hulking Giant

Many computers of the 1960s were large enough to fill entire rooms. Their
inner workings consisted of rows of expensive vacuum tubes; the standard
building block for early electronics. Because vacuum tubes generated great
amounts of heat, early computers needed cooling systems to prevent fires.
Some even had water pipes running through them for cooling. Not only did

Forgotten Fathers 17

vacuum tubes heat up, but they were also delicate. Certain computers, while
in operation, required a dedicated technician to replace broken tubes.

Since 1960, silicon chips have replaced transistors, which replaced vacuum tubes,
resulting in smaller, faster, and more powerful computers. Floppy disks and com¬
pact disks are used instead of much less efficient forms ol data storage, such as
punch cards and ticker tapes. A standard 3.5-inch floppy disk can hold as much
data as a mountain of punch cards and offers faster access to the information.

For the gaming world, the biggest transformation is in the way computers dis¬
play information. Early computers communicated via teletype. A few units had
computer readout screens. Throughout the 1960s, the University of Utah, Stanford,
and MIT were the only U.S. universities that had computers with monitors.

In 1961 MIT’s two main computers were gigantic—an IBM 709, which the
members of the TMRC called “the Hulking Giant,” and the TX-O, one of the
earliest computers to use transistors. Though it was considerably smaller than
the Hulking Giant, the TX-0 still required 15 tons of air-conditioning equip¬
ment for cooling. Unlike the 709, which used punch cards, the TX-0 encoded
data on long strips of paper tape.

Most students at MIT gravitated toward the IBM 709, causing the unregulated
forces of the TMRC to develop disdain for it. They preferred the more efficient
TX-O, which had been developed for military purposes. It was smaller, sleeker,
and its military designers had given it a monitor. Working on the TX-O, several
TMRC members quickly distinguished themselves as master programmers.

In the summer of 1961, Digital Equipment donated its latest computer to
MIT, the PDP-1 (Programmable Data Processor-1). Compared to the Hulking
Giant and even the TX-O, the PDP-1 was modest in size—about the size of a
large automobile. It sold for a paltry $120,000, and like the TX-O, it had a
readout terminal. The TMRC adopted it immediately.

In those days, when computers were as rare as nuclear reactors, hackers wrote
programs for the good of the computer-loving community. TMRC members
stored their PDP-1 programs on ticker tapes in a drawer near the computer,
where anyone could try them out or even revise them. Creating a new pro¬
gram was considered an impressive hack. So was making a good revision.

Steve Russell, a fairly new Model Railroader who had just transferred from
Dartmouth College, decided to make the ultimate hack: an interactive game.

l8 Forgotten Fathers

Russell, a short, nervous kid, was fairly new to the club. He spoke quietly,
wore glasses, and had curly hair. Though not a senior member of the club,
Russell had earned the other club members’ respect by helping a professor
implement a computer language called “LISP.”

Despite his nickname, “Slug,” Russell was intensely smart and energetic.
He was an avid reader of “B-grade” science fiction. He particularly loved Doc
Savage, a Flash Gordon—like character. Reflecting that passion, Russell deter¬
mined to set his interactive hack in outer space. He told the other club
members about his plans and generated more than a little excitement.

There was one problem, however. Russell needed motivating. Over the
next few months, fellow club members would ask about his progress and be¬
come frustrated. They complained that he was wasting time. In the end, Alan
Kotok, a more senior member of theTMRC, had to push Russell into finish¬
ing his work. When Russell told Kotok that he needed a sine-cosine routine
to get started, Kotok went directly to Digital Equipment, the PDP’s manufac¬
turer, to get it.

Eventually, Allen Kotok came to me and said, "Alright, here are the sine-
cosine routines. Now what’s your excuse?” He’d gotten it out of the [Digital
Equipment] users’ library.

Since I had run out of excuses, I sat down and wrote the program to run
two spaceships on the CRT, which you controlled with switches. The proto¬
type was completed in 1961 and the finished version in 1962.

—Steve Russell

It took Russell nearly six months and 200 hours to complete the first ver¬
sion of the game: a simple duel between rocket ships. Using toggle switches
built into the PDP-1, players controlled the speed and direction of both ships
and fired torpedoes at each other. Russell called his game Spacewar*

* Some historians argue that Willy Higinbotham, a scientist at the Brookhaven National
Laboratory, actually invented the first game. In 1958, Higinbotham programmed an
oscilloscope to play an interactive tennis game. While this appears to be the first interactive
game, it is an isolated instance. Apparently, neither Steven Russell nor Ralph Baer were
aware of the existence of Higinbotham’s game.

Forgotten Fathers 19

It was a two-player game; there wasn’t enough computing power available
to do a decent opponent. I was the first person to not make money on a two-
player computer game.

They [the rockets] were rather crude cartoons. But one of them was curvy
like a Buck Rogers 1930s spaceship. And the other one was very straight and
long and thin like a Redstone rocket. They were commonly called the Needle
and the Wedge.

Except for the pacing, Spacewar was essentially like the game Asteroids.

The spaceship controls were four switches. One let you rotate counterclock¬
wise, another was for rotating clockwise, one fired your rocket for thrust,
and the last one fired your torpedoes. The basic version used switches on the
console, and your elbows got very tired.

—Steve Russell

In typical hacker fashion, TMRC members revised Spacewar. Some of these
additions improved the game so much that they became integral elements.
By the time Spacewar was finished, Russell’s simple game had an accurate map
of the stars in the background and a sun with an accurate gravitational field in
the foreground.

I started out with a little prototype that just flew the spaceships around. Pete
Sampson added a program called Expensive Planetarium that displayed stars
as a background. Dan Edwards did some very clever stuff to get enough time
so that we could compute the influence of gravity on the spaceships. The
final version of that was done in the spring of 1962.

—Steve Russell

Battles took place around Edwards’s sun. The best players learned how to
accelerate into the sun’s gravitational field, loop around, and catch slower
opponents off guard. Hovering too close or flying into the sun meant death.
Another hacker added a hyperspace button. When trapped by an opponent,
players could hit the button and disappear. The risk was that you never knew
where your rocket would reappear. You could reappear safely across the screen,
but you were just as likely to appear too close to the sun to save your rocket.

20 Forgotten Fathers

To add a touch of realism, Russell originally made his torpedoes unpre¬
dictable. Most flew straight, but some strayed. Judging players’ reactions, he
later recanted, replacing realism with dependability. His final version of the
game had straight-flying torpedoes. Beyond these touches, Russell’s primary
vision of an outer-space torpedo duel remained intact.

Along with creating the first computer game, the members of the TMRC
invented another first in electronic entertainment. Tired of sore elbows, Alan
Kotok and Bob Sanders scrounged parts from the TMRC and assembled re¬
mote controllers that could be wired into the computer. These remotes were
easier to use than the PDP-l’s native controls since they had dedicated switches
for every Spacewar function, including hyperspace buttons. This was the fore¬
runner to the gamepad.

Though Russell’s amazing hack created a sensation throughout MIT, he
never made a penny from it. PDP computers were not a consumer commod¬
ity, particularly not arcade machines. “We thought about trying to make
money off it for two or three days but concluded that there wasn’t a way that
it could be done,” says Russell.

Eventually, Digital Equipment began using Spacewar as a diagnostic program
for testing equipment. In effect, PDP buyers got the game free.

Steve Russell never graduated from college. He followed a professor to
Stanford University and eventually moved into the private sector. In the 1970s,
he met another legendary computer wizard.

Steve Russell wound up years later in Seattle, working for a time-share com¬
puter company. They would bring in kids after school and have them pound
on keyboards to see if they could make the computers crash.

There was only one kid who could crash them no matter what they did.

The kid was named Bill Cates. There’s just this interesting little intersection
of worlds that I just thought was a really fascinating thing.

—Tom Zito, president, Digital Pictures

Spacewar was the first computer game. Steve Russell made no attempt to
copyright his work or to collect royalties from it. He was a hacker and had
created his game to show that it could be done.

Forgotten Fathers 21

The people behind the creation of the first video game did not share the
Tech Model Railroad Club’s utopian vision. Their capitalistic vision held up
better in the courts of law.

The Father of Home Video Games

I reported to the executive V.P. He knew what was going on. And he keeps
asking me, "Baer, are you still screwing around with that stuff [video games]?”
During the first couple of years and later on, I was subjected to his remarks
like, "Stop wasting our money.”

When the millions started coming in, everybody remembered how sup¬
portive they had been of the project.

—Ralph Baer, former manager of Equipment Design Division,

Sanders Associates

The first video game was created by engineers at Sanders Associates, a New
Hampshire-based defense contractor. Like many large contractors, Sanders
had its share of sensitive and top-secret activities. But in 1967, some of the
noises coming out of one Sanders research lab had many people wondering
what was going on.

For three months there were guitar sounds coming out of the little room on
the fifth floor. It sparked all kinds of rumors.

This is a military electronics company. Everything is classified. You don’t
walk in and out of any place without having either a key card or keys. And
here’s this room with guitar sounds coming out. All sorts of rumors started
floating around about what we were doing in there.

—Ralph Baer

The Equipment Design Division of Sanders was led by a stern and meticu¬
lous engineer named Ralph Baer; a man with a background in radio and
television design who had been with the company for more than ten years.

22 Forgotten Fathers

Baer was born in Germany eleven years before Adolph Hitler took power
in 1933, and he was largely self-educated. Being Jewish, he was kicked out of
school at age fourteen. Two years later, his family moved to America, where
he eventually took a correspondence course in radio and television servicing
from the National Radio Institute.

Baer had a knack for realizing positive results from unlucky turns of fate. After
joining the army in World War II, he studied algebra while stationed in England.
One day, after a long study session “in the English mud,” Baer was diagnosed with
pneumonia. Three days after he entered the hospital, the rest of his platoon was
sent to invade Normandy. He jokes that Algebra II saved his “collectives.”

A year after he returned from the war, Baer enrolled at the American Tele¬
vision Institute of Technology in Chicago. It was his first formal education
since being denied schooling in Germany.

After graduating with a bachelor’s degree in television engineering, he took
a job with a small defense contracting firm, turning down an offer from CBS
because the salary from the defense contractor paid five dollars more per week.
Baer quickly developed a solid reputation. When Sanders hired him in 1955, it
was to manage a design department with a staff of 200. By 1960, the staff had
expanded to 500.

Baer spent more than 30 years at Sanders. The first 15 years were dedicated
to military projects. During this time, he weaned himself from vacuum tubes
and began working on transistor technology and early microprocessors.

Among Ralph Baer’s best attributes as an engineer was his methodical re¬
cording of every step of the inventing process. From the moment he began
fleshing out new designs, Baer recorded the entire process, dated it, and filed
it away. Because of his meticulous note-keeping, he knows exactly when and
where he first got the idea to make games that could be played on a television.

I’m sitting around the East Side Bus Terminal during a business trip to New
York, thinking about what you can do with a TV set other than tuning in
channels you don’t want. And I came up with the concept of doing games,
building something for $19.95. This was 1966, in August.

Now you’ve got to remember, I’m a division manager, i have a $7 or $8
million direct labor payroll. I can put a couple of guys on the bench who can

Forgotten Fathers 23

work on something. Nobody needs to know. Doesn’t even ripple my over¬
head. And that’s how I started.

—Ralph Baer

The first man Baer allocated to game design was Bill Harrison. Once the
concepts were roughed out, Harrison, well versed in transistor-circuit engi¬
neering, did most of the implementation. Baer describes Harrison as a young,
talented technician who had educated himself on the workings of television
sets by assembling a Heath Kit television set.

In his younger days, Baer was extremely austere or, as he later described
himself, “uptight.” Working with Harrison, he created early video games us¬
ing a crude mechanism for transferring images onto the television screen.
Their game designs, however, lacked entertainment value. The first toy they
made was a lever that players pumped furiously to change the color of a box
on a television screen from red to blue. Though Baer would later prove to be
an excellent electronic toy and game designer, in the beginning his work was
more about engineering than game design.

When he first presented his invention to the executive board, including the
company founder Royden Sanders, most of the executives felt that Baer was
wasting the company’s time. Some suggested that Baer shelve the project.
Others wanted to pull the plug on it entirely.

My boss came up to play with our rifle; we had a plastic rifle by then. And he
used to shoot at the target spot [on a television screen] from the hip. He was
pretty good at it, and that kind of got his attention. We got more friendly.

And it kept the project alive.

—Ralph Baer

In 1967, Baer added another member to the team— Bill Rusch, who brought
a needed understanding of fun and games.

Bill Rusch was an engineer who worked for Herb Campman, the corporate
IR8D director. I needed an engineer to work along with Harrison. I wanted

24 Forgotten Fathers

two guys to work the problem, and Rusch came mostly because his boss
didn’t want him.

My biggest problem that summer was motivating Rusch. He’d come in at
10 or n am. and spend an hour talking; he was lazy and frustrating as hell.

Rusch was an extremely creative and extremely lazy, hard-to-motivate guy.
Brilliant. Also, he played really hep guitar.

But it’s a good thing we had him, because he helped put us on the map.

—Ralph Baer

To keep Rusch productive, Baer allowed him to continue working on a
project that involved playing guitar chords through a box that dropped the
sounds an octave, changing the notes to the pitch of a bass guitar. With Rusch
on board, the games began to take shape. Rusch made a game in which one
player chases another player through a maze.

The first ones were all two-person games. Baer’s game machine was not pow¬
erful enough to control objects or run any form of artificial intelligence. In May
or June of 1967, Rusch suggested a new game in which a hard-wired logic circuit
projected a spot flying across the screen. Originally, the object of the game was
for players to catch the spot with manually controlled dots. Over time, the play¬
ers’ dots evolved into paddles, and the game became ping-pong.

So here we had a respectable ping-pong game going, and it wasn’t long
before we called it a hockey game. Remove the center bar, which we put up
there to emulate the net, and now it’s a hockey game. We put a blue overlay
for blue ice on top of the screen so it looked more like hockey. We later added
a chroma signal to electronically generate the blue background.

We always had three controls—vertical control for moving the paddles up
and down, a horizontal control for moving the paddles from left to right (so
you could move close to the net if you wanted to), and what we called an
"English control,” which allowed us to put English on the ball while in flight.

—Ralph Baer

Sanders Associates had a rough time in the late 1960s, downsizing from
11,000 to 4,000 employees. As a military contractor, Sanders couldn’t suddenly

Forgotten Fathers 2 $

go into the toy business, so Baer had to find a customer for his invention. He
nearly licensed it to a cable company, but the depressed state of the cable in¬
dustry prevented the deal from ever taking shape. As a last resort, Baer urged
his bosses to notify television manufacturers about the project.

He had come up with the right audience. General Electric, the first TV
manufacturer to evaluate Baer’s toy, showed some interest. Then came Ze¬
nith and Sylvania. Both GE and Sylvania returned for second evaluations. RCA
almost bought into the project—contracts were written but never signed.

In 1971, Magnavox hired a member of the RCA team that had nearly pur¬
chased the project. He then told other Magnavox executives about the
television game he had seen at Sanders. Magnavox arranged for a demonstra¬
tion of the television game and immediately saw merit in the idea. After
months of the team working out details, negotiations were completed and
the contract was signed by the end of the year. Production started in the fall,
and early units were shown at Magnavox dealerships in 1972. Magnavox called
the finished product Odyssey.

Magnavox did a really lousy engineering job—[they] over-engineered the ma¬
chine. Then they upped the price phenomenally so that the damn thing sold for
$ioo. Here’s this thing I wanted to sell for $19.95 coming out at $100. Then in their
advertising they showed it hooked up to Magnavox TV sets and gave everyone
the impression that this thing only worked on Magnavox TV sets.

—Ralph Baer

While waiting for the Magnavox negotiations to finalize, Baer slipped into
a deep depression. The military contracting industry was undergoing difficult
times. Burdened both by Sanders Associates’ troubled financial state and doubts
about the value of his invention, Baer wondered if perhaps his bosses at Sand¬
ers were correct and he had wasted the company’s time and resources.

After helping Magnavox set up an Odyssey engineering group, Baer re¬
turned to New Hampshire. He went back to working on military projects.
This was after the layoffs, and few of Baer’s friends remained with Sanders.
During this period, he checked into a local hospital for an operation he had
been putting off.

26 Forgotten Fathers

So I decided I was going to have my back operated on. I just wanted to get
away from things. I went to the hospital. While I’m in the hospital, the first
$100,000 comes in from the Magnavox license. And it was like somebody
sticking the key in my motor and turning on the engine. My depression dis¬
appeared overnight.

—Ralph Baer

Ralph Baer and Steve Russell never met socially. They would, however,
meet on opposite sides of some very important litigation. Russell, who never
filed for a copyright or patent, would become the symbol for those trying to
break into the business. Baer, whose employers jealously guarded all of his
patents, would become the spokesman for people trying to protect their in¬
tellectual property rights.

Russell and Baer are the forgotten fathers of the industry. Because Steve
Russell’s game ran only on extremely expensive computers, it had no practi¬
cal application. Outrageously priced and poorly advertised, Ralph Baer’s game
machine might also have gone unnoticed. But in 1972, the year Magnavox
finally released Odyssey, another, rather similar, machine was about to change
the way America played games.

Fai f the Industry

Nolan at one point decided, as only Nolan can, that he wanted to run for the House of
Representatives. And the way that Nolan’s mind works, he decided that if he wanted to
be a congressman, he’d better buy a house in Washington, D.C.

—Tom Zito, former reporter, the Washington Post

28 Father of the Industry

he son of a small-town cement contractor, he became a citizen of the world.
A critic once called him “the smartest man who ever walked the earth,”
but a close friend describes him as having “the attention span of a golden re¬
triever.” He is Nolan Bushnell, an electrical engineer and inventor whose only
true invention is a $16-billion industry.

Nolan Bushnell was born a Mormon in Clearfield, Utah, in 1943. Though
he left both Mormonism and Utah behind early in life, he still speaks warmly
of both. Bushnell has eight children. The rest of the country would call this a
large family, but in the intensely Mormon town of Clearfield, Utah, the
Bushnells would fit right in.

Bushnell’s father died in the summer of 1958, leaving behind several unfin¬
ished construction jobs. Whether driven by youthful bravado or a sense of
responsibility, 15-year-old Nolan, who already stood over six feet tall, fulfilled
the contracts himself. “When you do something like that as a 15-year-old,
you begin to believe you can do anything,” says Bushnell.

Throughout his life, Bushnell demonstrated his love of ideas. In high school,
he was a champion debater and studied philosophy as a hobby. He also dem¬
onstrated a deep-seated need for fun. As a teenager he strung electric lights
along a kite and fooled neighbors into thinking it was a UFO. He stopped col¬
lege roommates from using his toiletries by putting a deodorant label on a
can of green spray paint. According to Bushnell, one rather unaware student
painted both underarms before realizing he’d been duped.

In 1962, Bushnell enrolled in the University of Utah. As a freshman, he wrote
a term paper stating his philosophy for an interesting existence: it expressed a
constant need for change and a wanderlust that would punctuate his life.

I said [in the term paper] that a bright person should be able to fundamen¬
tally master any discipline in three years—mastery meaning to hit the
90-percentile level. To become a truly immersed master, if you would, you
could spend the rest of your life on the last io percent. But I felt that I wanted
to be constantly on that 90 percent curve, which required me to keep chang¬
ing venues.

The way to have an interesting life is to stay on the steep part of the learn¬
ing curve.

Nolan Bushnell

Fattier of the Industry 29

Bushnell describes himself as having received “two educations.” After los¬
ing his tuition money in a poker game, he took a job running arcade games at
Lagoon, an amusement park located north of Salt Lake City.

Bushnell worked full time during the summer. During the slower spring
and fall seasons, he worked weekends. He began on the midway, talking people
into trying to knock down milk bottles with a baseball at a quarter a shot.
According to Bushnell, stacking bottles was the least important part of the
job. The real trick was attracting players. The job taught him lessons he’d use
the rest of his life.

Remember I started out on the midway, selling balls to knock milk bottles
over. So I’d say, "Come on over.” If I got you to take one of my baseballs and
give me a quarter, I was doing my job.

I always said that I was doing the same thing with Pong, only I was put¬
ting myself in the box. The things I had learned about getting you to spend
a quarter on me in one of my midway games, I put those sales pitches in my
automated box.

—Nolan Bushnell

Eventually, he moved from the midway to an in-park pinball and electro¬
mechanical game arcade. There he watched customers play games like Chicago
Coin Speedway. He helped maintain the machinery and learned how it worked.
Most important, he further honed his understanding of how the game busi¬
ness operates.

Though he majored in engineering, Bushnell divided his academic career
among many interests, with special emphasis on philosophy. He eventually
discovered the computer lab.

By this time, the University of Utah had emerged as one of the top schools
for computer science. Led by Professor David Evans, who worked with ex-
Harvard professor Ivan Sutherland to build a head-mounted virtual reality
display in 1968, the Computer Science Department had some of the best equip¬
ment in the country.

In the late 1960s, if you wanted to connect a computer up to a telephone or to
a video screen, you only did it four places in the world or in the known uni-

30 Father of the Industry

verse: the University of Utah, MIT, a college in Minnesota, or Stanford. And it
was just serendipity that I went to school there.

—Nolan Bushnell

As an undergraduate, Bushnell had only limited access to the computer
lab. He was determined to explore, however, and eventually befriended some
of the teaching assistants. In the end, Bushnell would become a regular, spend¬
ing many late nights in the lab. He learned to program in FORTRAN and
Gotran, two of the earliest computer languages.

Bushnell also learned about computer games. His favorite was Spacewar, Steve
Russell’s pioneering two-man combat game. Bushnell played it incessantly.

He also created some games of his own. Naturally charismatic, Bushnell
talked senior students into helping him. He made computerized Tic Tac Toe
and 3-D Tic Tac Toe. But his best creation was a game called Fox and Geese.

Fox and Geese was a very primitive game in which there were, it was either
four or six Xs, which represented the geese, and one 0 , which was the fox.

And if the geese completely surrounded the fox, they could kill it. But if the
fox got any of the geese off by himself, he could kill the geese.

So the idea was to have three geese touch the fox at the same time. And
they were actually run by the computer. They had a very simple algorithm:

They looked to see whether the fox was to the left of them or to the right, and
they’d click one space toward that side in both the X and Y. So they’d con¬
stantly be converging on him.

You were driving the fox around, trying to go after the goose and isolate it.

—Nolan Bushnell

Though the students at the University of Utah teamed up to write seven
computer games, Spacewar remained Bushnell’s favorite. He continued his late-
night Spacewar sessions all the way through school. By the time he graduated
in 1968, he had committed the game and its many nuances to memory.

In 1969, a northern California engineering firm, Ampex Corporation, hired
Bushnell as a research-design engineer for an annual salary of $10,000. He de¬
scribes his first project as a “high-speed digital type recording system.” He

Fate of the Industry 3 !

worked on the system for eighteen months before his wanderlust struck. For
his life to be interesting again, he needed to slip back into “the steep part of
the learning curve.”

Bushnell saw himself as a stifled entrepreneur. He had ideas, talent, and
ambition. Looking back on “both” of his educations, he decided to combine
engineering and arcade games. In his typically strong entrepreneurial fash¬
ion, he turned his daughter’s bedroom into a workshop. For the next few
months, two-year-old Britta Bushnell slept in the living room while her fa¬
ther made a coin-operated version of Steve Russell’s computer game, Spacewar.

Bushnell originally tried to build his game using a new and inexpensive
Texas Instruments minicomputer but found that it was too costly and lacked
the processing power to run a compelling game. The spaceships were shape¬
less and the game moved too slowly.

Undaunted, Bushnell found a way to improvise. Instead of building a gen¬
eral-purpose computer, he designed a specialized device capable of only one
thing—playing his game. As an Ampex engineer, Bushnell was able to get
most of the parts he needed free.

Ampex had a policy that for hobbies, they’d give you the parts. Everybody
called them "G-jobs.” As long as it wasn’t excessive... . they were just 15 or
20 cent items.

And the ones Ampex didn’t have, I got from Marshall Electronics. Every
engineer ends up having friends who are salespeople—salespeople all have
samples. So you just work your friend network and say, "Can you give me
some of these? I’m working a new thing and I’ll give you the order if it works."

—Nolan Bushnell

It worked. Though it lacked the crisp graphics Russell had created on
the $120,000 PDP-1, Bushnell’s Computer Space retained all of the basic play
value. It had the star and gravity field, the hyperspace jump, and the same
outer-space physics. Even Steve Russell would have appreciated Bushnell’s
brilliant hack.

Once he created the circuit board, Bushnell found other ways to save
money. He went to Goodwill and bought an old black and white television

32 Father of the Industry

for a monitor. The coin-drop emptied quarters into an empty paint thinner
can. Since the coin-operated video-game industry did not exist, and most of
the electromechanical amusement industry was in faraway Chicago,
Bushnell had to invent solutions constantly.

Having created a working prototype of his game, Bushnell now looked for
a partner to help manufacture it. He found that partner in Bill Nutting,
founder of Nutting Associates. Nutting, who had already begun dabbling in
the coin-op business, hired Bushnell and licensed his game.

We got Computer Space going and got a deal with Nutting. Nutting said
they’d build it for us, but they had no expertise. They wanted me to join the
company as chief engineer, and I agreed because Nutting had a couple of
projects that they needed me to do. So I worked on their projects during the
day and finished up Computer Space at night and on weekends.

That’s how I maintained my rights to things. And they actually later on
tried to litigate and said they had a shop right and video game patents.

—Nolan Bushnell

Nutting Associates was owned by Bill Nutting, who had had a successful
machine called Computer Quiz. It was one of the very first, if not the first,
solid-state amusement machines ever developed. It came out probably
around 1970. Computer Quiz was a trivia game, simple as that.

But what’s interesting is that Bill Nutting had a brother, Dave—they started
out in the business together but had an argument that ended with them
splitting up. Bill Nutting had Nutting Associates and Dave Nutting started
Nutting Industries. Bill Nutting made Computer Space and Dave Nutting made
I.Q. Computer Quiz.

—Eddie Adlum

Always aware of the importance of presentation, Bushnell put special em¬
phasis on creating an elaborate futuristic cabinet to hold his game. In his mind,
the cabinet would be the huckster convincing people that they wanted to
play—the same job he’d performed on the midway at the amusement park.

Father of the Industry 33

He ended up sculpting a cabinet with rounded corners out of modeling clay.
Engineers at Nutting molded the final version out of fiberglass.

Because of its complex game play, Computer Spacehad pages of instructions
explaining how to maneuver ships, steer clear of gravity, and jump into hy¬
perspace. Nutting used the Dutch Goose, a bar just off the Stanford University
campus, as a test site. No one in the bar had ever seen such a thing. Although
Computer Space attracted some curious stares, it did not attract many players.

Whether he had succumbed to Bushnell’s salesmanship or simply believed
in the project, Bill Nutting went on to make 1,500 Computer Space machines.
Bushnell personally demonstrated the game to coin-op distributors at the
1971 Music Operators Association* convention in Chicago.

It was called Computer Space, and I saw it in 1971 at the MOA show in Chi¬
cago. As a reporter for Cash Box [a vending machine trade publication], I
was strolling up and down the aisles where the machines were exhibited,
with my camera and notepad. I ran into a great big, long, skinny hiker indi¬
vidual who appeared summarily to be known as Nolan Bushnell, who worked
for a company named Nutting Associates.

Nolan was hired on at Nutting Associates to fool around developing a
game that had a television monitor in it. In those days the general public
didn’t call them monitors, they called them TV tubes.

Nolan came up with a game called Computer Space. It was a wonderful
try that went absolutely nowhere. It had a bizarre sculpted fiberglass cabi¬
net, hourglass shape, lots of curves. I never played the game. All I can
remember is that Nolan Bushnell was about the most excited person I’ve ever
seen over the age of six when it came to describing a new game, describing
it so much that I was backing up, trying to get away, while he was talking.

—Eddie Adlum

The music operators at the convention saw little potential in Computer Space,
and very few of them bought machines at the show. In the end, the game

* The Music Operators Association was later renamed the Amusement and Music Opera¬
tors Association (AMOA), to reflect the importance of video games to the industry.

34 Father ofthe Industry

turned into a marginally expensive gamble for Nutting. The company didn’t
sell all of the original 1,500 machines and never built more.*

Computer Space pulled in huge amounts of quarters at the Dutch Goose. But
it would earn almost no money in a workingman’s bar. The Dutch Goose is
really a Stanford University hangout... .

Computer Space obeys the first law—maintenance of momentum. [Bushnell
is probably referring to Sir Isaac Newton’s first law—objects maintain con¬
stant velocity unless acted upon by an external force. ] And so that was really
hard for people who didn’t understand that.

—Nolan Bushnell

Bushnell admits that the instructions were too complex: “Nobody wants
to read an encyclopedia to play a game.” He also blames Nutting for market¬
ing the game badly.

Nutting was literally about to go bankrupt. I mean, they really had some
problems. And it [ComputerSpace] did okay, but it really didn’t do nearly as
well as it could have. Companies that are in trouble... when you get inside
them, you figure out why they’re in trouble.

In some ways it was a blessing to have worked for Nutting. It didn’t take
very long to figure out I couldn’t possibly screw things up more than these
guys had. Seeing their mistakes gave me a lot of confidence in my ability to
do better on my own.

—Nolan Bushnell

After the failure of Computer Space, Bushnell decided to start his own com¬
pany. He formed a three-way partnership with Ted Dabney, an Ampex
engineer he’d brought to Nutting Associates, and Larry Bryan, also from
Ampex. Each partner agreed to contribute $250. Bryan later dropped out of
the partnership before contributing his money.

* Arcade historian Keith Feinstein located sales and shipping documents proving that
Nutting Associates began shipping Computer Space in 1971.

Father of the Industry 35

The company’s first step was to select a name. Looking through a dictio¬
nary, Bryan came up with Syzygy, a word describing the straight-line
configuration of three celestial bodies—a solar eclipse is the syzygy of the earth,
moon, and sun. When Bushnell applied for the name, the state of California
responded that it was already in use. “A candle company already had it. They
were sort of a hippie commune in Mendocino. We subsequently tried to find
it out of curiosity. I think it had gone defunct by that time. I never did find it.”

Because he could not use Syzygy, Bushnell turned to a word from the Japa¬
nese strategy game Go. He chose the rough equivalent of the chess term
“check,” naming his company Atari.

And The liei IN s F m

There were perhaps only five important game manufacturers and five pool table manu¬
facturers and four jukebox manufacturers, and for all intents and purposes, that was the
manufacturing side of the amusement machine business.

It stayed that way for quite some time—until 1972. In 1972, Nolan Bushnell, a rather
clever electronics engineer from Northern California, adapted Ralph Baer’s Magnavox
toy for playing ping-pong on the television screen into a coin machine. As the world
knows, he called it Pong.

—Eddie Adlum

My kid came home from school one day and said that Nolan BushnelPs daughter told the
teacher that her father invented Pong. Well, I told him to go to Nolan’s daughter and say,
"If your daddy invented Pong, how come he had to ask my daddy to come fix his ma¬
chine when it broke down?”

—Al Alcorn, former "sort of” vice president of engineering, Atari Corporation

j8 And Then There Was Pong

| n 1972, President Richard Nixon had all but locked up his re-election by
I visiting the People’s Republic of China and the Soviet Union; the Supreme
Court deemed the death penalty cruel and unusual punishment and ruled
it unconstitutional; and an investigation by White House counsel John Dean
found the Nixon administration innocent of any involvement in the at¬
tempted burglary of the Democratic Party headquarters in the Watergate
apartment complex.

The Dow Jones Industrial Average hit 1000 points for the first time on No¬
vember 14, 1972, and the economy looked brighter than it had in five years.
Along with a healthy economy came thousands of start-up companies.

On June 27, 1972, Nolan Bushnell and Ted Dabney applied to have Atari
incorporated. They founded their company with an initial investment of $250
each. Within ten years, Atari would grow into a $2-billion-a-year entertain¬
ment giant, making it the fastest-growing company in U.S. history.

Atari’s first office was located in a Santa Clara industrial zone—a crude
1,000-square-foot space in an inexpensive concrete building, made to house
start-up companies. These were lean times for the company. It existed on a
few small contracts and the limited royalties Bushnell received from Com¬
puter Space.

Bally, now a very successful pinball and slot machine manufacturer, be¬
came one of Atari’s first customers, signing a limited contract for Bushnell to
develop new extra-wide pinball machines. Bushnell also continued working
on a multiplayer version of Computer Space, which he hoped to sell to his old
employers at Nutting Associates.

We had a 2,ooo-square-foot facility. This was the original garage shop—you
know, one of those places with a roll-up door, one office, and a bathroom. It
had sort of a little reception area, and part of our requirement to the land¬
lords was that they put in another office. That was Ted’s lab.

Incubator facilities like that are unique to California. They’re cheap and
they’re made cheap because . . . what they really want you to do, and what
Cole Properties, the ones that were running the building wanted, was to sign
us for a long lease.

Eighty percent of the companies [that sign up] don’t grow or stay there
for a long time until the lease is out. But some companies get really big

And Then There Was Ponj 39

quickly. And they’ll say, oh, we’ll let you out of the lease. You can just roll it
into one of our other properties.

—Nolan Bushnell

To create a steadier income base, Bushnell and Dabney started a pinball
route that included a local bar, some coffee shops, and the Student Union
building at Stanford University. Because they could buy the pinball machines
cheaply and knew how to maintain them, the route became a profitable asset.
It eventually became so lucrative, in fact, that when Dabney left the com¬
pany, he accepted the route as part of his settlement.

The first full-time employee of Atari Corporation was Cynthia Villanueva,
a 17-year-old who used to baby-sit Bushnell’s children. She needed a summer
job so Bushnell hired her as a receptionist. He instructed her to “put on the
show,” giving callers the impression that Atari was an established organiza¬
tion rather than a start-up company with more owners than employees.

Nolan didn’t want to answer the phone, he wanted to have somebody else
answer it. So he hired a secretary, Cynthia. And when someone would call
[she would make them wait and yell], "It's for you Nolan.” We'd wait a cer¬
tain amount of time to make it sound like it was a bigger company, you
know it would take longer to go get him.

—Al Alcorn

Villanueva’s responsibilities did not stop with answering telephones. Be¬
cause of the company’s limited budget, she was called upon to do everything
from running errands to building electronic components and placing parts in
cabinets. She stayed with Atari for more than a decade, remaining long after
Bushnell and Dabney left.

Atari’s second employee was a young engineer named Al Alcorn, whom
Ted Dabney first met while working at Ampex. Alcorn had just completed a
work-study program that allowed him to work summers at Ampex while
finishing his engineering degree at Cal-Berkeley.

Short and sturdy, Alcorn was once a member of the same all-city high-
school football team as O. J. Simpson. He was naturally gifted when it came to

40 And Then There Was P 0115

electronics and had learned how to repair televisions by taking an RCA corre¬
spondence course in high school. When he got to college, Alcorn paid for his
education by working in a television repair shop.

When Alcorn finished his degree, he found the job market weakening and
was hired by Ampex. The company was going through rough times and had a
round of layoffs when Nolan Bushnell offered him a job working for Atari.
Alcorn agreed to move.

Nolan hired me when Ampex was going through some setbacks. He offered
me a job as the VP of engineering or sort of, VP of R 8 D or whatever title it
was of this company called Syzygy.

He offered me $1,000 a month and a chance to own stock in the company.

The stock was worthless; most start-up companies fail anyway. I had actu¬
ally been making a little bit more than that, but I figured what the heck.

Nolan had a company car. This was a concept I’d never thought of before
or conceived of. It was an Oldsmobile station wagon, but like, wow, you can
drive a car that isn't even yours and don’t have to pay for it. What a concept!

—Al Alcorn

Simply an Exercise

Shortly after hiring Alcorn, Bushnell gave him his first project. Bushnell re¬
vealed that he had just signed a contract with General Electric to design a
home electronic game based on ping-pong. The game should be very simple
to play—“one ball, two paddles, and a score.... Nothing else on the screen.”

Bushnell had made up the entire story. He had not signed a contract or
even entered into any discussions with General Electric. In truth, Bushnell
wanted to get Alcorn familiar with the process of making games while he
designed a more substantial project. Bushnell had recently sold Bally execu¬
tives on a concept for an outer-space game that combined the true-life physics
of Computer Space with a race track.

I found out later this was simply an exercise that Nolan gave me because it
was the simplest game that he could think of. He didn’t think it had any play

And Then There Was Pon^f 4 1

value. He believed that the next winning game was going to be something
more complex than Computer Space, not something simpler.

Nolan didn’t want to tell me that because it wouldn’t motivate me to try
hard. He was just going to dispose of it anyway.

—Al Alcorn

From his tenure at Ampex, Alcorn was already familiar with the transis-
tor-to-transistor logic (TTL) involved in creating electronic games. He tried
to work from the schematic diagrams that Bushnell had drawn while design¬
ing Computer Space but found them illegible. In the end, Alcorn had to create
his own design, based on what he knew about Bushnell’s inventions and his
own understanding of TTL.

As he worked, Alcorn added enhancements that Bushnell had never envi¬
sioned. He replaced the expensive components with much less expensive parts.
Bushnell’s original vision included paddles that simply batted the ball in the
direction it had come from. Feeling that this was inadequate, Alcorn devised a
way to add English to the game and aim the ball with the paddles.

Instead of using solid lines to represent paddles, Alcorn broke the paddles
into eight segments. If the ball hit the two center segments of the paddle, it
flew straight back at a 180-degree angle. If the ball hit the next segments, it
ricocheted off at a shallow angle. Hitting the ball with the outer edges of the
paddle would send the ball back at a 45-degree angle.

Alcorn also added ball acceleration. The original game simply buzzed along
at the same speed until someone finally missed the ball. Alcorn found the
game dull and thought that speeding the ball during extended rallies might
lend some excitement. He wrote the game so that after the ball had been hit a
certain number of times, it would automatically fly faster.

A certain mythology has arisen about the creation of Pong. People have writ¬
ten about the meticulous effort that went into creating the resonant
pong-sound that occurred whenever the ball struck a paddle. According to
Alcorn, that sound was a lucky accident.

Here I was developing this thing and feeling kind of frustrated because it
already had too many parts in it to be a successful consumer product. So I

42 And Then There Was Pon?

felt like I was failing, and Nolan didn't mention that the game had come off
better than he’d expected.

Now the issue of sound . . . People have talked about the sound, and
I’ve seen articles written about how intelligently the sound was done and
how appropriate the sound was. The truth is, I was running out of parts on
the board. Nolan wanted the roar of a crowd of thousands—the approving
roar of cheering people when you made a point. Ted Dabney told me to
make a boo and a hiss when you lost a point, because for every winner
there’s a loser.

I said, "Screw it, I don’t know how to make any one of those sounds. I
don’t have enough parts anyhow. ” Since I had the wire wrapped on the scope,

I poked around the sync generator to find an appropriate frequency or a
tone. So those sounds were done in a half a day. They were the sounds that
were already in the machine.

—Al Alcorn

played more like squash than ping-pong. Thanks to Alcorn’s segmented
paddle, it had become a game of angles, in which banking shots against walls
was an important strategy. Players controlled inch-long white lines that rep¬
resented racquets, which they used to bat the small white square that
represented the ball. The background was black.

The game was streamed through a $75 Hitachi black-and-white television
that Alcorn picked up at a nearby Payless store. He set the television in a four-
foot tall wooden cabinet that looked vaguely like a mailbox. Since the printed
circuit boards hadn’t been made, Alcorn had to hard-wire everything him¬
self. The inside of the cabinet had hundreds of wires soldered into small boards
and looked like the back of a telephone-operator’s switchboard.

It took Alcorn nearly three months to build a working prototype. His fin¬
ished project surprised Bushnell and Dabney. Instead of giving them an
interesting exercise, Alcorn had created a fun game that became their flagship
product. Bushnell named the game Pong and made a few changes, including
adding a bread pan for collecting quarters and an instruction card that read
simply, “Avoid missing ball for high score.” To test the game’s marketability,
Bushnell and Alcorn installed it in a location along the Atari pinball route.

And Then There Was Pon? 43

Our initial idea was to go into business as a contract design firm and sell our
ideas to others for licensing. We had a contract with Bally to design a video
game for them, and we saw it as being a big, pretty long project.

So I had Al do this Pong game, this ping-pong game. And, dammit, it was
fun. We tweaked it a little and it was more fun, and we thought to ourselves,
we’ll get Bally to take this. We’ll complete our contract way, way, way ahead
of schedule and life will be happy in the Valley.

So I took Pong and offered it to Bally. I said, "Hey, you know we con¬
tracted to do a driving game but we got this game instead. Do you want this
instead? Will this fill our contract for you?” They played it and said, "This is
kind of fun, but it requires two players and if a guy’s there all by himself he
can’t play it.” And I said, "Well, we could probably put a one playerversion
in.” I sold them pretty hard.

—Nolan Bushnell

Andy Capp’s was a peanut-shell-on-the-floor beer bar in Sunnyvale, California.

It was nothing special, other than it had a game room in the back that was
larger than any that you would see in a bar at that point in time.

—Nolan Bushnell

Once, when feeling particularly generous, Bushnell described Andy Capp’s
Tavern, the location where Atari first tested Pong, as a “rustic location.” It was
a shabby bar located in Sunnyvale, a much smaller town in the pre—high
technology days of the early 1970s. Alcorn, who visited the bar while running
the pinball route, remembers it as having four or five pinball machines, a juke¬
box, and a Computer Space machine. They installed the prototype in late
September 1972.

We put it [the Pong prototype] on a barrel. He had old wine barrels to use as
tables and we just put it on top of the table. It wasn’t even a full size.

Nolan Bushnell

44 And Then There Was Pong

Nolan and I sat there the first night and watched people play, and here’s the
scene. We’re sitting there with a couple of beers, and a young man goes up
and plays Computer Space while his friend plays Pong. While we’re watch¬
ing, the first guy goes over and tries Pong with his friend.

We went over to him afterward and asked, "Well, what did you think of
that machine?” And the guy says, "Oh, it’s a great machine. You know, I
know the guys who designed it.”

"Really! What are they like?”

So [he tells us] this whole bullshit story. I think he was practicing a line for
picking up babes.

—Al Alcorn

One of the legends of video games is that two days after installing Pong in
Andy Capp’s Tavern, Alcorn got an angry late-night call from Bill Gattis, the
tavern manager. According to the story, the machine had stopped working
and Gattis wanted it hauled out of his bar.

In truth, Alcorn received the call from Gattis two weeks after installing
the machine. It was a friendly call in which the bartender suggested that they
fix the machine quickly, since it had developed quite a following. Alcorn fre¬
quently visited Andy Capp’s while making maintenance runs on Atari’s pinball
route. He and Bushnell had selected the bar as a good test site because Gattis
had always been cooperative.

He said to me, "Al, this is the weirdest thing. When I opened the bar this
morning, there were two or three people at the door waiting to get in. They
walked in and played that machine. They didn’t buy anything. I’ve never
seen anything like this before.”

I went to fix the machine, not knowing what to expect. I opened the coin
box to give myself a free game and low and behold, this money gushed out.

I grabbed handfuls of it, put it in my pockets, gave the manager my busi¬
ness card, and said, "Next time this happens, you call me at home right
away. I can always fix this one.”

■Al Alcorn

And Then There Was Ponj 45

Nolan Bushnell left for Chicago to visit a couple of pinball manufacturers
a few days before Alcorn received the call from Andy Capp’s Tavern. He had
brought a portable Pong game to demonstrate to executives at Bally and Mid¬
way. Though Bushnell already had an inkling that Pong was doing good
business at the test site, he had no idea how well it had done. When he re¬
turned, an excited Al Alcorn told him that the machine at Andy Capp’s Tavern
had stopped working because the quarters had overflowed. The news struck
Bushnell like a revelation.

Surprised by Pong s success, Bushnell decided that he should manufacture
the game .himself rather than sell it to an established game maker. The prob¬
lem was, he had discussed the game with executives at Bally and Midway and
stirred up some interest. Now he had to find a way to steer them away from
Pong while keeping the door open for future projects. In the end, Bushnell
played one side against the other.

Nolan decided he didn’t really want Bally to take Pong because he knew it
was too good. So he met with Bally and Midway and decided to tell Bally that
the Midway guys didn’t want it. And so the Bally guys decided that they
didn’t want it.

Then he told the Midway guys that the Bally guys didn’t want it. He got them
convinced that it was no good. [Once they heard Bally didn’t want it] it... didn't
take much convincing.

—Al Alcorn

The Big Debate

There are unanswered questions in the history of video games. One question
involves Ralph Baer, the designer of the Magnavox Odyssey, and Nolan
Bushnell. It is a question of ownership.

In 1972, while Nutting Associates tried to market Computer Space as the be¬
ginning of a new generation of arcade games, Magnavox quietly circulated
the Odyssey television game around the country in special demonstrations
for dealers and distributors. Most demonstrations took place in private show¬
ings, but the new device was also displayed at a few trade shows.

If6 And Then There Was Pong

The first show began on May 3,1972, in Phoenix, Arizona. Three weeks later,
Odyssey came to the San Francisco Bay area in a large trade show held in the
town of Burlingame. According to Magnavox, a Nutting Associates employee
named Nolan Bushnell attended the show on May 24. Depositions taken from
Magnavox witnesses claimed that while at the show, Bushnell tested Odyssey.

Some time after Atari began marketing Pong, in 1972, Magnavox took the
California start-up to court. Pong, Magnavox argued, violated several of Baer’s
patents. It infringed upon his patents for projecting electronic games on a
television screen, and, more important, it infringed on his concept of elec¬
tronic ping-pong.

What they’ve always alleged was that there was a meeting or a distributor
show somewhere in the valley, and I should have, would have, could have
been there. So it’s one of those pissing matches.

—Nolan Bushnell

Atari was up against a stacked deck. First of all, the methodical Ralph Baer
considered filing for patents an integral part of the invention process. During
his life, Baer was awarded more than seventy patents and was once named
“inventor of the year” by the state of New York. Ffe documented everything.

By comparison, Bushnell, with his haphazard style, allowed the mundane
details of invention and legal filing to escape him. Even when he created sche¬
matics, like the one he had made for Computer Space, they were often illegible.

More important, whether Bushnell attended the Magnavox show or missed
it, there had been a show* Magnavox could prove that it had demonstrated
Odyssey in Burlingame prior to the creation of Pong and even prior to the
incorporation of Atari. Magnavox also had Baer’s patents and notes, all of which
clearly predated Pong and Computer Space.

Bushnell considered his options. Magnavox had more lawyers and re¬
sources than Atari could ever hope to afford. His attorney urged him to
take the matter to court, claiming they would win; but when Bushnell asked
how much it might cost, the lawyer thought the expenses could be as much

* In later litigation, it was revealed that Bushnell not only attended the Burlingame show
but also played the tennis game on Odyssey.

And Then There Was Ponf 4J

as $1.5 million—more money than Atari had to spend. Atari could not af¬
ford to fight, even if it won.

In order for his company to survive, Bushnell had to find another alterna¬
tive. It came in the form of a settlement. Magnavox offered Bushnell a very
inexpensive settlement proposal. Bushnell followed up by asking for special
terms in the agreement.

It was all settled outside and Nolan and Atari got extremely favorable terms.

They paid very little. He got away with a very, very, very small licensing fee
up front.

Atari became a licensee under a prepaid arrangement. It paid some fixed
sum, some ridiculous number like a few hundred grand. I don’t remember
the details. But he [Nolan] had an extremely advantageous, nonburdensome
license from us. And as far as we were concerned, that was the end of our
problems with Atari.

If anybody had had any inkling of what was going to happen to this busi¬
ness at Atari, they would never have gotten those terms.

—Ralph Baer

Bushnell played the legal action like a chess game. In exchange for settling,
Atari became Magnavox’s sole licensee. By this time other companies had be¬
gun making similar games. While Atari had already paid its licensing fees,
future competitors would have to pay stiff royalties to Magnavox. In several
later litigations, Magnavox zealously prosecuted all violators.

Magnavox said, "For $700,000 we’ll give you a paid-up license.” And Nolan
said, wisely, "You got it.” So we had a paid license and everybody else had
to pay royalties.

That was negotiated in June of 1976, a very key date. It was a week before
the consumer electronics show opened, and one of the caveats of that agree¬
ment was that Magnavox got the rights to any product we came up with in
the next 365 days. Anything we released.

So we said at one point, we’re not going to release any consumer prod¬
ucts for a year; we’ll release them at the next CES [Consumer Electronics Show].

That was the only time we ever kept our mouths shut about a product, and it

48 And Then There Was Pong

was funny because when the Magnavox attorneys came by to analyze our
stuff, we had Steve Bristow show them around. Bristow knew nothing about
the consumer stuff—the stuff that Magnavox wanted.

—Al Alcorn

I helped negotiate that deal. We paid so little money, and yet we agreed that
they would go after, as part of the settlement, all our other competitors. Well,
we were the dominant people, and all of a sudden Magnavox said, "We’ll help,
we’ll give you a sweetheart deal, and we’ll beat up on everybody else.”

—Nolan Bushnell

With the settlement signed, the case never went to court. Bushnell and
Baer met in Chicago, on the steps of a courthouse, the day that settlement
was sealed. Baer remembered being introduced to Bushnell and shaking hands.
They exchanged pleasantries, then went in different directions.

Over the years, Bushnell became a national celebrity as the “father of video
games.” In the late 1970s, as he prepared to retire, Ralph Baer finally told his
story to the press.

I finally got tired of being a shrinking lily and I started tooting my horn a little
bit. But it didn’t have any financial effect because it was all over by then.

I also didn’t open up my mouth, didn’t make any loud press for myself,
because guys like Nolan were clients. He was a licensee. He put the business
on the map. In fact, without him there would never have been any money in
the till. If Nolan wants to say he was the great inventor, hooray Nolan. You’re
a nice guy, you made a lot of money for us, say anything you want to.

—Ralph Baer

Years later, Baer ran into Nolan Bushnell and Gene Lipkin, Atari director
of marketing, on the floor of the Consumer Electronics Show. According to
Baer, Bushnell introduced him as “the father of video games.” Baer smiled
and said, “I wish you would have said that to the press.”

The King am Court

We had vendor credit from Cramer Electronics. Banks wouidn’t talk to us because we were
obviously in the Mafia if we were in coin-op.

■Al Alcorn

$0 The Kin^f and Court

Guilt by Association

More than thirty years had passed since Fiorello LaGuardia’s crusade success¬
fully shut down pinball in New York City, but the stigma of organized crime
still plagued the coin-operated amusement business. Politicians and bankers
remembered bingo and pay-out machines. When Joel Hochberg was assaulted
by thugs while repairing a game in a Brooklyn bar, local authorities assumed
it was a mob action and refused to believe that it was a case of mistaken iden¬
tity. Conscious of their bad image, amusement operators tried to change the
public’s perception of the industry.

Jukebox was considered within our industry to be a dirty word. It was a word
associated with organized crime that would bring up images of racketeer¬
ing, and we bent over backward to call it anything but a jukebox. My favorite
was "coin-activated musical device.” Of course, even people in the industry
would call it a jukebox when no one was listening.

—Eddie Adlum

As an all-cash business, the amusement industry naturally attracted suspi¬
cion and some members undoubtedly engaged in money-laundering activities.
But most of the stories about the Mafia controlling the industry were exag¬
gerations or myths. The truth was less interesting. “There isn’t enough money
in the business to attract that kind of people,” according to Eddie Adlum,
who began covering the coin-operated amusement industry in 1964.

It’s like a piece of ancient history that we’ll grin and giggle about today. It was
a sad thing when a little kid would go home and ask his daddy, "Daddy, are
you a crook?” And the daddy had to say, "No, why?” And the kid would say,
"Because my friend Joey says that all people who own jukeboxes are crooks.”

—Eddie Adlum

Even though Nolan Bushnell was quickly developing an understanding of
the coin-operated machine market, had an attractive high-technology gad¬
get that seemed like a sure hit, and had strong presentation skills—all necessary
ingredients for financial backing—he found banks unwilling to lend him

The Kin^ and Court $1

money. Lenders saw his machine as a new form of pinball. He might just as
well have approached them about opening a casino or a racetrack.

Even if his ideas did not scare people, BushnelPs appearance did. He was tall
and gangly, with unruly long hair. He looked more like a biker or a hippie
than a gangster, but bankers were not impressed by bikers or hippies either.

In the end, only Wells Fargo was willing to take a chance on Atari, extend¬
ing the company a $50,000 credit line. Though only a fraction of what Bushnell
wanted, it was the best he could do.

For Atari to compete with such established coin-operated amusement com¬
panies as Bally and Midway, Bushnell needed to expand his facilities. By
removing the concrete walls separating his space from an adjacent space in
the building, Bushnell doubled A tari’s size to 2,000 square feet. Bushnell leased
another space and had the wall separating the two facilities torn down, dou¬
bling his space again to 4,000 square feet.

It wasn’t enough. A few months later, Bushnell tried to get out of his lease
with Cole Properties. Instead, he ended up moving operations to another Cole
location, a defunct roller-rink a few blocks away. While Atari’s administrative
offices remained at the Scott Boulevard address, the new Martin Avenue fa¬
cility served as the assembly plant.

The next step was hiring workers. Trusting the more technical issues of de¬
sign and quality assurance to A1 Alcorn, Bushnell and Ted Dabney decided to
risk hiring untrained workers to assemble Pong machines. They went to a local
unemployment office and hired nearly every prospect the office sent them.

That’s when we started bringing in these guys that we got at the unemploy¬
ment office. There were members of motorcycle gangs and people who found
that they could fence the televisions and buy heroin. We didn’t think that
any of that existed here. I mean, this was San lose, California, really a very
pristine community.

—Nolan Bushnell

In the beginning, Atari offered a fun atmosphere but less than generous
wages. New line workers made slightly above minimum wage—$1.75 per hour,
plus benefits. One of the more popular benefits was “Friday night beer busts”
on the loading dock. Employees also got to play free games.

52 The Kin^f and Court

As Pong orders mounted, however, it became impossible to keep up with
demand. Bushnell hired nearly anyone who came in the door. Line personnel
sometimes worked 16-hour shifts. Tensions mounted, and there was a failed
attempt to unionize the company. A rift grew between management and the
rank and file.

Atari also became a notorious Mecca of drug abuse. The Martin Avenue
roller-rink facility smelled of marijuana. One ex-employee later quipped that
“you could get stoned just breathing the air coming out of the building.” Steve
Bristow, who later became a vice president of the company, remembered the
facility in a less extreme light. “Parts of the building smelled like pot, but I
don’t remember getting stoned just walking through.”

Former Atari executives described the people manning the assembly line
as long-haired bikers, junkies, and hippies. Even Bushnell admitted they made
him nervous.

It didn’t take long for some enterprising assembly-line workers to discover
that they could supplement their low wages by stealing televisions and parts
and selling them at local pawnshops.

There was about a six-week period [when employee theft was rampant]. We
figured out what was going on and then tightened things down, and that
went away. The theft was incredible until we woke up and fixed it. We fired a
lot of people, and there was still a lot of marijuana use.

One of the kids set up a jar and took donations to help other employees
with unwanted pregnancies. It was never an official Atari thing, but we didn’t
hide it [the jar] from vendors.

—Nolan Bushnell

Other employees remembered the drug use as an ongoing problem. When
the entire research and development team was asked to work on the line in a
last-minute effort to meet deadlines for the 1977 holiday season, a newly hired
designer named Roger Hector nervously took his place among the regulars.
When he went to use the bathroom, he found empty syringes on the bath¬
room floor. “I was amazed with what went on,” said Hector.

The King and Court 53

The Won Begins

We were getting cash up front for Pong machines. I think we were selling
them for $1,200—up-front cash—and it cost us about $300 or $400 to build
them. So we had positive cash flow from the get go, and we were doing it
without any venture capital or anything.

—Al Alcorn

Though Atari’s game production eventually evolved into a sophisticated as¬
sembly line, it began as a haphazard dash. Workers wheeled empty Pong cabinets
to the center of the production facility, and employees took turns installing
the various components until the machines were finished. The process was
slow and undisciplined and resulted in the production of about ten machines
a day, many of which did not pass quality testing.

The first order was for ten units for Advance Automatic Sales in San Fran¬
cisco. These were guys that I knew from my days at Nutting. Portale Automatic
was down in Los Angeles, and that was my second order. They ordered ten.

By that time, the word had gotten out. Advance Automatic had heard
about what had gone on with Andy Capp’s [Tavern],

—Nolan Bushnell

Bushnell began using Pong at other locations on the Atari amusement route,
as he drummed up business from other distributors. Word spread quickly. Pong
had become one of the most profitable coin-operated games in history. Other
machines collected $40 or $50 dollars a week. In those early days, Pong frequently
brought in four times as much as other machines, often topping $200 a week.

As the route’s profits expanded, Bushnell hired Steve Bristow, the engi¬
neering student at Cal-Berkeley who replaced Alcorn in the Ampex
work-study program, to collect quarters along the route. Since Atari had just
opened a game room in Berkeley, the route was a convenient way for Bristow
to earn some income, and he received 1 percent of the receipts.

54 The Kin; and Court

We had the game route operation that was giving us cash flow. And he [Steve
Bristow] was setting up the route in the summer, along with doing the other
things, because we needed to do everything we could to build cash flow.

We ran the first game room in Berkeley. It was Steve’s job to maintain that
game room and collect the money and bring it down to us. So while he was
still in college at Berkeley that fall, this was his shtick.

Steve usually took his wife on the route. When they’d go to collect, his
wife would carry a hatchet. They were afraid because they were carrying
hundreds of dollars’ worth of quarters, and they couldn’t carry a gun.

—Nolan Bushnell

We tried to get a permit to carry a gun, and they wouldn’t let us have one, so
we asked if there were any laws against carrying a hatchet. There weren’t, so
we took one along.

—Steve Bristow

Word traveled quickly in the amusement industry. Though the first orders
were small, they mounted. By the end of 1973, Atari had filled orders for 2,500
Pong machines. By the end of 1974, that number grew to more than 8,000. It
became more popular than the best pinball machines of the day.

Interestingly, another company benefited from Atari’s mounting success.
Though the Magnavox Odyssey attracted very little attention when it was
first released, the home entertainment system became increasingly more popu¬
lar as Pong expanded into new markets. Atari’s success spread quickly, and
Odyssey rode in its solid-state wake, selling 100,000 units in its first year.

... and I think if it hadn’t been for Nolan showing up that summer with Pong
and heightening the sensitivity to playing games on a television set,
Magnavox’s Odyssey wouldn’t have sold as well as it did. There was defi¬
nitely a complementary effect.

■Ralph Baer

The Kin? and Court 55

The King, the Queen, and the Five Princes

As Atari grew, Bushnell surrounded himself with people he knew and trusted.
He suddenly foresaw greater success than he had ever imagined and no longer
had time for people who did not share his vision.

Ted Dabney, Bushnell’s longtime friend and co-founder of Atari, was the
first casualty. According to Bushnell, Dabney still had a small-shop engineer’s
mentality. He wasn’t ready to be part owner of an international company and
slowed Atari’s progress.

At first, Dabney refused to leave, and he and Bushnell traded accusations.
In the end, however, Dabney took over operation of the profitable amuse¬
ment route and received several shares in the company. Years later, Dabney
sold his stock at a great profit. In exchange for his original investment of $250,
Dabney became a millionaire.

I bought him out two years into the business. What happened was that the
business outgrew Ted, and he knew it. I mean, he was an engineer’s engineer,
and he liked being in the company, but all of a sudden it got too big for him.

Ted ended up running the coin route. It was a very positive cash flow opera¬
tion. When we sold off [Bushnell later sold Atari], he ended up with a large note
for his shares and the operations, which he ran successfully for many years there¬
after. I think, probably all totaled, it was worth about a million bucks.

—Nolan Bushnell

In Dabney’s place, Bushnell assembled a crew of Ampex expatriates and
young gun executives. They became known around Atari as “the King, the
Queen, and the Five Princes.”

The group included A1 Alcorn, who led Atari’s research and development;
Steve Bristow, who eventually became the vice president of engineering; Bill
White, the chief financial officer; Gil Williams, head of manufacturing; Joe
Keenan, one of Bushnell’s next-door neighbors who would later be president
ofboth Atari and Kee Games; and Gene Lipkin, vice president of sales. (Keenan,
a married heterosexual, was referred to as the “queen” because he was second
in command, not because of his sexual orientation.)

56 The Kin? and Court

Of the members of Bushnell’s team, Lipkin stands out as the only executive
with a background in the coin-operated amusement industry. Before going to
Atari, Lipkin worked at Allied Leisure Industries, a Florida game manufacturer.

Lipkin brought experience and savvy to the group. He rose quickly at Atari
and proved to be a valuable asset.

Allied Leisure was started by an old timer in our business named Dave Braun,
basically to give his son Bobby something to do. Bobby was severely crippled.

They had a factory in Hialeah, Florida, and they made a couple of pretty
good motorcycle games. That’s where Gene Lipkin got his start, working as
the sales manager for Dave Braun and Bobby Braun.

That motorcycle game was a good game, but it broke down a lot, and Gene
ran around the country apologizing for the game as often as he was selling it.

—Eddie Adlum

Bushnell still preferred working smart and fun to working hard and made
sure that the men around him agreed with his philosophy. They held meet¬
ings in hot tubs, drank heavily, experimented with drugs, and named projects
after sexy female employees. Sometimes Atari board meetings seemed more
like fraternity parties than business meetings.

It’s an accurate part of the mythology that we played around with pot at our
planning sessions and things like that. And it’s actually, I think, a very inter¬
esting documentable piece of society that most of us played around. I mean
this is the late 1960s, early 1970s.

But then, very quickly, most of us said, "Hey, this isn’t really effective.

This isn't good.” But by that time some of us had already destroyed our lives.

—Nolan Bushnell

I remember this board meeting . . . Nolan lived in Los Gatos in a very nice
house on the hilltop with a hot tub out back. We had a board meeting in his
tub. Nolan was saying how much money we were going to be worth, al I these
millions, and I thought to myself, "I’ll believe this when I see it.”

The Kitty and Court 57

Nolan needed some papers and documents so he called his office and
said, "Have Miss so and so bring them up.”

We were in this tub [when she arrived], so he proceeded to try to get her
in the tub during the board meeting. Nolan's attorney was miffed [because]
we got his papers wet. He was not in the hot tub and he was not amused by
any of this. That was the sort of fun we had.

—Al Alcorn

In 1974, Bushnell added a final asset to Atari’s arsenal. Steve Mayer and Larry
Emmons, two of his former associates from Ampex, started a consulting com¬
pany in Grass Valley, a small community near the California-Nevada border.

Bushnell respected Emmons’s and Mayer’s abilities and immediately began
an exclusive relationship. Grass Valley became the Atari think-tank, the place
Bushnell and his board went when they needed to plan a strategic move or
devise some new and highly technical invention. Mayer and Emmons became
the prime architects of many projects. “Grass Valley would build the techni¬
cal stuff that people said couldn’t be built,” according to Bushnell.

They [Mayer and Emmons] both worked with me at Ampex, and so I knew
they were good.

So we had this little group up in Crass Valley, California. We had kind of a
reputation, you know, for smoking pot and things like that. And I think a lot
of it came from the fact that we had a think tank in Grass Valley and people
thought, "What is that? Grass Valley in California can only mean one thing.”

—Nolan Bushnell

Grass Valley was located deep in the Sierra Mountains near the Nevada
border. It was a naturally scenic location, near towns that had once boomed
during the silver rush. Atari executives adopted the Grass Valley facility as
their company retreat. Bushnell and his board drove up for weekends and
planning sessions. Trips to Grass Valley developed into an important part of
Atari culture. In the end, the Grass Valley facility became so important that
Bushnell bought it outright.

58 The Kin? and Court

Unknown Territory

With Atari’s growing success, Bushnell settled into the role of manager and lead
promoter. He left the technical wizardry in the hands of Mayer and Emmons,
while Alcorn and Bristow handled the practical matters of engineering.

Bushnell now focused his attention on the future. Though he dedicated
some of his time to inventing new products, he spent most days trying to
divine new paths for Atari’s future. His steady inclination was toward unbridled
growth. If there was an increase in orders, Bushnell wanted more workers. He
implicitly believed that Atari would continue to grow as long as his research
and development teams came up with new ideas.

One of Bushnell’s first tasks was to apply for patents to protect Atari prod¬
ucts. He remembered the lessons he had learned at the hands of Magnavox
and wanted to avoid further problems. The solid-state technology behind Pong
was completely original and Bushnell hoped to fend off imitators. Unfortu¬
nately, by the time the patent came through, it had no teeth. Countless
competitors had already built and shipped imitations.

Nolan filed for a patent on the motion circuit with a guy who was a patent
attorney on the low end of the totem pole. We were a very small company.

The guy was fundamentally incompetent. The patent was flawed because
it was filed too late. We told him that, but he told us it didn’t make any
difference. It was patently wrong—pun intended.

—Al Alcorn

By the middle of 1974, computerized ping-pong machines were in every
bar and bowling alley across the United States, but Atari had made less than
one-third of them. Bushnell called his competitors “the Jackals” because they
had an unfair advantage.

is Jackals

In those days it just took a long time to get patents through. That was a problem, so we
tried to be fast and to out-innovate the competition.

—Nolan Bushnell

There were a handful of companies that came in to develop games like Pong. Nolan
applied fora patent, but, of course, that patent wasn’t awarded until many years later.
I was there, by the way, when he got it. And at that time Nolan looked at the documents
and said, "Well, great,” but he decided not to do anything about it legally.

60 The Jackals

Success Has its Problems

The biggest accusation against Atari was that we caused radio interference at
the exact frequency used by the Nevada Highway Patrol. It was absolutely true.

It probably happened everywhere, but they figured it out in Nevada be¬
cause everything is so far apart. They’d get close to a bar and all of a sudden
they couldn’t communicate with headquarters. Then someone noticed that
after 2:00 a.m., when the bars would shut down, it would be okay, so they
knew it was something in the bars. They went around unplugging stuff and
finally they unplugged a video game and the interference went away. So the
Highway Patrol almost shut us down throughout Nevada.

We had to create these big wire-mesh shields that shielded the computer
and cut down the radio interference. We really tried to keep that puppy quiet
because we didn’t know if we were doing the same thing in New York, and
the local authorities would never, ever be able to track it down there.

—Nolan Bushnell

The imitators

Now that Atari had established “television games” as an arcade phenomenon,
a number of factors conspired against the company’s ability to preserve the
phenomena for itself. The first problem was that Nolan Bushnell couldn’t
promote his machines without competitors trying to steal his ideas.

No sooner had Pong become the hottest innovation in amusement machines
than dozens of potential competitors began studying it. According to A1
Alcorn, engineers from rival game companies started visiting Andy Capp’s
Tavern shortly after he installed the first Pong prototype.

More important, unlike Ralph Baer, Bushnell had no way to protect his
solid-state game technology. He filed for a patent, but the patent took so
long to arrive that other companies had already manufactured and sold
games using similar architecture. Bushnell had entered into an industry in
which success spawned imitation, and everybody considered Fong a success,
with Pong machines earning $200 per week. 1 There was no way to stop com¬
panies from copying it.

The jackals 6l

Just as pinball manufacturers stole Williams’s tilt mechanism and Gottlieb’s
flippers, they began making electronic ping-pong games. Within three months
of Pong 6 release, competitors with names like Electronic Paddle Ball started to
surface. Ramtek, Meadows Games, and Nutting (the company that made
Computer Space) were among the first companies to make their own versions of
Pong. In the next few years, established manufacturers like Midway and Na¬
tional Semiconductor followed.

Curiously, Atari did not build the number of Pong machines that the world
would think. I don’t know the actual number because the video-game in¬
dustry generally begins with Pong, even though Computer Space pre-dated
it as an actual video game.

Pong was the beginning of the video era, a new idea in those days. People
ripped it off. There were some companies that just came out of nowhere, saw
what was happening with Pong, and said I want to get part of this action.

—Eddie Adlum

Forgeries flooded arcades all over the world. As Atari expanded to overseas
markets, its success attracted international attention. In 1975, an Italian manufac¬
turer began imitating Atari’s Breakout. Its forgeries were so well made that the only
way to spot them was to check the address on the back of the machine. By this
time, Atari had moved to San Jose. The Italians used the correct (current) address,
while the Atari-made machines still had the company’s old Santa Clara address.

Bushnell developed a grave dislike for his imitators. He called them “jack¬
als” and believed that the only way to stay ahead of them was constantly to
generate new games and ideas. He considered his imitators less creative and
believed they would be unable to develop games on their own.

In an effort to stay ahead, Atari entered 1974 producing a new game every
other month. Bushnell’s new strategy allowed the competition to copy games,
and Atari retaliated by coming out with new ones.

The problem was that, like everyone else, Atari was still basing its entire li¬
brary on remakes of Pong. Other companies made paddle-ball games based on
sports— Handball {Pong in a three-walled court) and Hockey (Pong with, small goals
and two paddles). Atari released Pin Pong, Dr. Pong, Pong Doubles, and QuadraPong.

62 Hie Jackals

Early on in the history of Atari, I went to a meeting for distributors. Nolan
and i and several other people sat around a lunch table. After we were done
eating and shooting the breeze, Nolan came up with the unforgettable state¬
ment/question: "I wonder what else we can do with a video game than play
tennis and hockey."

He answered his own question with driving games like Trak /oand Grantrak.

Very visionary guy.

—Eddie Adlum

In the end, the Grass Valley think tank came up with the solution. In 1974,
Mayer and Emmons began designing the first racing game. Later named Trak 10,
the racing simulation was every bit as primitive as Pong. Players used a wobbly
steering wheel to control a boxy-looking car as it sped around an oval track.

Although Trak 10 had very basic graphics, it opened the gates for a flood of
creative new ideas. One of Atari’s next titles was Gotcha, a game in which a
player with a box chased a player with an X through a maze. Gotcha received
only a lukewarm reception from arcade owners, though. In later years, maze
chases would become one of the most popular themes in video games.

Even though it proved unsuccessful in the arcades, Bushnell was always
sentimental about Gotcha. His role in the company quickly shifted after that, as
Bushnell became more involved in management than game design. More than
a year passed before he came up with another design.

Atari made the first sports game, Pong. They had the first maze game, Gotcha,
and the first racing game, Trak io. Imagine what would have happened if
Bushnell had somehow managed to patent those ideas. You couldn’t have had
Pac-Man or Pole Position. The whole industry would have been different.

—Steve Baxter, former producer, CNN Computer Connection

While other companies remained bogged down with electronic ping-pong
and tennis. Atari came out with its second game —Space Race, a game in which
players dodged asteroids as they flew tiny spaceships across a screen. The game
did poorly, and Bushnell decided to return to the safety of tennis games.

The Jackals 63

Within a few years, however, Atari experimented with new themes— Steeple
Chase, a multiplayer game in which players jumped horses over gates on a
treadmill race track; and Stunt Cycle, a game in which players jumped buses—
capitalizing on real-life stunt man Evel Knievel’s wave of popularity.

Atari established itself as the most diverse and prolific coin-operated video
game company in history. The company developed an unwritten manifesto
that did not allow designers to make games that had been done before. This
legacy of innovation lasted more than a decade.

Though Atari was the first company to look beyond Pong for inspiration,
other companies soon followed. In 1975, the movie Jaws, a story of a man-
eating great white shark terrorizing a tourist town, set box-office earnings
records and launched the nation into a frenzy. Beach resorts reported that
tourists were afraid to go swimming, sometimes even in pools. The company
Project Support Engineers (PSE) attempted to capitalize on shark mania with
a game called Maneater.

Maneatervc&s a shark-hunting game housed in a fiberglass cabinet shaped
like the head of a shark. The distinctive cabinet made the game expensive to
manufacture. Though the idea of hunting sharks initially attracted players,
the game’s unexciting play did not attract repeat customers.

In 1975, Midway, one of the companies that originally rejected Pong, emerged
as Atari’s closest competitor. Midway and Atari were very different organiza¬
tions. While Atari had an established research and development department,
Midway distributed games developed by other companies.

Gunfight, Midway’s first major video game hit, was a shoot-out in which two
players controlled cowboys who shot at each other from opposite sides of the
screen. It was not an original concept; a Japanese firm had created the game,
then licensed it to Midway for the U.S. market. When Midway’s development
team members first tested it, though, they found it less than entertaining.
The graphics were blocky and the gunfighters’ movements were quite lim¬
ited. To try and salvage the game, Midway hired an outside designer, David
Nutting, brother of Nutting Associates founder Bill Nutting. (Nutting and
Associates went out of business shortly after the failure of Computer Space, and
Bill Nutting spent the next few years flying missionaries and relief supplies
into impoverished African nations.) Dave Nutting went on to create such clas¬
sic games as Sea Wolf, Gorf, Wizard of Wor, and Baby Pac-Man.

64 The jackals

While improving Gunfight, Nutting introduced new technology to the video-
game market. The original game simply featured two cowboys shooting at
each other. Nutting not only sharpened the graphics, he placed objects be¬
tween the fighters. Sometimes cactus or stagecoaches appeared in the middle
of the duel to add to the challenge. To power these changes, Nutting incorpo¬
rated a microprocessor into the game’s design, making Gunfight the first video
game with a microprocessor.

Gunfight opened the way for Japan to enter the American video-game mar¬
ket. Gunfight was originally developed by a firm named Taito—the Japanese
term for “Far East.” Taito and Midway worked together until 1979. Their final
project earned so much money that Taito abandoned Midway and opened its
own U.S. operation.

The Visit

As Atari expanded its repertoire to include racing games, Nolan Bushnell and
Gene Lipkin, vice president of sales, toured the country to find out what ar¬
cade owners and distributors thought about the future of video games. Lipkin,
who had started in the business working for the Florida firm Allied Leisure,
took Bushnell to have lunch with one of the most respected men in the amuse¬
ment industry, Joel Hochberg, the New York City game technician who had
moved to Philadelphia to manage an arcade-restaurant in 1961.

Flochberg moved to Florida to take a job working in a large amusement
arcade owned by Mervin Sisken, the son of the man who brought him into
the industry. They worked together for seven years, during which time
Hochberg’s knowledge of the industry earned him a national reputation.

When Hochberg and Sisken split under unpleasant circumstances, Hochberg
opened an under-funded arcade of his own. Finable to afford help, he worked
14-hour days, 7 days a week. Despite the long hours, his debts mounted. Just
as it looked like he might have to close, the owners of Allied Leisure con¬
tacted him, suggesting an attractive partnership. Hochberg moved from
maintaining equipment to sales and design.

It was during this time that Atari released Pong. Hochberg tried the new
medium and was impressed. Two years later, Gene Lipkin invited him to lunch
to meet Bushnell.

The jackals 65

Nolan Bushnell came to visit me here in south Florida when we had the game room
at Nathan’s (a popular restaurant). Gene was working for Atari at that time.

Nolan, pipe and all, made his way to south Florida to visit with me at our
game center. His question was, "Do you think video games are here to stay?”

The answer that I gave him was, "I don’t think there’s even a possibility of
turning back. I think that the customer, the player, has gotten such a taste of
technology utilized in a format that makes things appear to be so real, there’s
no chance of the industry turning back.”

I’m not quite sure why he asked that question since he was the pioneer.

—Joel Hochberg

Though both Bushnell and Hochberg were in the same industry, they did
not keep in touch with each other. Bushnell continued his tour, meeting with
arcade owners and trying to satisfy his insecurity about the industry’s future.

Hochberg continued with Allied Leisure for a while and eventually started
his own business again. By this time he had established international relation¬
ships, which soon fostered unique advantages in the amusement industry.

In another decade, Bushnell and Hochberg would trade places. Bushnell
would become the established authority, while Hochberg became a famous
maker of games.

Only the Paranoid Survive

Atari’s first years were filled with notable successes and important failures.
When asked about the early years at Atari, Nolan Bushnell and those around
him remembered the fun times, but they also recalled struggling to come up
with new ideas. Bushnell’s constant drive to expand the business depleted
Atari’s revenues, and growing competition cut into company profits.

Even in stressful situations, however, Atari’s corporate philosophy of smart
work and hard partying continued. Atari executives still had hot tub meet¬
ings and Grass Valley parties, though partying did not alleviate their concern
for the future. Bushnell spoke publicly of long-term interest in computer
games, but he privately questioned whether Atari’s success had been the re¬
sult of luck or skill. He knew he had outflanked the competition so far, but he

66 The jackals

wondered which company would pose the next serious threat. He needed a
scheme to maintain his advantage.

Keeping that advantage was of dire importance because of a unique set of
dynamics within the amusement industry. In the early 1970s, most cities had
two or three dominant vending-machine companies competing to do busi¬
ness in every arcade and bowling alley. These companies inevitably controlled
the bulk of the location-based amusement routes.

In the early 1970s, an unstated rule within the industry mandated that vend¬
ing companies serving the same area should not buy equipment from the
same manufacturer. If, for instance, the largest distributor bought Bally pin¬
ball machines and Rock-Ola jukeboxes, its competitors needed to carry
products from other manufacturers. BushnelPs goal was to find some way to
break that rule and sell equipment to competing distributors.

In 1974, Atari met that formidable competitor—a start-up company called
Kee Games. Founded by Joe Keenan, Bushnell’s next-door neighbor, Kee
Games was supposed to have lured away two of Atari’s “five princes”: Gil Wil¬
liams, of manufacturing, and Steve Bristow, of engineering.

A bitter rivalry began as soon as Keenan announced his new company. In
public, Bushnell tried to appear magnanimous. But confidentially, he floated
rumors that Keenan and crew were renegades not to be trusted.

[We used to complain about Kee Games. ] "Oh those bastards, ” you know, we’d
bad-mouth them. They [the distributors] just loved it ’cause they thought we
were all crooks anyway, and they loved the idea of being able to go around us.
Sometimes we’d say Kee stole our engineer [Bristow]. We gave him to them.

—Al Alcorn

At one point, the rivalry became so bitter that Atari executives made accu¬
sations about industrial espionage:

One weekend I drove around to the back of the [Atari] building. While my
wife talked with a security guard and kept him busy, I threw circuit boards
and equipment through a window and loaded them into my car.

—Steve Bristow

The lackals 67

For years, Bushnell refused to believe that Bristow would take such a risk
for what amounted to little more than an elaborate ruse. Kee Games, as it
turned out, was created by Atari, and Bushnell and Alcorn sat on its board of
directors. Rather than chance a real rivalry with an established amusement
manufacturer, Bushnell had created a controlled competitor.

The stories of industrial espionage and bad feelings were an elaborate cover
that had taken on a life of its own. When Bristow had his wife distract the
security guard and slipped into his old office, he simply added more reality to
the myths about the competition between Kee Games and Atari.

Bushnell’s plan was to compete with himself, selling Atari products to the
largest local distributors and Kee products to his competitors.

Just like Andy Grove [former president of Intel] says, "Only the paranoid sur¬
vive." I wanted to hijack the competition, so I created the number two guy.

Joe Keenan was my next-door neighbor. I told him, "I’d like to hire you to
set up a company and call it Kee Games. We’ll make it look like it’s Kee, for
Keenan, and it will look like you’ve come in and started up a new coin-op
machine manufacturer.” We gave him our number two man in manufactur¬
ing and our number two man in engineering—Bristow and Williams.

—Nolan Bushnell

We made up a new company named after Joe Keenan—Kee Games. We made
it sound like it was full of renegades. We gave him Steve Bristow to be the V.P.
of engineering—gave him some designs to get started. Nolan and I were on
their board. If any of the distributors wanted to check, they could see in the
corporate records that we were part of the company.

—Al Alcorn

The strategy solidified Atari’s hold on the market. The only problem was
that Kee Games became more dangerous than Bushnell anticipated. In 1974,
while Atari’s research and development team was still focusing on Pong and
racing games, Steve Bristow designed an innovative combat game named Tank.

Tank had very primitive graphics. Players controlled either a black or a white
tank that consisted of a square with a line sticking out of the front representing
a gun turret. By December, the game had become a runaway hit.

68 Thelackals

While Kee Games scored well with Tank, Atari found itself falling behind.
Grantrak 10, one of Atari’s first driving games, had been very expensive to de¬
velop and even more expensive to distribute. The Grass Valley team designed
the game, but after delivering it. Atari found that it was nearly unplayable.
Alcorn fixed the game’s control problems, but other complications followed.

It cost $1,095 for Atari to manufacture Grantrak 10, but because of an ac¬
counting error, the finished game was sold for $995. The company lost $100
on each unit sold, and Grantrak became Atari’s bestselling game of 1974. 2

The only animosity was that Atari was dying and Joe Keenan was a great
president who had skills that Nolan didn’t have. They wanted to cut the cord
and watch Atari die and they’d survive. And Nolan and i said, "No way.”

Ron Gordon, Bushnell’s vice president of international sales and market¬
ing, came back and said, "Okay, look here’s what you do. Merge Kee Games
back in with Atari and put Alcorn back in engineering. Let )oe be the presi¬
dent [of both companies].”

That’s exactly what happened, but there was a time when Nolan was just
in tears. He saw his company dying.

—Al Alcorn

Bushnell’s scheme had worked, yet it began having negative effects.
Through Kee Games, Bushnell had nearly doubled his distribution, but now
he had to merge both companies to keep Atari alive. Atari’s lackluster year,
combined with the overhead costs of starting up and running a second com¬
pany, had gouged deeply into Atari’s profits.

Historically, several companies have created controlled competition in the
past. Bushnell’s coup was that he actually fooled the entire amusement in¬
dustry into believing that Kee Games and Atari were bitter rivals. Even after
the merger, when it became public knowledge that Bushnell had been a Kee
board member all along, people had trouble believing it. Only one shrewd
distributor had seen through the guise.

The thing about it is that nobody in the coin-op business figured out what
we’d done except for one guy, joe Robbins. He was with Empire Distributing

The lackals 69

and later went to Bally. I remember him coming up to me at a trade show
and saying, "Bushnell, you think you’re pretty clever. I know your number,
but I respect you. I knew what you were doing and you did it really well.”

—Nolan Bushnell

The personnel lady came in with a young candidate who had shown up on
our doorstep. He was this real scuzzy kid. She said, "What shall we do?”

I think I said, "We should either call the cops or we should talk to him.” So
I talked to him.

The kid was a dropout and really grungy. He was 18 years old and he
knew something. ... He had a spark of brilliance. Don Lang, one of my
engineers, was asking for a tech, so I said, "Great. I’ll give you a job work¬
ing for a real engineer.”

The next day Don came to me and said, "What did I do to deserve this?”

I said, "What? You wanted a tech, you got a tech.”

He said, "This guy’s filthy. He’s just obnoxious. And he doesn’t know
electronics.”

The kid worked out in the end. His name was Steve Jobs.

—Al Alcorn

Shortly after Atari re-absorbed Kee Games, Al Alcorn hired the man who
would become the company’s most distinguished alumnus—Steve Jobs.
Though he went on to found such companies as Apple Computers and Pixar
Animation Studios, at the time Jobs was little more than a skinny kid with
long hair and a wispy beard. Several people described him as looking like a
“20-year-old Ho Chi Minh.” (Ho Chi Minh was the leader of North Vietnam
during the Vietnam war.)

Like many luminaries in the computer industry, Jobs knew more about
technology than social graces. He was dismissed as a hippie by most of his
fellow engineers. According to Alcorn, Jobs once came to work with a jar of
cranberry juice and told his supervisor he was fasting. “He said, ‘If I pass out,

7 ® The Jackals

just lay me on the workbench. Don’t call the police, please. I’ll be fine. I’m
just a little weak right now.’”

Some co-workers complained that Jobs smelled bad. He offended others by
openly treating them like idiots. In the end, Jobs’s genius helped him emerge
as a valuable employee, but by that time, he had managed to make enemies
throughout the company.

If he thought you were a dumb shit, he’d treat you like shit. That pissed
certain people off. I liked him a lot. . . . Still do.

—Nolan Bushnell

In 1975, Jobs decided to make a pilgrimage to India. At the time, several Tank
machines had broken down in Germany. Alcorn offered Jobs a one-way ticket
to Germany if he would fix the machines.

He wanted to go to India to meet his guru, i said, "Fine, I’ve got a problem
in Germany.”

The German distributors would take our boards and hook them up to
6o-cycle monitors to make games, but they only had access to 50-cycle
power and they had bad ground loops. I gave Steve a quick course in
ground-loop power-supply repair and a one-way ticket to Germany. I fig¬
ured it would be cheaper to get to India from Germany than it would be
from here [California],

I found out later that it would have been cheaper to leave from here.

He fixed their problem, but they were freaked because Steve Jobs is the
antithesis of the Germans. They’re meat and potatoes and beer, and he’s air
and water and vegetables.. . maybe.

—Al Alcorn

Jobs handled the problem without a hitch. When he returned from his
pilgrimage several months later, Alcorn hired him back.

Steve came back around the time that we were starting up the consumer
stuff. Steve was wearing saffron robes and a shaved head. . . . gave me a

Hie jackals 79

Baba Ram Das book. Apparently, he had hepatitis or something and had to
get out of India before he died.

I put him to work again. That’s when the famous story about Breakout
took place. That’s a big story that’s often told wrong.

—Al Alcorn

Breakout

Shortly after Jobs returned, work began on a game called Breakout. From the start,
the game took on special significance. Nolan Bushnell created the concept him¬
self* (As things turned out, it was the last game Bushnell created at Atari. In
fact, nearly twenty years passed before Bushnell designed another game.)

Breakout was a reiteration of Pong, in which players used the ball to knock
bricks out of a wall at the top of the screen. Though Bushnell knew consum¬
ers would love Breakout, he worried about the cost of manufacturing the game.

In order to cut costs, Atari engineers tried to minimize the number of dedi¬
cated chips used in their games; tightly designed games had around 75.

In those days, Atari shipped approximately 10,000 copies of its most popu¬
lar games. Because of repair costs and reduced circuit-board space, Atari saved
approximately $100,000 for each chip removed before production. Bushnell
wanted his engineers to reduce the number of chips in Breakout but got a less-
than-enthusiastic response when he asked for volunteers.

We had this bidding process. Nobody wanted to do Breakout. I remember
that I figured that Breakout was going to be about a 75-chip game, so I’d
give a bonus for every chip they took out.

—Nolan Bushnell

Steve Jobs accepted the challenge. By this time, Jobs and his partner, Steve
Wozniak, had begun developing the Apple II, generally regarded as the com¬
puter that launched the personal-computer industry. Wozniak worked for

* Years later, Steve Jobs claimed that he had developed the concept for Breakout. When asked
about it, Nolan Bushnell simply responded, “Perhaps he did.”

72 The Jackals

Hewlett Packard. He was a member of the Homebrew Computer Club, a group
of early enthusiasts who built their own computers. Other Homebrew mem¬
bers considered Wozniak, or “Woz,” to be the most brilliant member of the
club. Jobs turned to Wozniak for help in minimizing Breakout’s circuitry.

So meanwhile, Steve’s friend, Wozniak, comes in the evenings. He would be
out there during burn-in tests while these Tank games were on the produc¬
tion line, and he’d play fankforever. I didn't think much of it; I didn’t care.

He was a cool guy.

i found what really had happened is jobs never designed a lick of any¬
thing in his life. He had Woz do it [redesign Breakout],

Woz did it in like 72 hours nonstop and all in his head. He got it down to
20 or 30 ICs [integrated circuits]. It was remarkable.... a tour de force.

It was so minimized, though, that nobody else could build it. Nobody
could understand what Woz did but Woz. It was this brilliant piece of engi¬
neering, but it was just unproduceable. So the game sat around and
languished in the lab.

—Al Alcorn

Wozniak was able to remove more than 50 chips from Breakout, but his de¬
sign was too tight. No one could figure out how he did it, and the
manufacturing plant could not reproduce it. In the end, Alcorn had to assign
another engineer to build a version of Breakout that was more easily replicated.
The final game had about 100 chips.

Bushnell and Alcorn disagree on some of the details concerning Steve Jobs’s
bonus. Bushnell remembers offering Jobs $100 for each chip he removed. He
claims Wozniak removed 50 chips and Jobs received a $5,000 bonus. Alcorn
says that Jobs was told to reduce the design to a maximum of 50 chips and that
he would receive $1,000 for every chip he removed beyond that mark. Ac¬
cording to Alcorn, Jobs pocketed a $30,000 bonus.

Alcorn and Bushnell both agree, however, that Jobs misled Wozniak about
the amount that he received. Jobs told Wozniak that the bonus was only one-
tenth of what Bushnell actually paid.

The Jackals 73

I think we’ve got an order of magnitude problem here.

jobs misled Wozniak, but jobs got five grand and Woz got half of $500 .1
mean the macro-numbers are right, as it was told. I’m just saying that the
denominator, the dollars per chip, is off.

—Nolan Bushnell

And Nolan says, "For every chip less than 50 I’ll give you $1,000 cash bonus.”

Now Jobs didn’t use the money for his own personal gain. He put it into
Apple. But still, the fact that Wozniak’s best friend lied to him broke him up.

That was the beginning of the end of the friendship between Woz and Jobs.

—Al Alcorn

According to Silicon Valley legend, Steve Wozniak discovered that he’d been
misled many years later, while flying on a business trip and reading a biogra¬
phy about Jobs. Nolan Bushnell says that the legend is not true.

You want to know the real story? Woz was up here to a Sunday afternoon
picnic at our house. We were talking and I asked, "What did you do with
that $5,000?”

He says, "What?”

He was visibly upset. Wozniak’s tender. I mean, he’s really a good guy.

—Nolan Bushnell

Wozniak says that both stories are true. He first discovered Jobs’s deception
on the plane and he did later ask Bushnell for details at his house.

I got $375, and I’ve never really known how much Steve got. He told me he
was giving me 50 percent, and I know he got more than $750. I knew he
believed that it was fine to buy something for $60 and sell it for $6,000 if you
could do it. I just didn’t think he would do it to his best friend.

■Steve Wozniak

7 If Hie lackals

Dealing willt lagan

Atari first began shipping Pong machines outside the United States as early as
1973. As its business expanded, Atari sought foreign partners to help with dis¬
tribution and shipping laws. Namco became Atari’s partner in Japan.

At the time, Namco was Japan’s sixth- or seventh-largest arcade company,
behind such sturdy giants as Taito and Sega. Unlike Taito and Sega, which
were founded by a Russian and an American, respectively, Namco was founded
by a Japanese entrepreneur named Masaya Nakamura.

A former naval engineer, Nakamura started his company with $3,000. He
purchased two mechanical horse rides that he had to place on the roof of a
department store because his competitors had exclusive arrangements with
the best sites.

I initially purchased two secondhand horse rides, and I talked a department
store into allowing me to set them up in its roof garden. I operated the rides
myself. I refurbished the machines myself. I would polish them and clean
them every day, and I was there to welcome the mothers of the children as
they arrived.

—Masaya Nakamura, founder and president, Namco

Because of the size of the Japanese market and the country’s enthusiasm
for coin-operated entertainment. Atari created a Japanese branch to oversee
importing and distributing games. Nakamura visited Atari’s Japanese branch
shortly after it was formed. He began purchasing games and met Bushnell.

In 1974, Bushnell decided to close the Japanese operation. He sold it to
Nakamura, and Namco became Atari’s chief Japanese distributor.

Bushnell established Atari Japan and tried to expand his business. For vari¬
ous reasons, including poor maintenance and a selection of inappropriate
locations, Atari Japan’s business was not really doing well.

—Masaya Nakamura

We had real problems in Japan. Japan is a pretty closed market, difficult to get
your product in . . . closed distribution. That’s why we did the deal with

The Jackals 75

Nakamura and Namco. He was willing to sort of break with tradition and start
working with an American company. And he really made money on Breakout

—Nolan Bushnell

In 1976, Atari sent Nakamura Breakout. As soon as Nakamura saw the game,
he recognized it as a sure hit. To his disappointment, however, Atari set spe¬
cial conditions for Breakout, allowing Namco to distribute the game but retaining
exclusive manufacturing rights. In response, Nakamura asked for as many
units as possible.

This game Breakout was a wonderful game and I gave a very high evaluation
to the game. Namco, through Atari Japan, had the sales rights on the prop¬
erty in Japan, and we were doing quite well. All of a sudden we encountered
a great number of copies in the Japanese market.

The game was called Borokukuishi. It's literally the Japanese translation of
Breakout. And we saw more copies [units of Borokukuishi ] than the original games
that we were trying to distribute. It was to the detriment of our business.

—AAasaya Nakamura

The Yakuza

The Yakuza, most easily described as the Japanese Mafia, operates very differ¬
ently than other criminal organizations. Unlike other gangsters, members of
the Yakuza do not try to hide their identity. They often cover much of their
bodies with tattoos. For years they were the only people in Japan who wore
dark glasses. Many of them had missing fingers—cutting off fingers was a
form of punishment within the organization.

In Japan’s structured society, the Yakuza and the police coexist by setting
limits on various illegal activities. Although the Yakuza frequently went be¬
yond these limits, many of their activities involved nothing more spectacular
than running the Japanese fish market and setting up concession stands at
sporting events.

When it came to video games, a few Yakuza clans took a very aggressive
stance. One clan tried to take over Konami, the company that made Frogger

j6 The lackals

and Contra. When the owner of the company appealed to a friend in a rival
clan for help, he touched off a war and had to go into hiding.

When Nakamura investigated the counterfeit Breakout machines, he discov¬
ered that a Yakuza clan had manufactured them. It was a dangerous situation.

We knew exactly where the copies were being manufactured, and I instructed
my staff to go to these factories for surveillance.

They would watch from their car, then they would notice a car approaching
them from behind and another car coming from the front, making their car
immobile. They [the gangsters] would come out of their cars and make threats.

—AAasaya Nakamura

Nakamura met with the leader of the group that was manufacturing the
counterfeit Breakout machines and asked him to stop. The man responded by
offering to forge a partnership with Namco. According to Nakamura, the man
offered to “suppress” Namco’s competitors and make Namco the biggest com¬
pany in the industry. Nakamura declined, fearing that the offer would lead to
a takeover of his company and possibly the entire industry.

Rather than try to stand up to the Yakuza, Nakamura decided to work
around them. He asked Atari to send more Breakout machines as quickly as
possible, but shipments of Breakout continued at the same slow pace.

Nakamura and Bushnell disagree about what happened next. Nakamura
says he flew to London to meet with Bushnell at an MOA (Music Operators
Association, later renamed the Amusement and Music Operators Association)
convention. He claims he explained the situation to Bushnell and asked for
help but that Bushnell was in no condition to listen.

My recollection is that Hide Nakajima and I traveled to London to attend a
show, and Nolan Bushnell was there. Hide and I went to see him one morning
to lodge a very strong claim against the copies in Japan and to ask for his
assistance as the manufacturer who created the game, to counter the copies
in Japan and do something about it.

Unfortunately, when we met him, it was the morning after apparently a very
long night of partying on the part of Nolan Bushnel I and he very obviously had a

The lackals 77

hangover. He was in no physical condition to concentrate on our very serious
claim. He took it very lightly.

For that reason and for the sake of self-defense in terms of business, we
decided to start manufacturing the game ourselves.

—Masaya Nakamura

Since Bushnell and his associates had a reputation for partying, and liquor
bars were prevalent at most MOA parties, Nakamura may have been naive in
his decision to discuss such an important topic at the show.

Unsatisfied after his meeting with Bushnell, Nakamura returned home and
began manufacturing his own copies of Breakout. Before long, he flooded the
Japanese market. The game was a huge success and Namco became one of the
most dominant game manufacturers in Asia.

According to Bushnell, Atari knew nothing about Nakamura manufac¬
turing the game. He assumed that Namco did not want more copies of Breakout
because the game had not caught on. “It was doing so well in the rest of the
world, we couldn’t understand why they didn’t like it in Japan.”

The first time he heard about the counterfeits was when an Atari represen¬
tative visited Japan and reported seeing far more machines than the company
had shipped. Most of the machines had been built by Namco.

The first sign that something was going wrong was Breakout. We shipped 15
Breakouts to Japan. All of a sudden, it turns out there were more Breakouts in
japan than there were in the rest of the world combined.

—Al Alcorn

Breakout became the first issue in a growing rift that formed between Atari
and Namco. The argument ended in a lawsuit that Atari won in the late 1970s.

if

uSd You Repeal That
iWo ».u/e Times?”

Nolan sent this memo: "To: Engineering, From: Nolan, Subject: Products. You will have in
one year a consumer Pong game, an eight-player Tank game, and a 12-person game for
arcade midways."

The fact that we had no manufacturing capacity was not an issue to be brought up.

So i sent a memo back: "To: Nolan, From: Engineering, Subject: Your memo. One small
issue, we have no money.”

And Nolan wrote on my memo, "NO,” in big letters, and sent it back to me.

—Al Alcorn

Gene Lipkin called me and said, "I need an advertising agency.”

I said, "No, you don’t. George Opperman [who worked for Atari] is doing very well."
He said, "No, not for the trade magazines. I need advertising for the general public.”
I said, "For heaven's sakes, why?”

He said, "Because Nolan has come up with a device that you can plug into your home
TV set that will play video games.”

I said, "You’re kidding.”

He said, "No.” They made a deal with Sears Roebuck, and home video was born.

—Eddie Adlum

80 "Could You Repeat That Two More Times?”

A Hew Phase

In 1975, Atari released a consumer version of Pong and became the first com¬
pany to make both arcade and consumer products.

Throughout Atari’s early years, Nolan Bushnell constantly pushed his en¬
gineers to come up with a product that could expand his business. In 1974 an
engineer named Harold Lee proposed a device that could do just that—a home
version of Pong that could be attached to a television. Nolan Bushnell immedi¬
ately recognized Lee’s home unit as a logical next move for Atari.

Lee’s timing could not have been better. The Magnavox Odyssey was now
more than three years old and nearing the end of its retail life. Magnavox
executives had committed two grave errors in marketing Odyssey: They al¬
lowed only Magnavox-exclusive dealers to sell the system, and their advertising
suggested that Odyssey worked only on Magnavox televisions. Approximately
85,000 Odysseys were sold in the first year, and only 100,000 Odyssey systems
were sold over the product’s two-year life.

Alcorn and Lee, who worked together on Home Pong, decided to use the
same basic digital technology used in Atari’s coin-operated games. (Odyssey
used much older analog architecture.)

I hunkered down and worked with a guy named Harold Lee on the chip pro¬
totype. He designed the logic in the daytime, and he would give me a logic
design that my wife would wire-wrap at home in the evenings and I would
debug, i would give the corrected design to Harold and he would lay out the
chip on the design computer at night to save money.

—Al Alcorn

Once the design was approved, Alcorn, Lee, and an engineer named Bob
Brown constructed a working prototype. Originally code-named Darlene, after
an attractive employee, the finished product was called Home Pong.

With the price of digital circuits constantly dropping, Atari’s digital home
console ended up costing far less to manufacture than Odyssey. HomePonghaA
a sleeker cabinet and created sharper-looking images on television screens.
Since it had Alcorn’s segmented paddle design, it only required one knob per
player. Odyssey used an extra knob for adding spin to the ball.

"Could You Repeat That Two More Times?" 8l

On the other hand, Home /Lwyplayecl only one game—ping-pong. Despite
its weaknesses, Odyssey could play twelve games.

The finished prototype was attached to a wooden pedestal that contained
hundreds of wires. Alcorn and Lee had designed a chip that could replace the
wires, but until the first prototype of the chip could be tested, the console
could be built only with wire connections. Bushnell placed an order for chips,
without even stopping to decide how to market Home Pong.

Breaking into Sears

In the fall of 1974, the first prototype of the Home Pong c hip was delivered from
the foundry. Alcorn and Lee carefully plugged it in and turned on the console.
When they switched on the power, the game came to life. At that time, the chip
in Home. Pong was the highest performance-integrated circuit ever used in a con¬
sumer product. Alcorn ran to get Bushnell, and the design team celebrated.

The next day Bushnell and Gene Lipkin began approaching retailers about
Home Pong. In later interviews Bushnell described being turned down by several
toy stores. He says he got the same response from electronics stores. Electronics
buyers, remembering that Magnavox had sold only 100,000 Odysseys, asserted
that consumers weren’t interested in television games. Toy-store buyers said
that the asking price, $100, was too expensive. One buyer told Bushnell that his
stores carried nothing that cost more than $29 unless it was a bicycle.

Lipkin didn’t give up. He decided to approach department stores with Home
Pong. Since Sears Roebuck was the biggest chain at the time, he started there.
The buyers from the toy and electronics departments turned him down. As a
last attempt, someone looked through the Sears catalog and noticed that the
sporting goods department advertised Odyssey. Lipkin asked the operator to
connect him to sporting goods.

The guy [Tom Quinn] had done really well the year before on ping-pong
tables. In the winter, Sporting Goods would sell some hockey equipment and
a few basketballs and that was about it. To make his Christmas numbers, the
Sears buyer was focusing on ping-pong tables and pool tables, and he
thought consumer Pong might be just the thing for the family rec room.

•Nolan Bushnell

82 "Could You Repeat That Two More Times?”

We talked to Tom Quinn and said, "Remember the Magnavox Odyssey? We
got a better version. Would you be interested?”

He said, "Sounds interesting. Next time I'm in California i’ll stop in and
see you.”

Three days later he was on our doorstep at 8:oo a.m. Now, none of us were
there at eight o’clock, but he was. He was very excited about the prospect of
this thing and proceeded to try to get an exclusive.

We said, "No, we're too smart for that. We don’t want an exclusive with
Sears. It could be very dangerous.”

—Al Alcorn

Seeing Quinn’s enthusiasm, Atari’s executive team decided against signing
an exclusive contract. Still convinced that the toy industry offered the best
channel for selling Home Pong, Atari ran a booth at the January 1975 Toy Show
in New York City.

Like most industries, the toy business had a unique protocol. Although
hundreds of companies displayed toys at the show, the real business was con¬
ducted around town in private suites. During the show, toy companies set up
meeting rooms so that they could close deals with buyers away from the floor.
No one from Atari knew anything about setting up a private showing.

According to Alcorn, dozens of buyers stopped by Atari’s booth, curious to
see Home Pong. Although they said they liked it, no one placed orders because
they had already finished buying products at private showings. Atari did not
sell a single unit at the show.

Tom Quinn stopped by the Atari booth to say “hello” and ask how things
were going. The staff at the booth lied, saying that the show was going well. A
few days after the show, Lipkin called Quinn to ask for a meeting.

Before Quinn could purchase Home Pong, however, he needed permission
from the head of the Sporting Goods department. At Quinn’s suggestion,
Alcorn and Lipkin flew to Chicago to demonstrate Home Pong at the Sears Tower.

Quinn set up a demonstration in a conference room on the 27th floor. A
large group of executives in business suits flooded the room and watched as
Alcorn hooked the prototype to a television set. When he turned the game
on, nothing happened.

"Could You Repeat That Two More Times?” 83

The Sears Tower has an antenna on the roof that broadcasts a signal on
channel 3. The Home Pong prototype was set for channel 3, and the broadcast
blocked out its signal. Quickly figuring out the problem, Alcorn removed a
panel from the bottom of the prototype and made adjustments so that the
prototype’s signal could be picked up on channel 4.

I told Gene, ''You cover for me.”

I turned it [the prototype] upside down and opened the bottom up. I got
it to work in about ten minutes. I was sweating now and ready to jump out
the window. This was too much pressure for the kid.

So I finally played the game and it all worked and they were okay, but I
could see that something was bothering them. They had seen something in¬
side the prototype while I was adjusting it.

I said, "Well replace the wires with a silicon chip that’s the size of a fingernail. ’’

Carl Lind, head of the department says, "Mr. Alcorn, you’re telling me
that you’re going to reduce that rat’s nest of wire to a little piece of silicon
the size of your fingernail?”

"Yes, sir.”

He looked at me, leaned over the table and said, "How you gonna solder
the wires to it?”

—Al Alcorn

Once he received approval to carry Home Pong, Quinn asked Bushnell how
many units he could manufacture by Christmas. Bushnell promised 75,000.
Quinn responded that he needed 150,000. Bushnell agreed, fully aware that
Atari did not have the manpower or facilities to fulfill such a large order. He
would simply have to borrow the money. With the new business from Sears,
Bushnell decided this was the time to expand.

The Wizard of the VaHey

I read a story about Valentine.... In the story, a guy had gone into his office
and Don intimidated him so badly that he passed out. Don denies it, of course.

—Trip Hawkins, founder, Electronic Arts and 3DO

84 "Could You Repeat That Two More Times?”

Engineers and designers comprise only one side of the computer industry.
The other side is made up of shrewd businessmen and investors who look at
the latest technology in the same dispassionate way they view utility compa¬
nies and pork bellies. Technological breakthroughs do not excite these people.
A hefty return on investment does.

Known as venture capitalists, these businessmen do not part with money
easily. They are willing to invest in promising companies, but they demand
stock and control in exchange for their investment. Once, a venture capitalist
fired the founder and chairman of a home computer company over a dis¬
agreement about the company’s future.

Don Valentine, the founder of Sequoia Capital, was one of the computer
industry’s first and most successful high-tech venture capitalists. Extremely
conservative and intense, Valentine had a reputation for intimidating prospec¬
tive clients. A1 Alcorn once bragged, “I have actually seen Don Valentine laugh.”

As a venture capitalist, Valentine’s work involved sifting through hundreds
of proposals a year. He invested in a very small percentage of the companies
that approached him.

According to Valentine, when Bushnell first came to Sequoia, he mostly
talked about “coin-operated games for bars.” Like the bankers Bushnell ap¬
proached four years earlier, Valentine associated the coin-operated amusement
business with organized crime. He was not interested. When Bushnell described
Home Pong, however, he changed his mind.

One of the things that I was concerned about and interested in was that there
be a product or series of products that were designed for consumers. Only
after we were persuaded that the company would be taken in the direction
of a home product were we persuaded to invest.

—Don Valentine

Valentine minimized the risk of investing in Atari by demanding an active
role on the company’s board of directors. He decided to raise the capital from
a network of partners that included Time Inc., the Mayfield Fund, and Fidel¬
ity Venture Associates. Combined with Atari’s annual earnings of $2.5 to $3.5
million, Valentine’s capital opened a $ 10-million credit line at a bank. 1

'Could You Repeat That Two More Times?” 85

Valentine took longer than expected to close the deal. By the time he was
ready, the new business Atari received through its merger with Kee Games
had resulted in increased earnings. While Bushnell waited impatiently to open
a new money line with Valentine’s capital, his company amassed a balance
sheet that was strong enough to get a loan. When Valentine finally decided to
close the deal, Atari no longer needed him.

What happens with venture capitalists [is that] time is in their favor usually.

They love to delay and delay because the more they wait, the more they’re
squeezing your nuts and the more the deal gets better in their favor. In this
case, we had pulled ourselves out of the fire. Things were going along pretty
smoothly by the time Don was ready to cut the deal.

I don’t know the exact numbers, but two or three days before the deal
was going to close, we had a board meeting and our corporate attorney told
us, "You know, guys, the valuation on this deal is all wrong. You made the
valuation back when you were in trouble. You’re no longer in trouble. The
deal is way out of whack."

We had two choices. We could let the deal go as is or change the price—
basically, double the price. If we pissed Don off, we knew we’d never get the
deal. I think we still needed some money, and he was our only chance of
getting financing because he was the top venture capitalist in the valley.

We decided to roll the dice. We doubled the price Don had to pay us—
double or nothing. If he didn’t buy it and we went out of business, what the
hell, we’re all young.

Don showed up that night with a station wagon full of champagne to
celebrate closing the deal, and ]oe Keenan told him, "Oh, by the way, we’ve
doubled the price.” Don blew up, but when he calmed down, he went ahead
and did it at double the price.

—Al Alcorn

Valentine took his role as a member of the Atari board seriously. He at¬
tended board meetings and participated in the decision-making process.
Though he did not particularly enjoy video games, he took Atari games home
and played them. Despite the culture clash, he visited the manufacturing fa¬
cility to observe the progress.

86 "Could You Repeat That Two More Times?”

According to Valentine, he had to hold his breath whenever he visited Atari.
Straightlaced and conservative, Valentine did not smoke. He claimed that the
manufacturing plant reeked of marijuana, and if he wasn’t careful where he
breathed, he sometimes accidentally inhaled it.

Valentine’s association with Atari ended two years later. Though he prof¬
ited from the investment, Atari was far from his most lucrative deal. A few
years later, Steve Jobs and Steve Wozniak asked Valentine to help them start
Apple Computers. In 1986, Valentine was approached by Cisco Systems, a com¬
pany that pioneered the development of Internet equipment. He invested $2.5
million in the company in exchange for one-third of its stock. Over the next
decade, Cisco’s equipment became an integral part of the success of the
Internet. By 1996, Valentine’s one-third share of the company was valued at
more than $10 billion.

The Wild Ones

Don Valentine was not the only partner who dashed with Atari’s corporate
culture. Sears Roebuck was a no-nonsense, button-down business as well.

By this time, Bushnell had used his new line of credit to purchase a manu¬
facturing facility in Sunnyvale, California. One day, a number of Sears
executives visited the new location for an inspection.

The plant was not yet in operation. Workers had recently installed a new
conveyor line that Bushnell sometimes rode while in a box, as a diversion.
The Sears executives arrived just in time to see Bushnell climbing into a box
and “surfing” the line. They were shocked by his unorthodox behavior.

The difference in corporate cultures became even more apparent as the
day went on. The Sears people had come in suits and ties. The Atari people
wore T-shirts and blue jeans. By the end of the day, Bushnell was concerned
that he had alienated his visitors.

Not wanting to leave a bad impression, Bushnell had one final chance
to soften the situation. That night he and his board were scheduled to
have dinner with the Sears team at a local Italian restaurant. In an effort
to look more professional, Bushnell had his board attend the dinner
dressed in suits and ties.

'Could You Repeat That Two More Times?" 87

Unfortunately, the Sears executives, too, were worried about the impres¬
sion they had made. Not wanting to appear too stuffy, they attended the dinner
in T-shirts and blue jeans.

“Nolan Attaeir

I thought of Nolan as the great visionary, someone who would be bored by
day-to-day operations. |oe Keenan was the volunteer who took care of most
of the day-to-day operation.

—Don Valentine

For a brief period in 1975, Atari faced no emergencies. With the new factory in
Sunnyvale, the company had enough manufacturing muscle to fulfill Sears
Roebuck’s order for 150,000 tiome Pong consoles. Under Jim Tubb’s direction,
the manufacturing process moved along smoothly.

Through the merger with Kee Games, Joe Keenan became president of Atari.
Because he was the least wild member of the original Atari board, Keenan
made an excellent point man for working with Don Valentine and Sears.

During this time, A1 Alcorn was vice president of research and develop¬
ment and Steve Bristow was vice president of engineering. Al’s department
focused largely on home game technology but also built a prototype of an
extra-wide pinball machine and developed a high-speed modem. Bristow’s
team developed new arcade games. Of all the departments at Atari, Research
and Development and Engineering were the departments that intrigued
Bushnell the most.

Bushnell often visited. He looked over engineers’ shoulders as they designed
new games. Sometimes he saw ways to improvise and improve designs. On
occasion he suggested changes.

Alcorn referred to Bushnell’s visits as “Nolan Attacks” and said that they
slowed the engineers’ progress. According to Alcorn, Bushnell would ap¬
proach engineers in the middle of the design process with solutions, and
because he had not been involved with the projects from the start, his sugges¬
tions did not always work.

88 "Could You Repeat That Two More Times?"

Let me tell you what happens when you’re Nolan Bushnell. You go into a lab
and you sit down and you’re talking with guys, and they’re having a prob¬
lem, And they’ll say, "What about this?”

Unless you’re being very clear, sometimes junior guys think that you've
told them what to do when in fact you’re really asking, "Have you consid¬
ered this solution?”

Two or three times people thought they were following orders when in
fact I was just trying to help them solve a problem they were having.

—Nolan Bushnell

Hoping to keep Research and Development running smoothly, Alcorn
made a new rule—engineers were not allowed to follow BushnelPs orders
unless he repeated them three times. Bristow was even more straightforward:
“Nolan could do and discuss anything he wanted, but my staff made no
changes until I OK’d them.” Since Bushnell rarely followed projects closely,
he seldom checked to see if his suggestions were implemented.

Before long, Bushnell discovered Alcorn’s strategy. He held a brainstorm¬
ing meeting for the research and development staff in Grass Valley. During an
opening speech, Bushnell said, “I understand there’s a new rule that says you
don’t have to do what I tell you unless I say it three times. Well, I’m telling
you now, when I tell you to do something, you do it.”

An engineer sitting across the room shouted back, “Could you repeat that
two more times?”

In an attempt to control Bushnell’s visits, Alcorn set up a security sys¬
tem. Whenever Bushnell entered Research and Development, Alcorn
distracted him by leading him from project to project. If Alcorn was out of
the department when Bushnell arrived, his engineers could reach him with
a special beeper.

I couldn’t keep him out; but when he went in, I’d just follow him around and
tell the guys, "If you do what he tells you to do, you’re fired. You’re working
for me, not him.”

—Al Alcorn

"Could You Repeat That Two More Times?’’ 89

According to Alcorn, this strategy worked for a while, but Bushnell eventu¬
ally concocted a method of monitoring Research and Development that even
fooled Alcorn. He placed an ally in the department to tell him about each project.
His informant had to be unimportant, someone so small and insignificant that
Alcorn would never notice him. Bushnell’s informant was Steve Jobs.

Jobs was so low on the totem pole at Atari that I didn’t care what happened
to him. He was completely off the radar scope.

—Al Alcorn

BeiiiiiiiSers off a Blslf Past

In 1976, two events reminded video-game manufacturers of their roots in the pin¬
ball industry. The first was the legalization of pinball in New York and Chicago.

The process began in early 1976 when Irving Holzman, the president of the
New York Music and Amusement Association, applied to the New York City
Council to have LaGuardia’s 40-year ban on pinball removed. Gottlieb and Wil¬
liams had been marketing special add-a-ball pinball machines in New York since
1972, and Holzman felt that the time had come to challenge the ban entirely.

The city council agreed to hold a hearing on the matter in April. One key
testimony in the hearings came from Roger Sharpe, an editor at Gentlemen’s
Quarterly. Sharpe was an extremely gifted pinball player who, after completing
a feature about pinball, had decided to write a book about the history of the
pinball industry.

Sharpe testified about pinball and the skills needed to master it. He talked
about the work that went into designing pinball machines and the popularity
of pinball throughout the United States and in many countries around the
world. After his testimony, Sharpe was asked to demonstrate his skill.

Along with my testimony, I was supposed to give a demonstration to show
that the game was based on skill, not chance.

There’s a funny aside to all this. There were two games set up. The second
game was really a fail-back in case anything happened to the first. The cam¬
eras were all set up on the other game. We got to the end of my testimony

and the head of the city council stood up and said, "I understand that you
are now going to demonstrate pinball for us.”

I said, "Yes,” and he said, "Not that game. Let’s do that one over there.”

I guess he thought that the first game was fixed.

—Roger Sharpe

Sharpe was directed to play a Gottlieb pinball game called Bank Shot. He be¬
gan by describing the machine to the council, explaining its targets, rules, and
objectives. After some explanation, Sharpe played two balls, acquainting him¬
self with the machine and demonstrating the use of the flippers. On his third
ball, he decided to prove that proper use of the plunger required skill.

On the start of my third ball, I said, "Using the plunger takes skill as well.”

There were five lanes at the top of the playfield. I pointed to a lane and
said, "If I pull this back just right, the ball is going to go right down this
lane.” It was kind of like Babe Ruth calling his shot.

I pulled back the plunger. The ball went up, it went bounce, bounce, and
right down the lane.

"Alright, we’ve seen enough.”

I was supposed to play an entire game. The city council passed it [the
petition to legalize pinball] six-to-nothing.

August first of that year, which was my birthday, the mayor signed a law
for pinball machines to be operated in the city.

—Roger Sharpe

That year, 1976, was also the first year in which concerns were raised about
violence in video games. Exidy Games, a company founded by former Ramtek
executive Pete Kauffman, released a driving game titled Death Race.

Kauffman, a very quiet man, had originally planned to design games for other
companies. Destruction Derby, his first project, was a game in which players steered
cars around a screen trying to hit other cars. The computer-controlled drone
cars were slightly faster than players’ cars, but they traveled in zigzag paths. The
only way to hit computer-controlled cars was to anticipate which way the drone
would turn.

'Could You Repeat That Two More Times?” 91

According to Kauffman, Chicago Coin bought Destruction Derby but refused
to pay him his royalties. Kauffman responded by revising the game and re-
releasing it himself.

The biggest change in the game was in the targets players hit with their
cars. Kauffman renamed the game Death Race , and players ran over stick fig¬
ures that were supposed to be skeletons escaping from a graveyard. When
players ran over the skeletons, tiny crosses would appear in their places.

Death Race was a spin-off from a game we did for Chicago Coin called De¬
struction Derby, in which you hit other cars. We licensed that to Chicago
Coin, and they forced us into competing with ourselves by not paying royal¬
ties. We came out with Death Race to compete with our own game.

—Pete Kauffman, founder of Exidy Carnes

Pete came up with a game called Death Race. It’s very tame by today’s stan¬
dards, but in those days it caused a big controversy.

The player was asked to drive over running gremlins. They called them
gremlins; the rest of the world thought they were stick people, real people,
and the idea of the game, of course, was to kill them.

Every time you made a hit, a little cross would appear on the monitor,
signifying a grave. Nice game. Fun. Bottom line, the game really took off
when TV stations started to get some complaints from irate parents that this
was a terrible example to set for children.

The industry got a lot of coast-to-coast coverage during news programs.

The end result was that Exidy sales doubled or quadrupled.

—Eddie Adlum

Though the Death Race machine did substantial business in arcades, many
location owners refused to carry it. According to Kauffman, Exidy sold only
1,000 Death Race machines, just a fraction of the number of Sea Wolf and Gun
Fight machines Midway placed that same year, but Death Race stirred up pro¬
tests and was even discussed on CBS’s 60Minutes.

When defending their game in public, Exidy spokespersons claimed that Death
Racevcas about running over demons and had nothing to do with killing people.

92 "Could You Repeat That Two More rimes?”

In private, they agreed that the scandal had boosted their sales. When Death Race
//arrived in 1977, it had the same basic theme—running over stick figures.

Death Race did very well, but nobody wanted to be associated with it pub¬
licly because of the accusations from the press. It seemed like the more
controversy ... the more our sales increased.

We did a sequel, but it was really just the same game. There wasn’t any¬
thing new about it.

—Pete Kauffman

Although no one could argue with Exidy’s success, some competitors felt
threatened by the public’s reaction to Exidy’s violent games. New York City
had just legalized pinball, and Death Race threatened to cause the same kind of
scandal that gambling machines brought to pinball.

We were really unhappy with that game [Death Race], We [Atari] had an in¬
ternal rule that we wouldn’t allow violence against people. You could blow
up a tank or you could blow up a flying saucer, but you couldn’t blow up
people. We felt that that was not good form, and we adhered to that all
during my tenure.

Nolan Bushnell

in gi Hows

I got the contracts out, I got the lawyers out, and I removed Nolan from office. Nolan was
simply removed and he was put on the beach.

—Manny Gerard, former vice president, Warner Communications

Manny Gerard? Manny was a free spirit in a three-piece suit.

—Steve Bristow, former vice president of engineering, Atari Corporation

94 Strang Bedfellows

The New Champion

Sears executives calculated the success of the products in their catalog by com¬
paring dollars to inches. They measured the amount of page space given to
each product and matched it to the number of dollars grossed. In 1975, the
reigning champion was an Adidas sneaker. By 1976, a new champion emerged.

The previous record holder was Adidas tennis shoes. We blew that record
away in total dollar volume. We also won the Sears Quality Excellence Award-
something nobody knows or cares about, but they’re pretty proud of it.

—Al Alcorn

Magnavox sold 100,000 Odysseys. Atari sold 150,000 Home Pong machines in a
single season. The first heyday of the home video-game console had begun.

New Competition

Coleco was located in Connecticut, outside of Hartford. In their later years,
they moved into what was once a high school. Before that they were on Asy¬
lum Street. That place was like an asylum.

—Ralph Baer

With the success of Home Pong, an army of new competitors entered the home
video-game market. Seventy-five companies promised to launch home tele¬
vision tennis games in 1976. 1 Obscure companies like First Dimension, of
Nashville, Tennessee, 2 and established giants like RCA proposed game con¬
soles that looked and worked like Pong.

Atari’s most powerful competitors were Magnavox and National Semicon¬
ductor. Magnavox re-entered the market with Odyssey 100, a new console
that, unlike its predecessor, only played tennis. Magnavox had more advertis¬
ing muscle than other companies in the video-game business, but the poor
sales of the original Odyssey did not impress retailers.

National Semiconductor, a company that once made chips for Atari’s coin-
operated games, posed a more significant threat. Atari and National

Strange Bedfellows 95

Semiconductor had stopped doing business with each other under unfriendly
circumstances, back when Atari and Kee Games were separate companies.

Suspecting that Atari would not be able to pay its bills, National Semicon¬
ductor demanded that Atari pay cash up front for custom chips. Since Atari’s
income was generated by selling finished arcade machines, National
Semiconductor’s demand nearly paralyzed the company’s cash flow. In the
end, Steve Bristow, then working for Kee, developed discrete “piggyback”
boards that were able to serve the same function as National Semiconductor’s
chips. Bristow’s solution worked so well that Atari adopted it as well.

In 1976, National Semiconductor decided to compete with Atari in the con¬
sumer game business.

They then proceeded to try to steal our consumer business. So they showed
up at that same toy show with a bad version of our Pong game. It never sold.

We then summarily handed them a copy of our patent, which we later
found out was null and void. Fortunately, we didn’t push it very far cause it
could have backfired on us. You ever try to force a bad patent? You’re in real
trouble if you do.

—Al Alcorn

Atari’s most persistent competition came from a small company located across
the continent—the Connecticut Leather Company, better known as Coleco.

The company started with Indian crafts. From there, it became an outdoor
products company, making above-ground swimming pools out of plastic.

—Mike Katz, former president, Coleco

Coleco was a family business run by two brothers—Arnold and Leonard
Greenberg. Arnold made most of the decisions. His associates described him
as a short, anxious man with a quick temper and an aggressive desire to build
his company into an empire. One person described him as a “buttoned-down
lawyer who was very creative, very forceful, and willing to take great chances.”

When Greenberg took over Coleco, the company produced kits for leather
crafts. In 1956, Greenberg acquired equipment to manufacture plastics, and

96 Strange Bedfellows

Coleco became the leading manufacturer of above-ground swimming pools.
Ten years later, Coleco took over Eagle Toys and entered the toy business,
making tabletop hockey and football games.

In 1975, Greenberg decided that Coleco should expand its product line to
include a home video game. His engineers designed a video tennis console
called the Telestar, and Greenberg ordered the necessary chips from General
Instrument, the microelectronics company that supplied chips to most video-
game manufacturers.

In the beginning, Coleco’s success seemed preordained. Of all the compa¬
nies that ordered chips for console games from General Instrument, only
Coleco received the quantities requested.

As it turned out, Coleco was the first company to place its order. Surprised
by the number of orders received, General Instrument was unable to manu¬
facture enough chips to satisfy its customers. As the first customer in line,
only Coleco had its order filled and it looked as if the Telestarwould have little
competition if it reached the market by the proposed launch date of June 1976.

But Coleco ran into trouble when the prototypical Telestar console its engi¬
neers submitted for FCC approval did not pass interference tests. During the
demonstration, FCC representatives discovered that the Telestar generated ra¬
dio band interference. Greenberg was given a week to eliminate the problem
and have his product approved or he would have to resubmit his product at a
later date and go through the entire approval process over again. The process
could have put them months off schedule as they waited for the FCC to re¬
open the case.

During this period, Coleco had been considering hiring Sanders Associ¬
ates, the company that developed the original Odyssey, to develop future
products. In desperation, both Greenberg and his chief engineer called Sand¬
ers for help. Ralph Baer, the man whose team designed Odyssey, agreed to
find a way to block out Telestar’s interference if Greenberg signed the contracts
he had pending with Sanders.

The phone rings, and it’s the chief engineer of Coleco. They had just been
rejected by the FCC because they couldn’t meet RFI [radio frequency inter¬
ference] specs. They were told, and this was a Monday, that if they were not
back by Friday, they would go to the end of the queue [for approval needed

Stranye Bedfellows

to sell their product). At that moment, they had $30 million worth of game
inventory, and that would have thrown them out of the Christmas business....
they were desperate.

So here’s this chief engineer on the phone with me, asking if we can help
them overcome the problem. Meanwhile, Arnold Greenberg’s on another line
speaking to my boss.

I said, "Sign the agreement, license the agreement, and we’ll help you.”

They came the next morning, bright and early, from Hartford. They were
there and signed the agreement. I took the machine up to the fifth floor of
the building. We did radio frequency interference measurements up there.

We made measurements and we found that they indeed were out of spec-
radiation was too high.

—Ralph Baer

Baer tried several conventional methods of building a shield to block out
the Telestar s interference. Nothing worked. He went home frustrated at the
end of the day. When he returned the next day, he stumbled across a pos¬
sible solution.

I came into the lab the next morning, scratching my head. Nobody was
there yet; I was early. I walked around the lab, went outdoors to get the
measurements started, and saw two pieces of equipment sitting on a bench
connected by a piece of coaxial cable. The end of one of the cables was a
ferrite toroid (ring).

Later I asked somebody, "What’s this for?” Miracle of miracles, the guy
actually knew. They had been out in the field, they picked up external RF
from some transmission, and they suppressed it by putting this toroid on it,
which acts like a choke.

—Ralph Baer

Baer made a new shield using the ferrite rings. When he tested it on the
Telestar, the interference was within acceptable levels. He gave the shielded
unit to Greenberg, who returned to Washington, D.C., and received approval
to market his machine.

98 Strang Bedfellows

The Telestarc ame out in time for Father’s Day, 1976. Coleco sold over $100
million worth of the consoles and rose to the top of the consumer game
business. Its leadership, however, was short-lived. In August, Fairchild Cam¬
era and Instrument released a new game console that permanently changed
the industry.

The Rise of Cartridges

Fairchild Camera and Instrument, one of the companies that pioneered the
development of the transistor, released a new video-game console called the
Channel F in August 1976. Several features made the Channel F different from
other consoles. It had unique controllers with triangular handles at the end
of long shafts. One person described the controllers as looking like the plunger
on a device for detonating bombs. 3 More important, the Channel F played
games stored on interchangeable cartridges.

The original Odyssey played twelve games hardwired into the console’s cir¬
cuitry. To change games, players inserted circuit boards into a slot in the front
of the console. Inserting Odyssey circuit boards was, in effect, like changing
dip switches inside the console. (Odyssey also came with plastic overlays to
add color and backgrounds to its games. The Channel F had color games and
did not require overlays.)

Like every other game system, the Channel F had tennis and hockey pro¬
grammed into its circuits, but Fairchild released additional games stored in
casings that looked like 8-track tapes. They called the game units “Videocarts.”
Each Videocart contained a microchip with a game programmed into it.

Though the Channel F never developed a large following, it changed the
consumer market forever. Consumers no longer wanted single-game con¬
soles at any price. RCA responded quickly by announcing that it had a new
game console under development, Magnavox went back to the lab, and Atari’s
engineers stated that they had named a new computer chip after a bicycle.

Siolla

By the middle of 1976, Atari was no longer the star of the Sears catalog. Coleco
had stolen the home market, and the Fairchild Channel F had rendered Home
Pong worthless. In fact, television games had become a bit of a joke.

Strange Bedfellows 99

Many consumers lost interest in playing video tennis shortly after purchas¬
ing their systems. Game consoles were being thrown in closets or unloaded at
garage sales.

Atari executives had recognized the need for a new technology even be¬
fore Channel F hit the market. Restless as ever, Nolan Bushnell no longer
believed that Atari’s previous consoles, which were designed with a single game
hardwired into their chips, would continue to attract consumers. To com¬
pete with the Channel F, Atari would need a console that could read and
process information like a full-blown computer. The new system would have
to read and display information on a television screen. Nolan Bushnell turned
to his Grass Valley team for help.

Steve Mayer, brilliant man, basically solved the problem. All of the other
companies were run by semiconductor companies that made them use a
memory map as a frame buffer. We didn’t want a frame buffer. Back in those
days it was way too expensive.

We wanted to find a way to make the system with minimum silicon. The
other companies’ video games were all done by semiconductor companies.

We were the only one that did our own design.

—Al Alcorn

Steve Mayer, one of the founders of the Grass Valley facility, looked for
alternatives to the expensive Fairchild F8 microprocessor used in the Chan¬
nel F. Fie found the MOS Technologies 6502, a general purpose microprocessor
capable of creating images on a television screen in real time—nearly instan¬
taneously. Building off the 6502, the Grass Valley team designed a custom chip
they named “Stella,” after an engineer’s bicycle.

Though the Grass Valley engineers had the expertise to design the Stella
chip, they could not manufacture it. Al Alcorn took the design back to Atari
and consulted with his research and development team. In the end, they de¬
cided to bring in an expert to finish the project.

Harold Lee, who co-designed Home Pong, told Alcorn that the only person
who could build a chip as complex as Stella was a man named Jay Miner—the
chief microprocessor designer at Synertech, a company that created custom
chips for Atari.

100 Strange Bedfellows

Following Lee’s advice, Alcorn went to Synertech and asked the company
to loan him Miner as a consultant.

I went to Synertech and said, "I want Jay Miner to work on this project.”

They said, "No, he’s our chief CPU chip designer.”

"But you don't understand. I really want him. I’ll pay his salary plus I’ll
: give you all the business you can handle to keep your factory full.”

They said, "You’ve got a deal.”

Miner ended up with two badges. He had a Synertech badge. He had an
Atari badge. He was our chip guy.

—Al Alcorn

After he had secured Miner to lead the Stella development team, Alcorn
selected other members. The final team included Larry Wagner, a mathema¬
tician who was already programming games, and Joe Decuir, a skilled engineer.

Once the work started. Miner proved himself quickly. By most accounts,
Miner was an austere and brilliant man. He often brought his small cockapoo,
Mitchie, to work and usually remained at his desk late into the evening. When
the team had problems, Miner invented ingenious solutions, and the team
was able to finish Stella on schedule.

When a second member of the team approached Alcorn about bringing his
dog to work, he received this response. “That mangy golden retriever?” Alcorn
snapped. “You bring that animal here and I’ll have the guards shoot it on
sight. You start doing work like Miner and get yourself a decent dog and we’ll
talk about it.”

Mayer’s decision to use the 6507 microprocessor proved correct. Not only
would Atari’s new game system be less expensive to build than the RCA and
Fairchild game consoles, it would process information more quickly. Officially
named the “Video Computer System” (VCS), Atari’s new console was more
than a game machine; it was a computer with a eight-bit processor.

Bushnell worried that once he unveiled his new system, the “jackals” would
start imitating it. The only way to stop them, he decided, was to saturate the
market before his competitors came out with similar products. He would catch
the market by surprise and take it by storm.

Strange Bedfellows 101

Before Bushnell could move ahead with his plans, however, he needed
another infusion of cash. By this time revenues from Home Pong sales had prac¬
tically disappeared, and the coin-operated business was drying up. Too many
people had purchased Home Pong ox a similar system and no longer wanted to
spend quarters to play “television games.”

Year of Transition

By 1976, video games had made a permanent impact on the arcade industry.
In an interview with RePlay Magazine, Joe Robbins, a vice president of Empire
Entertainment, declared electromechanical games extinct:

Electro-mechanical games, with some exceptions, are becoming pretty
rare offerings. The cost of making them has forced most manufacturers
to cancel most production plans. This includes the once-popular gun
types and baseball games, to name a few.

The steady and abundant stream of TV games will slowly diminish.
Right now, large runs are confined to only the best games. It is even
becoming difficult to sell the TV game that is just good or marginal.
And this trend is irreversible. The number of manufacturers will de¬
crease—and so will the number of new games. But we will enter a new
generation of TV or similar games. They will inevitably stimulate re¬
newed interest, enthusiasm, and earnings. 4

If Robbins was correct, Atari would certainly be one of the companies to
benefit most, but Midway had also distinguished itself with games like Sea Wolf,
the most popular game of 1976. While Atari mostly created tennis, driving,
shooting, and tank games, Midway produced innovative games about gun-
fights and naval battles.

Sea Wolf represented a new high point in game presentation. Before Sea Wolf
most video-game cabinets looked similar. There were a couple of odd cabi¬
nets, such as Computer Space and Space Race, which were made out of fiberglass
and had rounded corners, and Maneater, which had a cabinet shaped like a shark.

But for Sea Wolf Midway attached a periscope in front of the screen for
players to use for shooting torpedoes at ships and submarines. Hitting slow-
moving ships earned few points. Hitting speedy PT boats earned more points.

102 Strange Bedfellows

The concept was not original. In 1966, Sega, the largest arcade company in
Japan, created an electromechanical game called Periscope that used lights and
plastic waves to simulate sinking ships from a submarine. Periscope was the first
game to cost 25 cents per play. Prior to this, games cost a dime. Several arcade
owners imported it to the United States, where it was imitated by many com¬
petitors—including Midway.

Sea Wolf, which was another creation of Dave Nutting, did solid business,
selling more than 10,000 machines. (A later color version, Sea Wolf II, sold an
additional 4,000 units.) With few exceptions, however, the coin-operated video
game was declining, and most games sold under 5,000 units.

The public was losing interest. The novelty of playing games on a television
had disappeared. Video games had been around for four years. People even
had them in their homes. Unless someone could come up with a method for
restoring the novelty, it looked like the industry would continue to stagnate.

The slow demise of video games did not necessarily hurt arcade owners. Pin¬
ball made a strong comeback in 1976. The first generation of solid-state pinball
machines appeared in arcades. Though solid-state pinball machines played like
older games, they had the advantage of scoring memory, allowing the game to
recognize the playfield for the progress of each player from ball to ball.

Even Atari, the company that started video games, began manufacturing
pinball games. Under Bushnell’s direction, the company opened a special pin¬
ball division that created extra-wide pinball machines.

The Decision to Seil

Atari was one of the great rides.... It was one of the greatest business edu¬
cations in the history of the universe.

—Manny Gerard

Around this time, Steve Jobs left Atari to dedicate himself to manufacturing
and selling the computers he created with Steve Wozniak. Jobs asked Bushnell
to invest in his company, but Bushnell declined. Jobs finally approached Don
Valentine for capital. Valentine insisted on some special arrangements. Jobs
agreed, and Apple Computer was born.

Strange Bedfellows 103

Instead of asking Valentine for more capital, Bushnell held a board meet¬
ing in which he discussed other options—going public or selling the company.
Their first choice was to make a public offering of Atari stock, but after taking
several steps toward the offering, the board decided that the slumping stock
market would not support their move.

In the end, the board decided to put Atari up for sale. Over the next few
weeks, Bushnell approached MCA, parent company of Universal Studios, and
Disney. Neither company was interested.

Everybody was losing interest in the digital watch and the pocket calcula¬
tor, and most of the people we went to wondered why video games would
be any different. 5

—Nolan Bushnell

One company that was interested in Atari was Warner Communications, a
conglomerate with a strong presence in film, recording, and magazine pub¬
lishing. Warner was owned by Steve Ross, a hardened entrepreneur who had
risen from the streets of Brooklyn. By most accounts, Ross was a brusque man
who expected results and had little patience for ineptitude.

Having worked his way out of poverty, Ross had grand intentions. He ex¬
pected Warner to corner every facet oi the entertainment industry. Toward
that goal, he hired Manny Gerard, considered the best entertainment indus¬
try analyst on Wall Street, to acquire new companies for the Warner
Communications fold. The first company Gerard selected was Atari.

The process began when Gerard received a telephone call from Gordon
Crawford, an analyst at Capital Management. Crawford described Atari with¬
out saying its name and asked if Warner might be interested in acquiring the
company. Gerard said yes.

The next step was for Gerard to fly to California and evaluate the opera¬
tion. He met with Bushnell and Joe Keenan, observed the company’s
manufacturing facilities, and discussed Bushneli’s future plans. By all appear¬
ances, Atari had a strong future.

I was the guy who took the trip and looked at the company and got the lay of
the land. I’m the lunatic who thought it was a good idea that we acquire it.

104 Strange Bedfellows

I wrote an internal memo about it, in which I said I think we ought to acquire
this company.

—Manny Gerard

When Gerard returned to New York, he recommended the purchase to
Steve Ross. Interestingly, he found Ross to be quite receptive.

Steve Ross had just gone to Disneyland with his kids. They went into an ar¬
cade and all they played was Indy 800, and they were really fascinated with
the game. One of the reasons this transaction occurred was because Ross
understood the power of this game. He’d seen it at Disneyland.

Actually, he really wanted an Indy 800 game for his apartment, but it
ended up that we couldn’t get it in. It was too heavy.

—Manny Gerard

At Gerard’s suggestion, Steve Ross decided to buy the company. Ross’s
lawyers contacted Bushnell’s lawyers, and representatives for both sides be¬
gan outlining the details of the transaction. The negotiating process took
four months.

Gerard wanted to keep Atari’s management intact. He recognized Bushnell
as one of the driving forces behind Atari’s success. He also respected the
company’s team of engineers, whom he described as “loyal to Bushnell and
very productive.” According to Gerard, the entire industry was new to Warner;
without Bushnell and his team, there was no reason to attempt entering the
business. He did, however, express some concerns.

I think we kind of understood Nolan, to some extent. Let me tell you what I
felt about the whole management [team].

The biggest problem with the company was that you had a bunch of
babies—not literally, not as a character flaw. These were young guys. If
they made too much money, I didn’t know how we could motivate them.

We couldn’t give them too much money because they’d go live under a
tree somewhere.

Strange Bedfellows 10$

Basically, they got a teeny bit of cash and the debentures of the subsid¬
iary, which were not secured by the parent. We took the outside investors
out for cash, but the insiders had to take these debentures.

—Manny Gerard

In the end, Warner Communications paid $28 million for Atari. It retained
Bushnell as chairman and Joe Keenan as president. The sales, marketing, en¬
gineering, and research and development departments also remained
unaffected. In theory, except for a seemingly endless supply of funding—
Warner invested $100 million in Atari—life at Atari would remain unchanged.

The entire deal almost fell apart, however, when Bushnell’s ex-wife, Paula,
challenged it.

If you want to know what appears to have triggered this, in the middle of all
our negotiations, Nolan gets his picture in one of the San Francisco newspa¬
pers in a hot tub with his new girlfriend.

This is not a great idea to start with. More than anything, I think his ex-
wife was really unhappy about the pictures.

Somehow it came up that she sued for recision of their divorce settlement.

If she got recision, the deal would have been off. What the law says is, "If you
buy ioo percent of the company and she gets recision, you’ve paid ioo per¬
cent of the price, you now get 75 percent of the company.” In effect, she’d
still own her half of his half of the company—that’s 25 percent.

We told Nolan, "We don’t think this is a grand idea. This is not our first choice.”

—Manny Gerard

Warner responded by going directly to Paula Bushnell’s lawyer and disclos¬
ing the entire deal so that she could no longer claim the transaction had
occurred without her knowledge. Nolan Bushnell then arranged a settlement,
in which she was paid to step out of the picture.

Once Paula Bushnell was satisfied, the deal could finally be closed. The signing
took place at a lawyer’s office in San Francisco in October 1976. That night, execu¬
tives from Atari and Warner celebrated the event with dinner at a French restaurant.

106 Strange Bedfellows

Years after selling Atari, Bushnell confessed that selling the company might
have been a mistake. The roller-coaster ride of meeting each month’s payroll
had left him exhausted, and the idea of raising the capital needed to produce
the Video Computer System overwhelmed him at the time. “I’ve often thought
that if I had taken a two-week vacation and really rested and got away from
the whole thing, I never would have sold the company.”

According to Gerard, Bushnell seemed elated at the signing. “The day we
signed the papers to close the deal, Nolan’s comment was, ‘I’ve been telling
people I’m a millionaire for years, and at last I am.’”

Uneasy Partners

As was the case with Sears, the cultural clash between Atari and Warner be¬
came apparent even before the deal was signed. Gerard and Ross were very
tough East Coast businessmen, unaccustomed to Bushnell’s Californian style.
Gerard once took his wife to Grass Valley. When she saw that many of the
engineers had long beards, she commented that they looked like “the Smith
Brothers [on the cough drops box].”

Once, to try to break the ice, Bushnell took several executives from Atari
and Warner for a night cruise across the San Francisco Bay on his 42-foot sail¬
boat, Pong. They left from Alameda and sailed to Tiburon. An accident on the
way back to port left the Warner people less than impressed.

There was this buoy, and we were up in the crest of the waves when the buoy
was down and vice versa, and we never saw it. We were sailing along and
suddenly we heard a loud KATHWANG as we hit the buoy—not side-swiped,
but actually hit it with the point of the boat. It made a large sound, at which
point the New York crowd looked a bit aghast.

Someone went front to see if there was a crack on the outside. One of us
went flying down below to see if there was any water coming in.

—Steve Bristow

Oh, was that a night! We sailed from Oakland across the bay to Tiburon. They
managed to... oh, was that funny I They managed to bang the boat into a buoy.

By the time we got back, it was like moo. We were freezing and wet and cold.

Strange Bedfellows IOJ

That was hardly a win over. Yes, we took the boat. If that was perceived as
a way to win us over, i can tell you ... it wasn’t too successful. I’m laughing
because I remember that night. It was wonderful. It was a comic opera.

—Manny Gerard

In January 1977, RCA released the Studio II: a game system with interchange¬
able cartridges. Though its only competition was the Channel F, the Studio II
had a major design flaw that slowed its sales—its games were all black and
white. Magnavox announced it would release a programmable game system
called Odyssey 2 in September. Allied Leisure and Bally also announced new
systems. It appeared as if the market might be too crowded by the time Atari
released the VCS.

In October 1977, Atari released the Video Computer System, along with
nine game cartridges. Atari engineers had worked hard to distinguish the VCS
as the best system on the market. Like the Studio II and the Channel F, the
VCS had controllers with dials for playing paddle games, but it also had a new
device called a joystick, a pivoting lever in a pedestal, for controlling the tank
and flying games on the Combat cartridge* The VCS also had switches for se¬
lecting games, displaying games in color or black and white, and setting
difficulty levels. None of these enhancements had ever been offered.

The profit margin on the VCS was low, but Atari executives planned to re¬
coup their losses on software. It cost less than $10 to manufacture the game
cartridges, which sold for $30. They set a precedent that would remain an axiom
in the video-game industry: “Give away the razors so that you can sell the blades.”

Unfortunately, very few consumers bought razors or blades that year.

One of the problems was shipping. According to Bushnell, Atari was un¬
able to get the majority of its 400,000 game consoles on store shelves in time
for the holiday rush. Other problems included lack of consumer interest in
home video games, confusion over the glut of new products, and the success
of a new line of handheld electronic sports games from Mattel and Coleco.

After Christmas 1977, the video-game market crashed. Manufacturers like
Magnavox and Atari sold inventory at reduced rates. RCA pulled out entirely.

* Atari did not make the first joystick. German scientists developed the joystick during
World War II for controlling guided missiles.

As it looked like the video-game market was dead, tensions increased between
Bushnell and the new owners of Atari.

Adding to the tension was Bushnell’s lack of enthusiasm about the busi¬
ness. Now that he no longer owned Atari, Bushnell seemed less interested in
its day-to-day operation. He got involved in real estate, purchasing an enor¬
mous mansion in Woodside, California, from coffee-heir Peter Folger. Bushnell
remarried. In a ceremony held in a courtyard on the grounds of his newly
purchased mansion, Bushnell married Nancy Nino. Nearly 700 people were
in attendance, including Steve Ross and Manny Gerard.

[One thing] I think what I wasn’t prepared for is that after we bought [Atari],
basically Nolan and Joe [Keenan], having some money, went off and did
their real-estate investments. They stopped paying attention to the busi¬
ness. That, I will tell you, I did not anticipate. They just refocused on
something else.

—Manny Gerard

After I sold the company, I did take a couple of vacations and I think that was
something that bothered Manny a little bit. It was just one of those things
where I needed a certain amount of time.

As it became clear that some of the things that were going on were things
that I really disagreed with, it was harder and harder for me to really climb in
and be as enthusiastic as before.

—Nolan Bushnell

VCS sales continued at a steady-but-disappointing pace through 1978. Al¬
ways wary of “the jackals” and convinced that the only way to stay ahead of
the competition was to introduce new products, Bushnell wanted to discon¬
tinue the VCS and move on to the next-generation game console. Bushnell
preferred moving to new technologies rather than spending time refining
old ideas and letting his competitors catch up to him. He called his philoso¬
phy “eating your own babies” and said that if Atari didn’t (eat its own babies),
somebody else would.

Strange Bedfellows 109

There was endless pushing and shoving. I’d go to meetings and Nolan, who
kind of disappeared, would turn up and say, "This is what we’re going to
do." His own people were getting crazy with him.

I used a phrase over and over with Nolan. "Nolan, you can’t rule the com¬
pany by the divine right of king. You’ve got to be here, you have to pay
attention. You can’t just come in... . ”

—Manny Gerard

The Czar

In February 1978, Warner hired a consultant to help turn the company around.
Ray Kassar had extensive experience as a former vice president of Burlington
Industries, the largest textile manufacturer in the United States.

A Harvard graduate, Kassar claimed to know nothing about video games. He
had been with Burlington Industries for twenty-five years and distinguished
himself by becoming the youngest vice president in the company’s history. This
experience, he felt, could be transferred to nearly any manufacturing situation.

I came in as a consultant for Warner, but my title in the company at the time
was general manager of the consumer division, which was, at that point,
doing terribly.

I mean, there was no infrastructure. They had no financial person. They
had no marketing. They really had nothing. It was a disaster.

—Ray Kassar

Most people who knew Kassar described him as autocratic but fashionable.
He wore tailored suits to work, insisted on being driven in a chauffeured lim¬
ousine, and demanded very lavish treatment. He ate at only the finest
restaurants.

According to Kassar, his first assignment was to determine whether Warner
should liquidate Atari. After testing the VCS, Kassar was impressed and de¬
cided not to abandon it. He reported to Steve Ross that with some changes,
Atari could be a profitable company.

HO Strange Bedfellows

My plan was to stay in California for as I ittle time as possible. Warner really thought
I was going to go out there and liquidate the company. That’s what they wanted
me to do. They were looking for me to give them a recommendation.

Believe me, there’s only one person who knows the full story and that is
me. Even Manny Gerard doesn’t know the full story ’cause he was sitting in
New York. I was there. I was running the company.

—Ray Kassar

Predictably, Nolan Bushnell and Ray Kassar found very little common
ground. Kassar, who routinely arrived at work at 7:30 a.m., did not approve of
Bushnell’s “work smart, not hard” attitude. He was bothered by the stories of
drug abuse among Atari’s employees and felt that Bushnell’s laid-back style
did little to discourage it. He disagreed with Bushnell about the future of the
VCS and wanted to use it as the lead product in Atari’s Christmas lineup.

The first or second week I was there, Nolan invited me to a management
committee meeting. I arrived at his office at 3:00. Everybody was sitting
around in jeans and T-shirts. In fact, when I first arrived at Atari, Nolan was
walking around the company in a T-shirt that said, "I love to screw.”

Anyway, I arrived at this so-called management committee meeting and
there were about six or seven of them drinking beer and smoking marijuana.

They offered me a joint.

I said, "No, I don’t do drugs.”

And Nolan said, "Well, why don’t you just relax? We’re just kind of... ”

I said, "Look, are you having a meeting? If you’re having a meeting, I’ll
stay. If you’re not, I’m leaving.”

He said, "No, we’re just going to drink some beer and wine.” So I left.

—Ray Kassar

The final battle came at a Warner Communications budget meeting held
in New York City in November 1978. Atari had been mildly profitable, but
Steve Ross was not satisfied. Bushnell’s solution was to close down the pinball
division and abandon the VCS.

Strange Bedfellows III

In Bushnell’s mind, the only way Atari pinball could succeed was to make
specialty tables. Standard pinball playfields were 22 inches wide; Atari’s first
three tables were 29 inches wide. If Gerard insisted on making standard tables,
Bushnell wanted to close down the division all together.

Gerard said that Bushnell also proposed discontinuing the VCS, but
Bushnell said he only wanted to cut its price. Either way, his suggestions were
in direct opposition to those of Gerard and Kassar. The battle lines were drawn.

The ultimate parting with Nolan came at the budget meeting of Warner in
1978. Nolan came to the meeting, got up at the meeting, and everybody sat
there in stunned amazement as Nolan said, "Sell off your remaining inven¬
tory of 2600s. [2600 was another name for VCS. ] You’ve saturated the market.

The market is saturated at the top. It’s over.”

Remember, there were a lot of Warner people who didn’t know nothing
about nothing. And nobody in the room could figure what the hell Nolan
was talking about.

—Manny Gerard

I said, "If, in fact, you guys are bound and determined to do regular pinball
machines, I think we should close the division down because you aren’t go¬
ing to make any money.”

The battle was really over pricing the VCS. I felt that the strongest posi¬
tion would be to price the hardware lower and the software higher.

—Nolan Bushnell

By this time, it was too late to make changes in the Christmas lineup. If
Bushnell was right, Warner faced another holiday bloodbath.

The meeting erupted into a shouting match. Bushnell felt that Gerard and
the entire Warner team had no feel for the electronics industry. Gerard claimed
that Bushnell was no longer taking the business seriously. He said that
Bushnell’s decisions were erratic. Not only had Bushnell’s recommendations
caught the Warner people offguard, they even surprised Atari’s executive team.

The day after the showdown, Gerard had a private meeting with Steve Ross,
in which they discussed Atari’s future. Ross wanted to know what Gerard

112 Strange Bedfellows

thought would happen over the holidays. Gerard said that Atari had not satu¬
rated the market with the VCS and that he expected the system to sell well.

The next day I got called into Ross’s office, and he basically goes nuts, and I
mean nuts. He says to me, "Oh my God, what do we do?”

I said, "Look Steve, there are only two possible outcomes.” It’s now De¬
cember 10th or thereabouts, and I said, "Steve, in my opinion, on December
26th there's going to be a game in every home in America, in which case
we’ve got one of the biggest businesses you ever saw. If I’m wrong, we’ve
got us a big problem. But what the hell, all we have to do is do nothing for
two weeks, and we’re going to know. Okay.”

He said, "I guess so.”

By December 26th we knew we had a monster business on our hands.

—Manny Gerard

Shortly after the budget meeting, Gerard returned to California. While
there, he heard that Bushnell was holding an Atari board meeting without
Warner representation. This was the last straw. Gerard had an attorney draw
up papers, and he dismissed Bushnell.

There was this whole thing in which it came to my attention that Nolan was
trying to call a board meeting with Joe [Keenan], and they said something
about didn't I get my notice? I said to myself, this is untenable, then I got
the contracts out, I got the lawyers out, and I removed Nolan from office.

Nolan was simply removed and he was put on the beach. Okay?

Then Joe asked to be put on the beach. That's a... word of ours, because
by putting him on the beach, he was entitled to certain modest compensa¬
tion in some bonus pool arrangements.

I don’t remember the numbers, but Nolan and Joe got 1 percent of this
bonus pool, which, at that moment in time, he [Bushnell] believed was val¬
ueless. I believe what was going on was that they perceived they could make
a fortune with Chuck E. Cheese, and who gave a shit about Atari anyway?

—Manny Gerard

Strange Bedfellows ll|

Bushnell’s forced retirement knocked him out of the video-game indus¬
try. One of Warner’s original stipulations for purchasing Atari was that
Bushnell sign a seven-year noncompete clause. Once he left Atari, he was not
allowed to work for any video-game company until 1983. On the other hand,
he still received bonuses based on Atari’s performance. If Gerard and Kassar
ran Atari profitably, he stood to make some easy money.

Ray Kassar replaced Bushnell as the CEO of Atari. His autocratic style had
angered a few Atari employees when he was just a consultant. Now that he
was chief executive, he offended people in droves. Once Bushnell left, several
of Atari’s key figures followed within the next few years.

A lot of us didn’t know Ray when he was appointed to run the company, so
he gathered the entire consumer engineering department in one of the caf¬
eterias to talk about how he was going to run things.

The question just came up, "What’s your background?” He said it was
from the textile industry, importing fabric and stuff like that.

Somebody asked him, "Well, how are you going to interact with electron¬
ics designers?”

He said, "Well, I’ve worked with designers all my life.”

I remember saying to myself, "What does he mean by that?”

He went on to say, "The towel designers...”

I was like, oh-oh, we’re in for a lot of trouble. This is going to be a disas¬
ter. And it sure turned out to be a disaster.

—Alan Miller, former Atari game designer,
cofounder of Activision and Accolade

Bushnen

Solid-state pinball was a really foolish market—they sold before they even finished building
it. It was a wonderful market for Bally that only lasted about three years and went into the
dumps. The reason it went into the dumps is because a video game called Space Invaders
came out and captured the attention of everybody on the face of the earth.

—Eddie Adlum

Nolan started Chuck E. Cheese at about the same time that Warner bought Atari. You want
to hear about Chuck E. Cheese?

—Al Alcorn

Il6 The Return of Bushnell

Arcades Reborn

In the spring of 1978, Taito approached Midway about distributing a new
arcade game in the United States. The game had originally been invented as
a hexadecimal test used for evaluating computer programmers. Someone
decided to convert the test into a video game that Taito distributed in Japan,
despite the unenthusiastic blessing of company executives. The game was
called Space Invaders.

Space Invaders did very poorly for the first few months after being introduced
to Japanese arcades. By the time the game was three months old, however, it
started to show' signs of life. More than a year passed between the time that Space
Invaders was introduced in Japan and when it arrived in the United States. By
that time, it had become an unprecedented phenomenon in Japanese arcades.

By the end of its arcade life, more than 100,000 units of Space Invaders blan¬
keted Japan. So many people were playing the game that it caused a national
coin shortage. The Japanese mint had to triple the production of the 100-yen
piece because so many coins were glutted in the arcades.

In 1978, Taito came out with Space Invaders in Japan. It was such an outra¬
geous hit in Japan that many vegetable stores and other little stores would
get rid of their vegetables and dedicate the whole store to Space Invaders.

All told, worldwide, they say there were at least 300,000 Space Invaders games
built, including counterfeit versions.

—Eddie Adlum

Even after Space Invaders’ triumph in Japan, Taito executives felt that the
game’s theme of defending space stations from an extraterrestrial attack was
too different from other games to appeal to American audiences. Most of the
top games of 1978 were based on popular themes such as driving, sports, and
w'ar. In Space Invaders, players moved a laser turret from side-to-side along the
bottom of the screen, instead of controlling familiar objects.

The aliens in Space Invaders marched in a rectangular formation eight col¬
umns long and five rows deep. They marched horizontally, advancing toward
the bottom of the screen. Players lost if the invading alien army reached the
bottom or if players lost all their turrets.

The Return of Bushncll 117

To defend against the invaders, players had to shoot at the aliens with their
laser turrets while avoiding descending enemy missiles. Four bases toward the
bottom of the screen offered limited cover from missile barrages, but enemy
fire could obliterate those bases quickly. Destroying an entire wave of aliens
earned 990 points. Extra points could be earned by shooting flying saucers
that flew across the top of the screen at 25-second intervals.

There was no way to beat Space Invaders; the alien waves kept coming until
the player either gave up or was killed. The best you could hope for was to
post the highest score of the day at the top of the screen.

After testing the game, Taito of America’s vice president of product devel¬
opment Keith Egging predicted that Space Invaderswould do well in the United
States. He set up a prototype in a secret testing location in Colorado. The
players’ response convinced him that Taito had sold Midway a major hit.

I was exceptionally confident that it would do good in this country. I had
just started with the company [Taito of America], and they thought I was a
nut. I said we could sell tens of thousands, and they said, "You can’t sell
that many."

—Keith Egging, former vice president of project development,

Taito of America

Midway introduced Space Invaders into the United States in October 1978,
and American audiences adopted it almost immediately. Midway sold Space
Invaders macbines for approximately $1,700. The orders poured in so quickly
that the company became backlogged. Arcade owners gladly paid the price;
the game could pay for itself in a single month. In good locations, each ma¬
chine earned between $300 and $400 per week.

Within a year, Midway manufactured and sold more than 60,000 Space In¬
vader machines in the United States. Suddenly, video games were the most
lucrative equipment a vendor could own.

Not too long after I opened the game room, Space Invaders came out. What
a great game. That was the first time I saw a cash box that represented a
significant portion of the cost of [buying] the game in any one week. It was

Il8 The Return of Bushnell

hard to believe that any game could capture the audience to the degree that
it was capable of doing.

I can remember only a few games that had that dynamic game-playing
magnetism. You could probably count them on your fingers.

—Joel Hochberg

In a 1982 interview, Taito import manager S. Ikawa tried to explain why so
many people liked Space Invaders: “Space Invaders gives you a feeling of tension. A
little neglect may breed great mischief.” 1

Though Space Invaders played the biggest role in revitalizing the coin-
operated business, another game also had a major impact—Atari Football.

Contrary to a popular notion, Football was not the first game to use a trak-
ball controller. According to Dave Stubben, who created the hardware for
Atari Football, Taito beat Atari to market with a soccer game that used one.
According to Steve Bristow, when his engineers saw the game, they brought a
copy into their lab and imitated it.

Dave Stubben, a large and beefy man who often wore cowboy boots to work,
cocreated Football with software designer Mike Albaugh. Stubben saw a par¬
tially completed football game called X’sandO’s that Bristow had begun around
the time that he created Tank. Stubben improved Bristow’s design by adding a
smooth-scrolling playing field and trackball controllers*

Few games absorbed more abuse than Atari Football, and few games have
injured so many players. It was housed in a waist-high tabletop cabinet. Play¬
ers stood beside the cabinet, pounding the trackball as hard as they could. On
offense, players slapped the trackball to control their quarterback and make
their receivers run. To build speed and to maneuver, players had to spin the
trackball as quickly as possible. All over the country, people developed blis¬
ters on their hands.

Although the computer microprocessor that powered Football far exceeded
dedicated circuits of games like Pong, it lacked the horsepower needed to dis¬
play complex graphics. The teams in Football were represented by Xs and Os.

* The trackball was created by Jerry Liachek, the Atari mechanical engineer who created all
of Atari’s best coin-op controllers. Liachek worked on the handle for Lunar Lander, the
joystick controller for Star Wars, and the dual joysticks for Battlezone.

The Return of Bushnell 119

Unlike Space Invaders, Football ran on a three-minute timer. Once the three
minutes were up, players had to insert more quarters to continue. For the
first three months of its release, Football was, quarter-for-quarter, as big a money
maker as Space Invaders. The football season ended in January, and with it went
most of Atari’s Football business.

The Problem with Plm

One of Nolan Bushnell’s pet projects while working at Atari was finding new
outlets for getting his games to the public. Video games had already found
their way into bowling alleys, amusement parks, movie theaters, bars, pool
halls, and arcades. In 1979, Space Invaders opened new doors as fast-food restau¬
rants and even drugstores began experimenting with games.

The progress was slow, however, because much of the public still associ¬
ated video games with pool halls, sleazy arcades, and vagrancy. Adding to the
problem was a very effective war against video games launched by a woman
named Ronnie Lamb, from Centereach, Long Island. She had seen a growing
number of children playing the games and was appalled at the waste of time
and money. She did not approve of the violence in many of the games and felt
that arcades were not wholesome environments.

Ms. Lamb presented her concerns on The Phil Donahue Show. Her campaign re¬
sulted in a few small towns banning arcades and helped to sour the public’s
perception of video games and arcades. Despite arcades’ growing popularity,
few shopping mall owners would allow arcades to be built on their properties.

In order to reach a larger audience, Bushnell had to find a way to legitimize
video games. He wanted to make them a family activity, and the only way to
do that was to create locations in which parents were practically forced to let
their children play them. The answer came in the form of a pizza parlor with
a video game arcade and a built-in theater that showed a robot stage act.

Bushnell hoped that the restaurant would legitimize the arcade. The robotic
show, he thought, could create a Disney-like atmosphere that would make chil¬
dren select his parlors over such other chains as Pizza Hut and Godfather’s.

It didn’t matter if the pizza was good or even mediocre; the arcade and
robot show would attract kids. Once he lured c ustomers, B ushnell hoped they
would enter his arcade while their pizza was cooking. To help tempt them, he
gave them a handful of free game tokens—enough to last five minutes. They

120 The Return of BusMI

would have to purchase more tokens if they wanted to spend additional time
in the arcade while they waited.

We were running out of locations, and opening a video game arcade in the
1970s was like opening a pool hall. Malls weren’t interested in letting us open
arcades. So Nolan figured, okay, I’ll go into food service.

What food are people used to waiting a long time to eat? Pizza. While
they wait, we’ll give them tokens to play games so they don’t mind wait¬
ing a half hour for the pizza. We’ll use these animatronic robots that Grass
Valley engineered.

It was a scheme where you could tell mall management, "I’m not put¬
ting in a video-game arcade, I’m putting in a pizza parlor with video
games.” But it was as big an arcade as you could possibly get in and still
call it a pizza parlor.

—Al Alcorn

Bushnell called his new venture Pizza Time Theaters. He named his res¬
taurants Chuck E. Cheese after the robotic rat mascot.

Although Chuck E. Cheese restaurants were somewhat similar to the Cava¬
lier restaurant/arcade that Joel Hochberg helped open in 1961, Bushnell’s vision
was unique. The Cavalier was designed to attract adults with games and food.
Bushnell went after children, knowing that if they came, their parents would
have to follow.

Bushnell began work on Chuck E. Cheese long before leaving Atari. He
told a reporter that he had a rat costume on a mannequin in his office as early
as 1974. Atari purchased an abandoned Dean Witter brokerage office in a San
Jose outdoor mall and converted it into a Chuck E. Cheese restaurant in No¬
vember of 1977.

The first Chuck E. Cheese was far smaller than later restaurants. Along
with an arcade, the establishment had a food service area with three stages,
from which a robotic animal band played family tunes. The eating area was
laid out like a cafeteria, with tables in long rows.

Though Warner acquired the rights to Chuck E. Cheese when it purchased
Atari, the project never interested Manny Gerard or Steve Ross. According to
Bushnell, they eventually asked him to sell the entire franchise off.

The Return of Bushnell 121

The project was started before Warner bought the company. They sort of
said, "Okay, it’s another one of Nolan's hare brains.” They sort of tolerated
it, but they figured it was going to be something that would go away. They
didn’t understand it.

—Nolan Bushnell

When Bushnell left Atari, he asked to buy the rights to Chuck E. Cheese.
Ross sold him the entire project, including the rights to the robot technol¬
ogy, for $500,000. Bushnell paid the debt at the rate of $100,000 per year. Within
weeks of leaving the company, he began planning his second location.

Along with video games, Chuck E. Cheese had midway games that rewarded
players with tickets that could be redeemed for prizes. Bushnell had run simi¬
lar games at the amusement park in Salt Lake City, Utah, while working his
way through school. He believed that the promise of winning prizes would
have enormous appeal to children.

Skeeball was dying. The company [that made the games], Philadelphia To¬
boggan, was going out of business and all of a sudden Nolan recognized
there was play value there. You’ve got to give him credit for this.

The whole redemption idea was kind of a shady thing at the arcades, al¬
most gambling, but Nolan realized that this was something the kiddies would
love because they could spend time at the counter redeeming al I those tickets.

I don’t know if he stole the idea from somebody else, but it was his drive
and his vision.

—Al Alcorn

Had the video-game industry remained in the doldrums, Chuck E. Cheese
might have quietly failed and disappeared. Instead, Space Invaders burst upon
the scene and the entire industry flourished. Since Chuck E. Cheese was one
of the places people were sure to find the games they were looking for, the
franchise rode the swell of excitement over hot titles like Space Invaders.

The second Chuck E. Cheese was far more ambitious than the first one.
Bushnell put it in a San Jose building that had once housed a Toys “R” Us
store. It was one of the largest Californian arcades of its time, with two floors

122 "Hie Return of Bushnell

of video games and a spiral ramp running around a 20-foot tall revolving statue
of Chuck E. Cheese.

By the end of 1979, Bushnell began selling Pizza Time Theater franchises. It
cost approximately $1.5 million to construct a full-sized Pizza Time Theater.
A properly run location could pay for itself in six months.

As it turned out, Space Invaders was only the tip of an iceberg that eventually
turned Chuck E. Cheese and several other video game-associated ventures into
billion-dollar success stories. The golden age of video games was about to dawn.

Nobody gets their first game published.

—Theurer’s Law (Atari doctrine named after Dave Theurer,
creator of Missile Command and Tempest)

Games such as Pac-Man and Space Invaders were going into virtually every location in
the country, with the exception of maybe funeral parlors, and even a few funeral parlors
had video games in the basements. Absolutely true. I believe churches and synagogues
were about the only types of locations to escape video games.

—Eddie Adlum

124 The Golden Aje (Part i: 1979-1980)

The End of an Era

Once Nolan Bushnell left Atari, other notables soon followed. Within a few
months of Bushnell’s departure, Joe Keenan joined him. Gil Williams hung
on for nearly two years; his last assignment was to set up a coin-op manufac¬
turing plant in Ireland. Gene Lipkin remained a bit longer, then left the
company under unpleasant circumstances.

As one of the company’s original employees, A1 Alcorn was caught in a
tough position. He had been with the company since 1972 and helped develop
its most successful products— Pong, Home Pong, and the Video Computer Sys¬
tem. His name still carried weight at Atari, but he did not like the direction in
which the company was headed.

As far as Alcorn was concerned, things had changed since Warner Communi¬
cations took control. Under Bushnell, Atari was an engineering company. The
leadership took risks and pioneered new technologies. When Ray Kassar replaced
Bushnell as president, Atari became a marketing company. Instead of developing
new technologies, Kassar preferred to push existing ideas to their fullest. Alcorn
wanted to begin work on the next generation of home video-game hardware, but
Kassar didn’t even want to consider an alternative to the VCS.

Toward the end of 1978, Alcorn assembled a team of engineers and began
designing a game console called Cosmos. Unlike the VCS, Cosmos did not
plug into a television set. It had a light-emitting diode display. Both systems
played games stored on cartridges, but Cosmos’s tiny cartridges had no elec¬
tronics, simply a four-by-five inch mylar transparency that cost so little to
manufacture that the entire cartridges could retail for $10.

Alcorn’s team included two new engineers. Harry Jenkins, who had just
graduated from Stanford University, and Roger Hector, a project designer who
had done some impressive work in the coin-op division. Both were assigned
to work directly under Alcorn on the project.

The perception was that Al was given a group of people to "play with." Harry
Jenkins and Roger Hector were fresh hires. There was probably a bit of envy
around the company because they did not have to actually deliver projects
on time or budget but were more on a research and development-bent.

—Steve Bristow

The Golden A^e (Part i: 1979-1980) 12 $

Borrowing a page from Odyssey, the Cosmos used overlays to improve the
look of its games. Cosmos’s overlays, however, were among the most impres¬
sive technologies ever created by Atari engineers.

Atari negotiated a deal with a bank for access to patents belonging to Holosonics,
a bankrupt corporation that controlled most of the world’s patents for holo¬
grams—a technology for creating three-dimensional images using lasers. Alcorn
brought in two specialists, Steve McGrew and Ken Haynes, to develop a process
for mass-producing holograms that could be used with his game.

McGrew developed a process for creating holograms on mylar. In later
years, Haynes expanded the technology for other uses, such as placing 3D
pictures on credit cards.

Alcorn used their mylar technology to create an impressive array of 3D
holographic overlays for the Cosmos.

One of the first games developed for the system was similar to Steve Russell’s
Spacewar —an outer-space dogfight in which two small ships battled. The game
took place in empty space with no obstructions, but the holographic overlay
created an extremely elaborate backdrop with whirling 3D asteroids. The over¬
lay did not affect the game. The ships could not interact with the backdrop,
but the visual effects were spectacular.

Before beginning the project, Alcorn asked Ray Kassar for permission to create
a new stand-alone game system. According to Alcorn, Kassar seemed uninter¬
ested but did not object. By the middle of 1980, Alcorn and his team had completed
a working prototype. When they showed it to marketing, they were told that the
department had no interest in selling anything other than the VCS.

By this time, sales were up over a billion dollars. Everybody was fighting the
idea of trying to get a new product out. You’ve got to real ize that marketing
had sold out [of the VCS] by April for the entire year. So the marketing
department’s only job was telling people, "I’m sorry, we’re sold out.”

All of a sudden, here comes Alcorn with a challenge: "Let’s get to work
and let’s sell a new product. ” Why would they want to do that?

So here I am with this new product idea. Marketing didn’t want to have
anything to do with it. Manufacturing said they were too busy building VCSs
to build a new product.

126 The Golden A<fe (Part i: 1979-1980)

I said, "Put that in writing.” I then found a manufacturing place outside
that could do a better job for less money.

—Al Alcorn

Alcorn, Jenkins, and Hector had invested too much time in Cosmos to aban¬
don it. Other engineers advised them to simply walk away from the project, but
Alcorn decided to market the unit himself. He asked for space to show Cosmos
at Atari’s booth during the 1980 Winter Consumer Electronics Show in the Las
Vegas Convention Center. Amazingly, the marketing department said yes.

By this time, Mattel and Bally had entered the market with newer, more
powerful consoles, but no one seemed to care. The VCS had more games and
a much larger installed base. A constant stream of buyers from toy stores and
department stores flowed through the Atari booth. While they were there,
several buyers stopped by the Cosmos table, where Alcorn, Hector, and Jenkins
demonstrated the console themselves. The holographic overlays attracted a
lot of attention.

A few months later, Alcorn, Hector, and Jenkins manned a similar display at
the Toy Fair in New York City. Having learned from his failure to sell Home Pong
on the floor of the show, Alcorn also set up a suite for private meetings. Among
the visitors to the booth was Al Nilsen, the new toy buyer for JC Penney.

The first time I saw Cosmos was at Toy Fair. I had heard the big deal about the
hologram nature of it.

From what I remember, I wanted to see more because they were only show¬
ing one very small demo game with it. That was the last that I ever heard
about the product.

—Al Nilsen, former toy buyer, JC Penney

Harry, Roger, and I went to the winter CES in Vegas. We managed to get a
part in the Atari booth, and we sold our product. We couldn’t get any mar¬
keting guys to sell our product; we had to run the booth ourselves.

We were at Toy Fair in New York a month later. This time we had the proper
suite and the proper way to do it. And I think we had about a quarter million
of them sold. Ray Kassar still wouldn’t build them.

The Golden A^e (Part i: 1979-1980) I 2 J

I got it as far as I could. I had Cosmos tooled and sold, and there was
nothing but Ray Kassar that could stop Cosmos from happening.

Then he said, "No. We’re not going to do it.”

-Al Alcorn

Although the response to Cosmos was not even remotely close to the re¬
sponse to the VCS, several buyers decided to gamble on the system. Alcorn
returned to California from the Toy Fair with orders for 250,000 units. When
he told Kassar that he wanted to begin manufacturing, Kassar derailed his
plans. Despite the impressive number of orders, Kassar did not want to manu¬
facture a game system that would compete with the VCS. Cosmos was never
manufactured.

Alcorn and Hector long claimed that Kassar refused to manufacture the
Cosmos because it represented competition for the VCS, but some of the
people who tried the game console disagree. There were questions about the
play value of its games.

Cosmos was an attempt to do tomorrow’s tech today. The holograms were
only window dressing. The play action and the interest level proved to be
very low. It was a cosmetic advance and a game-play setback.

It was one of those things that looks like an advance, but it really isn’t.

—Arnie Katz, the first full-time video-game journalist,

Electronic Games

Kassar’s decision to mothball Cosmos infuriated Alcorn, and he left the
company. He hoped to receive the same retirement benefits that Bushnell,
Williams, and Keenan were enjoying. According to Alcorn, being put “on the
beach” by Manny Gerard meant receiving an expense account, a monthly
check, and a company car.

At that point I realized that if they were going to refuse this product, they
weren’t going to do any new products. And they never did. Atari developed
several new products, but none of them ever appeared until after Ray left
the company.

128 The Golden Age (Part i: 1979-1980)

So I said to myself, "All I do is develop new product that never comes out.

Why would I want to be there?” I was getting huge bonuses, six-figure bo¬
nuses, but I just said, "Good-bye, I’m out of here.”

—Al Alcorn

Alcorn’s plans, however, nearly did not come to pass. According to Warner
Communications, Alcorn was not entitled to the same retirement package as
Bushnell and Keenan. Warner attorneys claimed that Alcorn had negotiated
his severance separate from the other board members and that he was not
entitled to the same bonus-pool compensation.

By this time, Atari controlled 75 percent of the lucrative home video-game
market and VCS sales were nearing $2 billion per year. The 1 percent of a
bonus pool that Bushnell and Keenan received represented a substantial in¬
come. The case went to court.

When we bought the company, everybody was represented by the same coun¬
sel except Al. He had separate counsel. I still remember those guys reading
every page. The documentation doesn’t have Al’s name on it.

Al’s suit was that somehow the documents were wrong. Warner settled
with him for other reasons, but I believe to the tips of my toes that he
was wrong.

The issue at hand was that the other guys kept 1 percent of the bonus
pool. I think that’s what it was about. Atari suddenly becomes this money
gusher that got to be worth a goddamned shit load of money. I mean, that’s
the issue in a nutshell.

Afterward, I said this to him, "Al, I know you believe you are right, and as
surely as you believe you are right, I believe you are wrong. ” There was noth¬
ing personal in that. We had a fundamental disagreement about the facts,
and we’ll all go to hell without knowing any more about it.

—Manny Gerard, former executive, Warner Communications

Warner settled and Alcorn, Atari’s first full-time engineer, retired “to
the beach.”

The Golden Aye (Part i: 1979-1980) 129

Golden Age Begins

In 1978, Cinematronics released Space Wars, a coin-operated arcade version of
Steve Russell’s computer game that improved on the original by incorporat¬
ing vector graphics.* Cinematronics was founded by Jim Pierce, Dennis Parte,
and Gary Garrison in El Cajon, California, in 1975. Over the next few years,
Parte and Garrison sold most of their shares in the business to Tom “Papa”
Stroud. 1 Cinematronics and its games went fairly unnoticed until MIT gradu¬
ate Larry Rosenthal joined the company. Rosenthal, who had done his master’s
thesis on Spacewar, the game created by MIT’s Tech Model Railroad Club, had
created a processor powerful and economical enough to run a full-scale ver¬
sion of the PDP Computer classic in an arcade machine. He convinced Stroud
and Pierce to manufacture a game based on Spacewar wsmg his processing tech¬
nology. Appropriately enough, the game was called Space Wars.

Rosenthal’s vector graphics technology gave him several advantages over
designers using raster-scan screens. Images drawn with vector graphics can
have sharp edges and crisp shapes. At the time, most raster-scan games had
crude shapes—cars looked like rectangles, and people and animals looked
like doodles. By contrast, vector graphics enabled designers to create fairly
elaborate line art with stark contrast. Early vector-graphics hardware could
not generate colors, so many companies placed colored plastic overlays on
their games to create the illusion of color.

Feeling that he was not being paid enough for his innovations, Rosenthal
left Cinematronics and tried to take his processing technology with him. Pierce
and Stroud sued. The case was settled with Rosenthal selling his technology
back to the company.

Vector graphics also enabled Cinematronics’ game designers to animate
more independent objects simultaneously than their competitors. Thanks to

* There are two kinds of monitors—vector and raster scan. Raster-scan technology, used in
televisions, is based on an electronic beam painting images of the screen by constantly drawing
and redrawing every row. Rather than going row by row, vector screens draw images by tracing
lines from point to point, making them unsuitable for drawing pictures but excellent for
displaying high-resolution outlines. Vector, or X-Y graphics, are displayed as lines. Rather than
drawing an entire screen, a vector-graphics generator creates independent objects. The games
Asteroids, Battlezone, and Star Castkwere vector graphics games, as was Space Wars.

IJO The Golden A^e (Part i: 1979-1980)

his vector-beam technology, the first game from Rosenthal’s designer had
forty independent objects at a time. Most raster-scan games had fewer than
ten moving objects on a single screen.

After Space Wars, Cinematronics released a few more games that tapped into the
science-fiction mania created by George Lucas’s Star Wars movies. Star Castle, for
instance, featured a Death Star-like space fortress with a giant cannon. Players
flew tiny spaceships around the fortress, pecking away at its shields until they cre¬
ated a hole deep enough to destroy the fortress by shooting deep into its heart.

In 1981, Cinematronics released Tail Gunner, the first video game to feature
three-dimensional animated objects* In this game, players used a small
chrome-plated joystick to target a gun in the rear of a large spaceship. The
game was played from the first-person perspective—the player looked directly
through the gunning station window, rather than over the shoulder of a char¬
acter in the game. Because of the 3D effects, enemy fighters could turn and
fly away rather than simply pass the ship.

Cinematronics emerged as one of the more successful companies in the
wake of the Space Invaders phenomena. The company’s biggest hit, however,
would come with another innovative technology.

Tiie Golden Days off Atari Coin-Op

In 1980, an Atari engineer named Howie Delman created a powerful vector-
graphics generator for coin-op games. The first game that used his hardware
was Lunar Lander —a game based on a common exercise in physics classes that
was adapted for arcade use by Rich Moore. In this game, players had to dock a
lunar lander on the moon, using limited fuel and dealing with a realistic simu¬
lation of the physics of lunar gravity. In order to succeed, players had to
conserve fuel by using their thrusters as little as possible.

To dress up their game. Atari engineers created a massive two-handled le¬
ver for controlling the lander’s booster engines. Springs on the lever made it
snap back in place when it was released. Unfortunately, some younger play¬
ers got their faces too close to the lever, resulting in complaints about children
being hit in the face when the lever snapped back in place.

* Though Night Driver, a driving simulation published by Atari in 1977, featured 3D pylons
along the side of the road, Tail Gimneris generally acknowledged as the first true 3D game.

The Golden Age (Part i: 1979-1980) 131

Though Lunar Lander was never particularly successful, its vector-graphics
generator was the impetus of Atari’s most successful coin-operated game. Lyle
Rains, vice president of the coin-operated games division, had an idea for a
game in which players cleared an area of space by shooting asteroids flying
around a small ship.

Rains described his idea to programmer Ed Logg and suggested that the
asteroids should repeatedly get smaller when the ship shot them. Logg, who
held a master’s degree in math from Stanford University, thought he could
expand the idea into a working game. He had recently completed the game
Super Breakout and wanted to start his next project.

Lyle Rains called me into his office and said, "I have this idea for a game in which
you shoot asteroids." He said we needed something that keeps players from do¬
ing nothing, so I suggested throwing a saucer out to keep the player alert.

I said, "Sure, I’ll go do that.” So I went up and started the project.

I wanted high resolution. If you tried to put a little ship like the ship in
Asteroids up on standard resolution, it would look like garbage; you couldn’t
tell what it was. Part of the deal I had with Lyle was that I’d go vector be¬
cause, at the time, its high resolution was 1024 x 768, and at that resolution,
the game would look nice.

—Ed Logg

Within one week, Logg had a preliminary version of Asteroids running on
his workstation. Within six weeks, the game was nearly complete. It featured
the same basic control scheme as Computer Space and Space Wars. Players directed
a small spaceship with five buttons—rotate left, rotate right, thruster rock¬
ets, fire, and hyperspace. When players jumped into hyperspace, they
reappeared in a randomly selected spot on the screen or the ship blew up if
they were hit by an asteroid or UFO while coming out of hyperspace.

The game began with a small spaceship in the center of the screen. Aster¬
oids began floating toward the ship from every direction. Players had to rotate
and move the ship to avoid getting bombarded, while shooting the advancing
rocks into dust.

Asteroids had two classes of UFOs—large, slow-moving ones that fired a few
wild shots while crossing the screen, and small, speedy ones shooting smart

132 Hie Golden A<je (Part 1:1979-1980)

bullets that homed in on the player’s ship. Around Atari, the saucers were known
as Mr. Bill and Sluggo (after characters in a series of Clay Nation skits on the
NBC comedy show Saturday Night Live), but when the nicknames were mentioned
in an interview, a lawyer from NBC sent Atari a cease-and-desist order.

Players received 200 points for destroying large UFOs and 1,000 points for
shooting small ones. Like Space Invaders, Asteroids rewarded players with extended
lives at regular intervals.

The audience for coin-operated games had matured along with the indus¬
try in the seven years since Nolan Bushnell first created Computer Space. People
were not intimidated by the controls in Cinematronics’ remake of Space Wars,
and they flocked to Asteroids.

In the beginning, most players lasted less than one minute per quarter.
When players learned to maneuver and shoot, they could make their games
last for hours. One teenager set the world’s endurance record for Asteroidswhen
he played a game for more than 36 hours. He earned so many free ships while
playing that he was able to leave the game running and take breaks for meals.

Atari sold more than 70,000 Asteroids machines in the United States. The
game did not do as well in Europe and Asia, however. Only about 30,000 units
were sold overseas.

Logg’s fellow designers later nicknamed him “Golden Boy” because of his
long string of hits.

Inside Atari Coin-Op

The culture within Atari’s coin-operated games division encouraged individu¬
ality. The quiet ones in the group were Ed Logg and Lyle Rains. Logg did not
smoke, drink, or take drugs. He earned the respect of other department mem¬
bers by creating the most successful games. His string of hits included Super
Breakout, Asteroids, Centipede, Gauntlet, and Steel Talons.

Like Logg, Lyle Rains was generally serious in nature but able to adjust to
working with the wilder members of the division. According to some coin¬
op engineers, Rains never lost track of his executive status. Some
programmers considered him guarded. One of the departmental jokes in¬
volved Rain’s administrative assistant, an Asian woman from Hawaii who
pronounced his name “Wyle Wains.”

The Golden A^e (Part i: 1979-1980) 133

She could say luau and Lanai, but for some reason she couldn’t say Lyle.

—Lyle Rains

After Bushnell left Atari, the people in the coin-operated games division
began feeling alienated from other Atari personnel. Though they created many
major hits—and Atari’s bestselling cartridges were based on their arcade hits—
the coin-operated game designers felt unappreciated by Ray Kassar, who
focused most of his attention on home sales. Even worse, Kassar offered more
praise to designers who adapted arcade games for the VCS than to the coin¬
op engineers who first created them.

The kinds of things that went on were just wild. We were the company ren¬
egades. Atari, at that point in the early 1980s, was growing at an enormous
clip, and coin-op really didn’t grow too much. It stayed pretty small.

Even though we were creating a lot of the titles that were the cornerstone
for the consumer part of our business, we were kind of anonymous to a certain
extent within the company because we were so small. But, by the same token,
we didn’t feel like we were going to take any crap from anybody either.

—Ed Rotberg, creator of Battlezone

Ray always came off aloof to us. Outside of official tours, he only made one
unannounced visit to the division, and that one day, nobody was in engi¬
neering. We all went out to see Raiders of the Lost Ark.

I played poker with him once at a distributor meeting down in Pebble
Beach. Nobody introduced me as the guy who did Asteroids, but I think he
knew who I was.

—Ed Logg

Coin-op’s ironic sense of self often manifested itself in mischievous pranks.
Kassar told Fortune magazine that Atari’s game designers were abunch of “high-
strung prima donnas.” The day after the interview was published, the entire
division came to work wearing T-shirts that said, “I’m just another high-strung
prima donna superstar.”

134 The Golden A^e (Part i: 1979-1980)

An engineer made fun of Atari’s slogan, “We take fun seriously,” by circu¬
lating a memo that looked like an employment ad. “Looking for pilot. Must
be able to fly at night without lights. Must have experience flying below radar
range. Knowledge of Colombia-U.S. routes a plus. Must be comfortable han¬
dling large sums of cash. Atari. We take fun intravenously. Atari Recreation
Pharms [short for Pharmaceuticals] Division.”

The engineer was nearly fired.

A few months later, the entire division produced the “Outstanding in Our
Field” video, a home movie—style spoof of life at Atari. The video took its name
from a skit in which the narrator, Owen Rubin, describes the company’s coin-
operated engineers as outstanding in their field. As he speaks, the video shows
the entire division standing in an empty field.

In one skit, two engineers heave an empty coin-operated cabinet from the
top of their building. The narrator explains that “Not all of Atari’s games are
successful, but we know what to do with those,” as the cabinet hits the pave¬
ment and shatters.

Two of the skits on the tape lampooned company commercials. One
showed a young couple very absorbed in a game of Atari Football. The game
is clearly a mismatch. The man, hardware engineer Howie Delman, is en¬
joying himself even though he is losing. As the camera backs away, it reveals
that the woman is topless.

In the other parody, Ed Rotberg pretends he is a used-car salesman trying
to sell an Asteroids Deluxe* machine. “How much would you expect to pay?”
Rotberg asks. “$3,900? $2,900?” He reveals the real price—$4,387. “Hell, no.
We fuck you over completely!”

In another skit, the company’s top designers visit “Club Atari,” an Old Spa¬
ghetti Factory restaurant that they dressed up to look like a bordello. The
programmers are greeted by women dressed in camisoles and clipped-up stock¬
ings as they straggle in. (Dona Bailey, probably the woman who had the greatest
impact on arcade games as the cocreator of Centipede , appears in the video as
one of the women of Club Atari.) Though they have two women each, the
programmers congregate around an A steroids Deluxe m achin e and forget about
the club’s other pleasures.

* A number of industry people, including coin-op game executives, acknowledged that
Asteroids Deluxe was not one of Atari’s better games.

The Golden Aye (Part i: 1979-1980) 135

Frank Ballouz, the coin-op division’s marketing manager, also appears on
the video. In his skit, he determines a game’s future by throwing a dart. On
the wall of his office is a dartboard with four cards taped around it. “Kill it.”
“Make 1,000.” “Make 10,000.” A fifth card, in the bull’s-eye says, “Make 100,000.”

Ballouz had a reputation for handling coin-op humor with stoicism. A
group of engineers once smuggled a large ice sculpture of a swan into Ballouz’s
hotel room during a trade show in Chicago. When he returned to the room,
he found the heavy sculpture in his bed. Ballouz dragged the sculpture to his
bathtub and had to shower beside the unmelted portion of the statue the
next morning.

Once A1 Alcorn and Gene Lipkin dropped in on Ballouz while he was mak¬
ing an important telephone call. He ignored them. To get his attention, Lipkin
leaned over Ballouz’s desk and started a fire in his in-box. Ballouz responded
by telling the person on the telephone, “A couple of VPs just lit the papers on
my desk on fire. If it’s all right with them, it’s okay with me,” and continued
his conversation.

Coin-op even launched a little war with the building facilities department.

Facilities decided to reserve some parking spots for themselves in front of
our building so that no one else would have them. They would come out and
paint lines on the spots, and every time they painted the lines, we would go
out with a can of black spray paint and paint over their lines.

Within 15 minutes there was no facilities parking.

No matter how many times they came out there, we would go out and
paint the lines over again.

—Ed Rotberg

Despite their minor rebellions, the engineers of Atari’s coin-op division main¬
tained incredibly tough standards. They seldom duplicated existing games. With
only a few notable exceptions such as Asteroids Deluxe and Space Duel, program¬
mers were not allowed to remake games already published. Other companies
made new versions of Space Invaders; Atari looked for new ideas.

Until about 1986, the attitude was that every game had to be completely
new, completely different. It was much like saying if anybody ever did a

136 The Golden A^e (Part i: 1979-1980)

fighting game, we shouldn’t do a fighting game because that would be a
derivative product.

That kept the market very flexible. I think the players in the arcades in the
1980s were a lot more flexible because every time they went to the arcades
and tried an Atari game, they were challenged to learn an entirely new con¬
trol scheme, a new way of life.

—Mark Cerny, creator of Marble Madness

Another unwritten rule around the coin-operated division was that pro¬
grammer's never had their first game published. The rule was dubbed
“Theurer’s Law” after Dave Theurer, whose first game was Four-Player Soccer —
a game that did not do particularly well.

Before manufacturing games, Atari tested prototype games in selected ar¬
cades to gauge player response. If a game had strong earnings, the company
sent it to manufacturing. If a game did poorly, its design team could either
find ways to improve it or abandon it altogether.

Atari coin-op had two unofficial in-house tests—the Stubben Test and the
In-House Approval test. The Stubben Test, named for Atari Football designer
Dave Stubben, was a measure of game durability. By most accounts, Stubben,
who stood about six-feet-five and weighed 275 pounds, liked to break things.
Once, while joking around with other Atari engineers at the lodge at Pebble
Beach, Stubben kicked a door in. They tried to repair the damage using tooth¬
paste as caulking.

When engineers wanted to test the durability of their designs, they took
the games to Stubben. Few games ever survived. One man bragged that he
had created an impregnable coin-drop door. Stubben smashed it in with one
kick of his cowboy boot. He bent one joystick in half and ripped another con¬
troller right out of a cabinet.

While making the game Paperboy, Dave Ralston and John Salwitz decided to
use handlebars instead of a joystick and had handlebars welded to the ma¬
chine. When Salwitz told Mark Cerny, a skinny, brainy, 18-year-old who
probably weighed less than 150 pounds, that the prototype was ready for the
Stubben Test, Cerny pried the handlebars off himself. A dejected Salwitz took
the handlebars back to the lab and looked for another way to attach them.

The Golden A^e (Part i: 1979-1980) !||

The other in-house test, and the programmers’ first indication about how
much players would like their game in the arcades, was the reaction the games
got around Atari. While engineers built their prototypes, other coin-op em¬
ployees often entered their labs and asked to play them. If a game was good, it
usually developed a following. With Asteroids and Tempest, Ed Logg and Dave
Theurer had to chase people away from their workstations.

The Rivalry

In the late 1970s and early 1980s, our main competitor was Atari. I always
looked at it as we had a hit, they had a hit, etc. It was great because we were
creating a constant interest out there. Regardless of who had it, there was
always something new, and people put their quarters in the slot and enjoyed
what they were playing.

—David Marofske, former president, Midway Carnes

Atari’s biggest competitor was Midway games. Cash-rich Bally, a company
renowned for slot machines and casinos, purchased Midway in the 1970s. By
purchasing Midway, a major video-game distributor, Bally entered the elec¬
tronics industry and acquired new technologies.

Since Taito executives decided to market their own games in the United States
after their success with Space Invaders, Midway either needed to license games from
a new partner or needed to begin developing games in-house. Midway found a
partner in Namco, Atari’s former distributor in Japan. In the beginning of 1980,
Midway imported Galaxian, a game that improved upon the Space Invaders theme.

In Galaxian, players controlled a spaceship that moved laterally across the
bottom of the screen and fired shots toward the top. Unlike Space Invaders,
Galaxian had a color screen. The player’s spaceship was white and red with
yellow torpedoes, the alien ships had many colors, and the background in the
game had a field of colorful twinkling stars.

Galaxianwas more difficult than Space Invaders. Rather than marching in straight
lines across the screen, the alien ships in Galaxian swooped down in changing
formations. Though its profits were only a fraction of the money brought in by
Space Invaders, Galaxian was one of the most successful games of its time.

138 The Golden Age (Part i: 1979-1980)

In those days, the [Space Invader] games became exceedingly popular in
Japan, to the point that people were just going crazy over [them]. As their
popularity began to wane, we introduced Calaxian. I must say that Galaxian
was a far superior game.

As you will recall, the Invader game was black and white, and it has ver¬
tical and horizontal movements only, whereas Galaxian was in color and the
enemies attacked from various directions. So it was a significant improve¬
ment over the Invader game.

—Masaya Nakamura, founder, Namco

Distributing games created by Namco and other foreign partners, Midway
challenged Atari’s leadership in the arcade market.

Atari responded with Missile Command. Dave Theurer had just finished Four-
Player Soccer when a team leader named Steve Calfee suggested he make the game.

Missile Command was based upon an old game called Missile Radar that
Nolan had seen before he started Atari. In that game you tried to intercept
missiles before they hit your base. We always brought this up at brainstorm¬
ing sessions.

—Steve Bristow

Calfee called me into his office and said, "Dave, we have something we want
you to work on next. We want you to explore the idea of the U.S. being in¬
vaded by the USSR. We want your game to have this radar screen that shows
missiles coming in.”

I walked out of his office and my spine was tingling because I just had this
feeling that this was going to be fun and it was going to be hot. It was so
relevant—that was in the middle of the Cold War.

I just had this really, really good feeling about it.

—Dave Theurer

Theurer, a relatively mild-mannered person who had to struggle to stay in¬
terested in Soccer, fell in love with the idea. Though he was known throughout
the division for constantly editing and re-editing his work, he managed to finish

The Golden A?e (Part i: 1979-1980) IJ 9

Missile Command in approximately six months. Theurer had to make only mini¬
mal alterations to get the final version of the game ready for location tests.

I just sat down and drew up a basic game idea, which is pretty much the way it
turned out, except we got rid of the radar screen because that was too distract¬
ing. I hate radar screens because you can’t see what’s going on half of the time.

—Dave Theurer

The finished game was fairly simple. Players launched missiles from three
silos to protect six cities located at the bottom of the screen. The silos had lim¬
ited numbers of missiles, so players could not waste them by shooting wildly.
Once the missiles ran out, players had to sit and watch their cities explode.

Missile Command was controlled with a Magic 8-ball—sized trackball similar
to the one used in Football. It was the perfect controller because it enabled players
to move the aiming device quickly and accurately.

The game began with missiles appearing like streaks in the sky above the
player’s silos and cities. Players launched defensive strikes by firing their mis¬
siles in the path of the oncoming threat. As the game progressed, enemy jets
and UFOs flew across the top of the screen and dropped clusters of warheads
and an occasional bomb. If players were unable to hit enemy aircraft before
they launched clusters, they’d have to waste shots mopping up.

We added railroad tracks between the cities and missile bases. The cities
were manufacturing the missiles and shipping them on the railroad tracks to
the bases. If the incoming bombs blew up the railroad tracks, the missiles
were stranded.

It was all too complicated and we figured that it was going to confuse
people, so we threw all the railroad track stuff away.

We had submarines for a while, but we decided that it was confusing, so
the submarines went.

We were going to have a localities-option for the operator to set the ma¬
chines to for the east coast or west coast or middle America. Then we’d label
the cities according to where they were. But that got to be too complicated.

■Dave Theurer

14O The Golden kf (Part i: 1979-1980)

One day Theurer came up with an idea for creating an enormous explo¬
sion. When players lost their last city, he would make it look as if the entire
screen had been destroyed by an atomic blast. When Calfee saw the explosion,
he suggested putting the words The End in the middle of it.

One lunchtime I had this urge to try something cool—I could make this huge
explosion on the screen. So I just whipped it up one lunch hour. Steve Calfee
walked through on his way back from lunch and said, "Why don’t you put
'The End’ in there?”

So I stuck it in.

Everybody liked it. The explosion made it into the movie Terminator II.

—Dave Theurer

A Game About Eating

Space Invaders was an outrageous hit, but it was nothing compared to the
one that was to eventually become the icon of the video game business; and
that was Pac-Man.

—Eddie Adlum

Pac-Man was the invention of Torn Iwatani, a young pinball enthusiast who
joined Namco shortly after graduating from college in 1977. Iwatani wanted
to create pinball machines, but Namco was only manufacturing video games.
As a compromise, he created Gee Bee, Bomb Bee, and CutieQ, video pinball games
that reached the United States in limited quantities.* Namco released Bomb Bee
and Cutie Qin 1979, the same year Calaxian was released in Japan.

In April 1979, Iwatani decided to try something other than pinball. He
wanted to make a nonviolent game, something female players might en¬
joy. He decided to build his game around the Japanese word taberu, which
means “to eat.”

* Gee Bee was the only game manufactured by Namco in 1978, and Bomb Bee was one of the
only games manufactured by the company the following year.

The Golden A<>e (Part i: 1979-1980) 141

At that time, as you will recall, there were many games associated with kill¬
ing creatures from outer space.

I was interested in developing a game for the female game enthusiast.

Rather than developing the character first, I started out with the concept of
eating and focused on the Japanese word "taberu, "which means "to eat.”

—Toru Iwatani

Iwatani was assigned a nine-man team to convert his concept into a game.
The first thing he produced was the character Pac-Man, which was a simple
yellow circle with a wedge cut away for a mouth.

The actual figure of Pac-Man came about as I was having pizza for lunch. I
took one wedge and there it was, the figure of Pac-Man.

—Toru Iwatani

The next step was to create Pac-Man’s enemies. Since the game was sup¬
posed to appeal to the female audience, Iwatani felt that the monsters had to
be cute. He settled on colorful “ghosts” that looked like mop heads with big
eyes. The maze, dots, and power pills came next. It took just over a year to
produce a working prototype of the game.

The idea came up in April 1979, and the project team was put together in
May. Location testing was a year later, in May of 1980. A private showing was
done in June of 1980, and in July the game went on sale.

—Toru Iwatani

The final game was exceptionally simple. Players used a joystick to guide
Pac-Man as he swallowed a line of 240 dots in the maze. Four ghosts swept
through the maze as well, trying to catch Pac-Man. The player lost if the ghosts
caught Pac-Man before he cleared all of the dots.

There were two ways to earn bonus points in Pac-Man. The first was to eat
fruit and objects. Cherries, strawberries, bells, keys, and other objects appeared
near the center of the maze at different intervals. Each time players cleared
the maze, the value of the fruit increased.

142 The Golden A<?e (Part i: 1979-1980)

The other way of earning bonus points was to eat the ghosts. There were
four large dots, or “power pills,” located near the corners of the maze. When
Pac-Man ate the power pills, the ghosts turned blue and Pac-Man could eat
them for a brief time.

Around Namco, the reaction to Iwatani’s game was not terribly enthusias¬
tic. Namco produced four games in 1980. While Pac-Man was generally
recognized as a promising game, most executives preferred Rally-X, a similar
game in which players maneuvered a race car around a maze, collecting flags
while avoiding other race cars. The other Namco games that came out in 1980
were King and Balloon and Tajik Battalion.

I did not imagine that Pac-Man would be an international hit of the magni¬
tude that it was and is to date. People know Pac-Man. People who don’t even
know about videogames know about Pac-Man. So, no, I didn’t realize that it
was going to be the hit that it is.

—Masaya Nakamura

Before Namco showed Pac-Man to Midway, one change was made to the
game. Pac-Man was originally named Puck-Man , a reference to the puck-like
shape of the main character. Nakamura worried about American vandals
changing the “P” to an “F.” To prevent any such occurrence, he changed the
name of the game.

When Midway president David Marofske saw Namco’s four new games, he
thought Rally-X was the hottest prospect.

There were actually four pieces that Namco was showing at that time. Of the
two best games, one being Pac-Man and the other one being Rally-X, I sort
of thought that Rally-X was the favorite.

—David Marofske, former president, Midway

Buyer and analyst response at the October AMOA show further confirmed
that Rally-X was the best game in the group. Of all the video games at that
show, Rally-X received the most favorable comments.

The Golden A?e (Part i: 1979-1980) 143

Once they hit the street, however, Pac-Man quickly overshadowed Rally-
X. More than 100,000 Pac-Man machines sold in the United States. Several
companies published Pac-Man strategy guides. Pac-Man appeared on the
cover of Time magazine, inspired a hit song, and translated into a popular
Saturday morning cartoon show. Some arcades purchased entire rows of
Pac-Man machines.

The video-game industry changed in the wake of Pac-Man s success. Before
Pac-Man, the most popular theme for games had been shooting aliens. After
Pac-Man, most games involved mazes. Arnie Katz, editor and founder of Elec¬
tronic Games, the first magazine about the industry, called these games “maze
chases.” Soon there were maze chases involving mice (Mappy), eyeballs (Eyes),
penguins (Penpo), fish (Piranha), even a personified fire hydrant that slurped up
water and spat it at bipedal flames. Like Pac-Man, the heroes of some of these
games were relatively helpless. Other games, such as Targ and Eyes, were tank
battles set in mazes.

The video-game business quickly became a wildly lucrative enterprise, and
arcades grew to be as common as convenience stores. Hotels replaced gift shops
with arcades. Grocery stores placed video games near their entrances. Some
doctors even placed games in their waiting rooms.

To reflect the growth in the video-game side of the business, the Music
Operators Association changed its name to the Amusement and Music Op¬
erators Association.

Despite the success of his game, Iwatani never received much attention.
Rumors emerged that the unknown creator of Pac-Man had left the industry
when he received only a $3,500 bonus for creating the highest-grossing video
game of all time. They were untrue.

I don’t recall receiving anything special, although I am told that I received
some recognition in my semi-annual bonus.

—Toru Iwatani

According to Namco president Masaya Nakamura, Iwatani received a very
small bonus—less than $3,500.

Maybe he received some bonus but nothing really to write home about. He
did not leave the company. He now performs a very important function within
our R S D group. He's the general manager.

—Masaya Nakamura

In Japanese business, summer and winter bonuses are considered an im¬
portant part of the overall employment package. Japanese employers seldom
award bonuses to employees for performing the work they were hired to do.
Iwatani’s next game, Libble Rabble, did not create much of a stir in Japan and
was never exported to the United States. Shortly after the release of Libble Rabble,
Nakamura promoted Iwatani to manager of research and development as a
token of respect.

A New Competitor

Pac-Man was not the only overlooked game at the AMOA show that year. Few
people noticed when Williams Electronics, the leading pinball manufacturer,
unveiled its first video game since Paddle Ball, a rip-off of Pong. The game was
called Defender.

Eugene Jarvis, creator of Defender , had broken into the amusement industry
designing wide-body pinball machines at Atari. He realized the pinball divi¬
sion would be closed shortly after Bushnell left the company, so he quit and
spent a few months vacationing in Costa Rica. When he returned, another
Atari pinball veteran named Steve Ritchie asked him to come to Chicago to
help produce pinball games for Williams. They teamed up to build three
groundbreaking pinball games— Lazerball, Firepower, and Gorgar•*

In February 1980, Williams executives decided to enter the arena of video
games. They asked Jarvis to design their first title. He had to start by designing
a hardware platform for running his game.

The first step was getting a hardware system going. We debated the merits
of color versus black and white. We kind of said, "Okay, we’ve got to go with
the future, we’ve got to be hip dudes, so we’re going to go color.”

Goyarwas the first electronic game to feature synthesized speech.

The Golden Aye (Part i: 1979-1980) 145

The next question was deciding how many colors.

For Defender, we decided we’d go all out and make every pixel on the
screen capable of sixteen colors. It was I ike, "Wow! This was more colors than
you’ll ever need.”

I don’t even know if the game had a name at that point.

—Eugene Jarvis

Jarvis, who described himself as a fan of violence and action, wanted to give
his game a title that would justify the game’s violence.

I had to have this whole justification for why you were there and what you
were doing. A lot of games fall short. They just put you there, and all of a
sudden you’re beating people up and you start to wonder, "Why am I beat¬
ing these people up?”

There was actually an old TV show called The Defenders about attorneys
back in the 1960s, and I kind of liked that show. You know, if you’re defend¬
ing something, you’re being attacked, and you can do whatever you want.

—Eugene Jarvis

According to Jarvis, space battles provided the most popular theme for
games at the time. Placing Defender in space appealed to Jarvis because it cov¬
ered up the inadequacies of his hardware.

At the time, space was just the happening thing. It was very easy to do space
because space is very abstract.

We had limited graphic ability—just making a person look like a person
was very difficult. It was almost as if you wanted to go to more abstract
outer-world themes because that way people couldn’t say, "You know, that
thing looks like shit.”

—Eugene Jarvis

Jarvis’s first inclination was to create a game similar to Space Invaders. After
several aborted attempts, he began trying to design something closer to Aster¬
oids. He liked the controls in Asteroids, which let players go anywhere on the screen.

146 The Golden A^e (Part i: 1979-1980)

When his programmer began creating the game, Jarvis changed his mind be¬
cause he didn’t like the way the game anchored him into a single screen.

In his next attempt, Jarvis created a world that was far larger than the screen.

I came up with scrolling the screen, making the field larger than the actual
screen. The Defender world turned out to be three and one-half screens or
seven screens or something. Having a universe that was larger than the screen,
that was just a huge, huge breakthrough.

My original idea was to go one direction. I tended to want to go left to
right. My friend told me that was bogus, that you needed to be able to go
backward. Changing the program to make it go backward was a pain in the
ass, but he finally talked me into it.

—Eugene larvis

By July, Jarvis found himself far behind schedule. He had his spaceship, his
scrolling world, and his controls, but he still needed to create allies to defend
and enemies to attack. He needed to finish the game before the upcoming
trade show, which took place in mid-September.

Jarvis decided to defend astronauts—humans in space. He spent weeks cre¬
ating tiny men who actually walked on the surface of the planet while players
shot enemy aliens out of the sky. The process took too long. Jarvis’s boss began
pushing him to finish the game, even if it meant taking the astronauts out.

Somewhere during that time, I just wanted to put all my stuff in a box and
quit. I don’t know why I didn’t actually quit. Everyone was hassling me on
spending so much time on these little astronaut guys.

Around this time, a really talented guy joined the team. His name was
Sam Dicker. He was about nineteen years old.

He did some really incredible effects for the game. All of a sudden, we were
blowing up things, we had some sound going, and it was starting to get fun.

—Eugene Jarvis

Jarvis did not finish the game on time. He ended up spending several hours
completing Defender on the floor of the show.

The Golden Ajfe (Part i: 1979-1980) 147

Defender was Williams Electronics’ biggest seller. More than 55,000 units were
placed worldwide.

In making Defender, Jarvis had created one of the toughest games in arcade
history. Players controlled a fighter craft as it defended the inhabitants of a
small planet, ten astronauts in stasis, from alien abduction.

In the beginning, the alien invaders slowly dropped from the sky in an
effort to snare an astronaut and fly back into space. When aliens escaped
with an astronaut, they turned into fast-moving mutants. If the aliens man¬
aged to capture every astronaut, the planet exploded and the player found
himself flying through hyperspace being chased by a seemingly endless sup¬
ply of aliens.

Defender had an elaborate control panel with a joystick for controlling alti¬
tude and five buttons for firing weapons, dropping smart bombs, accelerating,
changing directions, and jumping into hyperspace.

Beginning players seldom lasted more than a few seconds on Defender, and
mastering the game became a badge of honor. Some players let the aliens
capture their astronauts, then shot them as they tried to escape. They would
catch the astronauts as they fell back toward the planet and carry them on
the front of their fighter. Other players preferred to let the aliens take the
humans because so many aliens attacked them in hyperspace that they easily
built up their scores. Different players came up with their own solutions for
conquering Defenders very intense play.

I came into an arcade on a Friday night and there was a crowd of people four
deep around this game, putting in their quarters and lasting maybe 35, 40
seconds. Defender was a very ferocious game—very difficult controls.

They were seeing the special effects in the game and they just, they wanted
to do it. And one after the other, they were throwing quarters in. Defender
made $700 its first week. I have never seen a quarter-a-play video game
make money like that—not before or after Defender. It was the most phe¬
nomenal collection anyone had ever seen.

It was a hell of a game.. . .

—Larry DeMar, video-game and pinball designer, Williams Electronics

148 The Golden A^e (Part i: 1979-1980)

Battlezone

In November 1980, Atari released a game with an updated version of a familiar
Atari theme—tank warfare. The game was titled Battlezcme.

Though Ed Rotberg is credited with creating Battlezone, the game was a group
effort from the beginning. Rotberg used Howie Delman’s vector-graphics gen¬
erator because it offered enough power to create a three-dimensional
environment. He also asked other designers for help.

The idea that we should do a first-person tank game came out of a company
brainstorming session. Morgan Hoff was the project leader, jed Margolin was
the electrical engineer, and I did the programming.

Roger Hector did the models [for the enemy tanks]. I went to Roger and
said I needed something that looked like a tank but used as few lines as
possible because we had only so much processing power back then.

We needed a missile and we needed this and that, so Roger did all the
artwork. He did the background as a line drawing that we had converted
into a series of vectors, and there was a volcano in it.

We worked in labs and I was in a lab with Owen Rubin, who would always
come in and say, "When are you going to make the volcano active?"

I was trying to make a game, and every day Rubin came in with, "When
are you going to make the volcano active? When are you going to make the
volcano active?”

Finally, I said, "Look, I’m trying to make this game here. If you want the
volcano active, write the damn code yourself.”

I came into work the next day and there, sitting on my desk, was a bunch
of code. That’s how we got the active volcano in Battlezone. It was really the
only code in the game that was not written by me.

—Ed Rotberg

Like Sea Wolf, Battlezone had a distinctive periscope-like viewer. Players pressed
their faces against it to see the screen. The viewer in Sea Wolf, however, pivoted
and was used to aim torpedoes. The one in Battlezone was a stationary plastic
structure that enhanced the feeling of being inside a tank. It could not be
used for aiming, however, since the player’s tank only fired straight ahead.

The Golden A<fe (Part i: 1979-1980) 149

To this day I don’t like it [the viewer], I was concerned with coin drop. It
isolated players and gave them a feeling of immersion, but it blocked other
people’s view of the game.

—Ed Rotberg

In Battlezone, players used two large joysticks to maneuver their tanks as
they hunted enemy vehicles. A radar scope in the top of the screen showed
the position of enemy vehicles. The key to the game was using the scope to
evade enemy attacks.

Battlezone featured several kinds of enemies—slow-moving standard tanks,
super tanks, and anti-tank missiles. Sometimes flying saucers appeared as well.

Rotberg created a three-dimensional plain for his battlefields. In this silent
world, Roger Hector’s volcano could be seen spewing boulders along the ho¬
rizon. Blocks and pyramids scattered throughout the plain added depth and
provided players with cover from enemy attacks. Though all of the objects
were shown as line art, Battlezone s realistic depiction of tank warfare attracted
attention that Rotberg later came to resent.

The Golden Age
(Part 2:1981-1983)

We only mentioned Space Invaders and Pac-Man, but there were a few others that made
it into that boom period, which lasted until June of 1982. It was only a short-lived thing,
but it got everybody’s attention, including the national media.

—Eddie Adlum

Ron’s accountant called me up and said, "We’ve got to incorporate Ron.” I started laughing
and said, "Ron is nearly bankrupt. Why would we incorporate him?”

He said, "Don’t you know? Nintendo is just going wild selling this Donkey Kong
coin-op game.”

—Howard Lincoln, chairman, Nintendo of America

152 The Golden A?e (Part 2:1981-1983)

Arcade’s Biggest Year

In 1981, 15-year-old Steve Juraszek of Arlington Heights, Illinois, scored
15,963,100 points in a 16-hour game of Defender. He set a new world’s record,
became an instant celebrity, and got his picture in Time magazine. Local school
officials were not impressed. The game began during school hours. Juraszek
was banned from leaving school grounds for playing hooky. 1

Arlington Heights was not the only town that saw a connection between
video games and truancy. The Pittsburgh City Council enacted an ordinance
that prohibited minors from playing video games during school hours and
threatened to revoke the license of any arcade that ignored that ordinance.

Several small towns, including Babylon, New York, pushed for laws to
monitor the operation of video-game arcades. In Oakland, California, the city
council voted to ban minors from visiting arcades during school hours, after
10 p.m. on weeknights, and after midnight on weekends. A dispute over zon¬
ing laws between Aladdin’s Castle, a large chain of arcades, and the city of
Mesquite, Texas, ended up before the Supreme Court ( City of Mesquite v. Aladdin's
Castle, Inc., 455 U.S. 283 [1982]).

Other countries also struggled with the growth of video games. In Novem¬
ber 1981, Philippine president Ferdinand Marcos banned video games and gave
arcade owners two weeks to destroy them. 2

A Time magazine cover story reported that Americans dropped 20 billion
quarters into video games in 1981 and that “video game addicts” spent 75,000
man-years playing the machines. The article went on to explain that the video-
game industry earned twice as much money as all Nevada casinos combined,
nearly twice as much money as the movie industry, and three times as much
money as major league baseball, basketball, and football. 3

America was covered with arcades. According to a Play Meter Magazine study,
there were approximately 24,000 full arcades and 400,000 street locations. In
all, according to the 1982 study, more than 1.5 million arcade machines were
in operation in the United States.

nameless Stars

Despite the popularity of their games, Atari’s designers were forbidden to take
credit for their work. Whether Atari president Ray Kassar thought competitors

The Golden A^e {Part 2:1981-1983) 153

would try to buy his designers away or simply felt that they didn’t deserve the
publicity, he seldom allowed his designers to meet reporters and never let
them put their names on their machines. When Steve Bloom interviewed
Atari coin-op engineers in a book called Video Invader, he had to change their
names. He referred to Dona Bailey and Ed Logg, creators of Centipede, as Dona
Taylor and Ed Lodge*

Tension continued to mount between game designers and management at
Atari. By this time, such software companies as On-Line Systems** and
Broderbund were making consumer versions of popular coin-op games for
Apple, Atari, and Commodore home computers. Ken Williams, founder of
On-Line, treated his designers like rock stars, lavishing them with publicity
and bonus checks.

At Atari, only managers and executives received public accolades. Some
coin-op engineers began referring to Lyle Rains as “Hollywood Lyle” because
he appeared before the media so often. A number of publications mistakenly
credited him with the creation of Asteroids.

Military Battlezone

Shortly after Battlezone was released, a group of retired Army generals con¬
tacted Atari. The officers wanted to license a more realistic version of the game
to be used for training soldiers. The new version of the game would require
several technical features and had to be built within a few months, in time to
be demonstrated at an important trade show. Despite his vigorous protests,
Ed Rotberg was asked to take the project.

I didn’t think it was a business that we should be getting into. You’ve got to
remember what things were like in the late 1970s, and where those of us who
were in the business came from—our cultural background. There were any
number of jobs to be had by professional programmers in military industries
or in military-related industries. Those of us who found our way to video

* Craig Kubey released The Winner's Book oj Video Games the same year. Kubey’s book was
published by Warner Books, part of the Warner Communications empire that owned Atari.
It listed Logg, Bailey, and several other Atari designers by their correct names.

** Later renamed Sierra On-Line.

154 The Golden A<>e (Part 1. 1981-1983)

games... it was sort of a counter-culture thing. We didn’t want anything to
do with the military. I was doing games; I didn’t want to train people to kill.

Since Battlezone was my baby, and it was Battlezone that they wanted to
convert, and there was a deadline to get it done, I agreed to do the proto¬
type if they [his bosses] would promise that i would have nothing to do with
any future plans to do anything with the military. They gave that assurance
to me, and I lost three months of my life working day and night and hardly
ever seeing my wife.

—Ed Rotberg

Military Battlezone was much more complex than the original game. In the
arcade game, players could only shoot straight ahead, and their projectiles
flew in a straight trajectory unaffected by gravity. The military version was
considerably more realistic.

The changes were extensive. First of all, we were not modeling some fantasy
tank, we were modeling an infantry fighting vehicle that had a turret that
could rotate independently of the tank. It had a choice of guns to use. In¬
stead of a gravity-free cannon, you had ballistics to configure.

You had to have identifiable targets because they wanted to train gun¬
ners to recognize the difference between friendly and enemy vehicles. So,
there were a whole slew of different types of enemy vehicles and friendly
vehicles that had to be drawn and modeled. Then we had to model the phys¬
ics of the different kinds of weapons.

—Ed Rotberg

Rotberg deeply resented being forced to work on the military version of
Battlezone. His next project was a game called Dragon Ridersthat was based on the
novels of fantasy writer Ann MaCaffrey. Had it been completed, Dragon Riders
would have been the first game based on a novel. Atari never licensed
MaCaffrey’s books and the game never made it out of production.

Rotberg’s final project at Atari was a game called Warp Speed. This was a high¬
speed outer-space flight simulation in which players attacked a well-armed
space fortress. Rotberg left Atari before the project was finished.

The Golden A<je (Part 2:1981-1983) 155

The people who completed Warp Speed decided to use the joystick from Mili¬
tary Battlezone on their game. Around this time, Atari struck a licensing deal
with another Bay-area legend—film maker George Lucas. With its ships and
activities altered to replicate the battle over the Death Star, and voices from
the movie added to the game, the game was released as Star Wars.

ligiMey Kong

Our coin-op engineers were really tough, arrogant guys. They didn’t believe
anybody made a coin-op game as well as they did.

One day they came in and they wanted to take the rights to manufacture a
game called Donkey Kong jot coin-op in the United States. What that told me,
knowing our coin-op people, was that it must have been a hell of a game.

—Manny Gerard

During the golden age of arcades, a few Japanese companies earned huge profits
through U.S. operations. Namco prospered through its partnership with Mid¬
way. Taito had made so much money from Space Invaders that it opened its own
U.S. operation—Taito America.

A few Japanese companies, nevertheless, seemed unable to crack the American
market. One of these was Nintendo, a nearly 100-year-old playing-card manufac¬
turer that had recently expanded into making toys and electronic games.

By 1980, Hiroshi Yamauchi, president of Nintendo Company Limited, de¬
cided that his company needed a U.S. office if it was going to break into the
American arcade market. He hired his son-in-law, Minoru Arakawa, to estab¬
lish an American operation.

Yamauchi did not hire Arakawa out of family loyalty. Arakawa had just
spent three years overseeing the building of a Canadian condominium project
for a Japanese construction firm. He had a proven track record as a manager.
More important, he had experience running the North American office of a
Japanese firm.

In April 1980, Arakawa set up an office in Manhattan and a warehouse in New
Jersey. His first distributors were a couple of entrepreneurs named Ron Judy and
A1 Stone, who owned a Seattle-based trucking company but moonlighted as game

156 The Golden Age (Part 2:1981-1983)

resellers. They had been purchasing Nintendo arcade games through a firm
in Hawaii and marketing them in the continental United States.

Arakawa offered to cover their expenses and pay them a large commission
if they would become consultant-representatives of Nintendo of America.

Ron and Al had a small trucking company, Chase Express, and I was their law¬
yer. They came in one day and said that they had discovered coin-operated
video games. This was actually before they had been involved with Nintendo.

They started importing Nintendo video games through Hawaii. These were
games that Nintendo Company Ltd. produced and exported to the United
States. Not a lot of games but a few.

At some point they hooked up at a trade show with Mr. Arakawa, who by
now had set up Nintendo of America. Mr. Arakawa engaged Ron and Al Stone
on a consulting basis. The term of the deal was that they would be paid on a
commission basis.

Their responsibility was to go around and set up the distribution through¬
out the United States and Canada for Nintendo of America coin-op games.

—Howard Lincoln, chairman, Nintendo of America

Their first game, Radarscope, did not sell well, even though it had done fairly
well in Japan. Yamauchi told Arakawa that Radarscope would be a hit. Nintendo
shipped 3,000 copies of the game to the United States.

Around this time, Arakawa discovered that locating his operation on the East
Coast added two weeks to the time it took to ship games from Japan. He decided to
relocate his headquarters to the West Coast and settled in Redmond, Washington.

Radarscope did not appeal to American audiences, and Judy and Stone were
unable to sell all 3,000 units. Since Nintendo of America covered their ex¬
penses, they did not incur debts, but they also received very little income since
they were being paid a straight commission.

The fact that it was one of the most expensive games in the industry and we
were not an established line with the American distributors... we had some
difficulty selling the entire amount of the shipment from lapan.

■Al Stone

flie Golden A?e (Part 2:1981-1983) 157

Radarscope and Heavy Fire and mediocre games were available. Radarscope
was the number two game after Pac-Man [in Japan], so it was pretty popular
... very popular at the September show, in Japan. And we had Ron Judy and
Al Stone very excited [about bringing the game to America],

It's a shooting game, like Calaxian from Namco but more sophisticated.

We brought it to the United States ... I think too many games, about
3,000 Radarscopes. We saw them pile up. We sold 1,000, and had 2,000 left.

—Minoru Arakawa, president, Nintendo of America

As president of Nintendo Co. Ltd., Hiroshi Yamauchi ran his company in a
notoriously imperialistic style. Before taking over the family business,
Yamauchi had his dying grandfather fire relatives working for Nintendo so
that he could consolidate his power base. As Nintendo expanded operations
from Hanafuda playing cards to toys, Yamauchi acted as sole judge of new
products. If a concept appealed to him, it went to market. Since Yamauchi’s
instincts were almost always correct, Nintendo generally thrived.

Breaking into the American market, however, proved baffling to Yamauchi.
Arakawa reported failure after failure. Space Fever did not attract business. Ar¬
cade owners did not like Sheriff. Judy and Stone were able to sell a scant 1,000
units of Radarscope, the game Yamauchi hoped would take America by storm.
Two thousand Radarscope machines sat stacked in the New Jersey warehouse. If
Yamauchi was going to establish Nintendo in the United States, he would
need something that Americans had never seen before.

Fortunately, there was a project that looked very promising. In 1977,
Yamauchi had hired a creative young college graduate with a degree in indus¬
trial design named Shigeru Miyamoto.

Miyamoto was somewhat of an anomaly in Kyoto, Japan. He played the
banjo, loved bluegrass music, and collected Beatles albums. Above all else,
Miyamoto loved designing toys. Years later, after establishing himself as the
greatest designer in the video-game industry, Miyamoto told a reporter that
he still wanted to design toys, not video games.

Ironically, one of Miyamoto’s first jobs at Nintendo was to create the art for
the outside panels of Radarscope and Sheriff cabinets. In 1979, Yamauchi called
Miyamoto to his office and asked him if he could design an arcade game.
Miyamoto excitedly said yes.

I$8 The Golden A?e (Part 2:1981-1983)

What I wanted to do was to make fun toys, interesting toys. They [Yamauchi ]
knew that I had been doing kids’ toys, but nobody expected me to get in¬
volved in the video-game business.

When I was first hired, I did artwork for game cabinets. I was actually
making some game characters before I started Donkey Kong, so when I knew
that I was going to be given a chance to make a game, I was very excited.

—Shigeru Miyamoto, creator of Donkey Kong

Miyamoto did not have to worry about the technical aspects of game cre¬
ation. The cabinets already existed—Yamauchi planned to build Miyamoto’s
game by converting unsold Radarscope machines. To make sure the project pro¬
ceeded smoothly, Yamauchi assigned Gumpei Yokoi, the dean of Nintendo’s
engineering team, to oversee the implementation of Miyamoto’s ideas.

Like Eugene Jarvis, Miyamoto began by inventing an elaborate story to ex¬
plain his game. The story involved a gorilla escaping from its master, a carpenter,
and kidnapping his girlfriend. First the gorilla climbed to the top of a seven-
story construction site. When his master followed, the ape rolled barrels at him.
Players helped the carpenter leap over the barrels as he followed the gorilla.

Once the carpenter reached the top of the foundation, the chase moved to
a five-story structure made of steel girders. This time the carpenter had to
avoid marching flames while pulling the pins that held the girders together.*
Once the structure collapsed, the carpenter and his girlfriend were reunited.

Because of his desire to penetrate the American market, Yamauchi wanted
the game to have an English name. Since Miyamoto spoke only a little En¬
glish, he used a Japanese-English dictionary to find the correct words for the
title. He wanted to name the game after the ape—“Stubborn Gorilla.” Look¬
ing through the dictionary, Miyamoto selected the word donkey as a synonym
for “stubborn” and the word Kong for “gorilla.”

Masaya Nakamura may not have foreseen the success of Pac-Man and
Michael Kogan may not have predicted the impact of Space Invaders, but Hiroshi

*The original version of the game also included a level where the carpenter chased the gorilla
through a cement factory. The level involved jumping vats of cement on a conveyor belt. This
level was not included in the Nintendo Entertainment System version of the game.

The Golden A<[e (Part 2:1981-1983) 15 $

Yamauchi immediately recognized the potential of Donkey Kong. He called his
son-in-law and told him that a new game was coming that would make
Nintendo one of the hottest game companies in American arcades.

The news could not have come at a better time. Ron Judy and A1 Stone had
nearly bankrupted themselves, and Arakawa was having trouble covering the
costs of his floundering operation. Around this time, Mario Segale, the land¬
lord of Nintendo’s warehouse, visited Arakawa to complain that the rent was
late. After threats and angry words, Segale accepted Arakawa’s promise that
the money would arrive shortly. Arakawa later immortalized Segale by re¬
naming Jumpman, the carpenter in Donkey Kong, Mario.

Arakawa wanted to file a trademark patent on the new game, so he asked
Ron Judy to recommend a good lawyer. Judy and Stone took Arakawa to meet
their lawyer, Howard Lincoln, the day they learned that Nintendo’s new su¬
per game would be called Donkey Kong.

By this time they were deeply in debt and anxious to abandon Nintendo.
The only reason they had stayed was Arakawa’s solemn promise that the next
game out of Japan would be a major hit. The name Donkey Kong&\& not inspire
their confidence.

I remember that day. The fellow who was setting up the distribution for
Nintendo Coin-Op was a client of mine named Ron Judy. Ron was compen¬
sated with a commission based on game sales. The games that had come in
that year had not been strong, so Ron was really strung out.

Poor Ron. I can still see him sitting there when Mr. Arakawa said, "We
have this new game and we need to get it trademarked. The name of the
game is Donkey Kong.”

And I said, "Pardon me. What was that? Donkey Kong? How do you
spell that?”

I remember Ron saying, "Yeah. Can you believe that? Donkey Kong!” It
was at a point in time when Ron was thinking, "What have I gotten myself
into? None of these games have been great. I didn’t earn any money, and
now the final blow is a game called Donkey Kong, which even my lawyer
can’t understand.”

—Howard Lincoln

l6o The Golden Aje (Part 1 1981-1983)

Just as A1 Alcorn had learned about Pong 's appeal by placing it in Andy Capp’s
Tavern, Arakawa discovered he had a hit by placing Donkey Kong in two Seattle
bars—the Spot Tavern in South Seattle and Goldies, a bar near the University
of Washington. Stone and Judy persuaded the managers of the bars to let them
use their locations as test sites. When both test locations cleared more than
$30 per day for an entire week, the managers asked for more machines.

It didn’t take long for Donkey Kong to develop a following. Because of a lack
of funds, Arakawa, Judy, and Stone converted the 2,000 Radarscope machines
stockpiled in the warehouse into Donkey Kong machines themselves. Soon the
entire inventory had been sold, and orders kept rolling in, Arakawa decided
to manufacture more machines in the Nintendo of America warehouse in
Redmond because it took too long to ship them from Japan.

At any rate, the game went out to a Jew distributors who managed to get
some operator to put it out before the playing public, and the thing broke
out of the box. Smash hit!

I caught the buzz early on, just from talking to distributors, and I flagged
it in RePlay and said this was something to keep your eye on. It went crazy. I
think they ended up selling 67,000 Donkey Kongs.

—Eddie Adlum

The straight-commission pay schedule that had nearly bankrupted Ron
Judy and Al Stone suddenly turned them into millionaires. Toward the end
of 1981, Lincoln received a telephone call from their accountant. He had
been expecting the accountant to call about filing their bankruptcy notice.
Instead, the accountant asked Lincoln to incorporate them to protect their
immense earnings.

Bug Shooter

After Asteroids, Ed Logg teamed up with Dona Bailey and created one of the
few games that appealed to female players as well as male— Centipede.

Before going to Atari, Bailey spent three years at General Motors, where
she helped design the microprocessor-based cruise control in the Cadillac
Seville. In 1980, she applied for a job at Atari because she enjoyed playing video

The Golden A^e (Part z: 1981-1983) l6l

games. Once she got the job, she found herself in an odd position—the only
female programmer in the coin-op division.

I was doing this New Yorker profile on Nolan [Bushnell] and Dona was work¬
ing for him at Sente Games. What I really remember about her is that she was
charming. Dona was one of my heroes because Centipede had always been
one of my favorite, favorite, favorite games.

I remember going out to dinner with Dona. She was just so anxious to talk
to me because her dream in life was to be able to write for the New Yorker,
and here I’m just this guy writing this profile on Nolan and talking about it.

I said, "So it must be really cool making video games." And she said,

"What I’d really like to do is be a writer."

She gave me a story that she had written. It was tremendous. She was a
terrific writer.

—Tom Zito

Ed Logg got the idea for Centipede from a book of game ideas, in which it was
listed as “Bug Shooter.” Bailey asked if she could work on the project, so Logg
fleshed out the game and turned it over to her.

I did all the self-tests. I did the graphics, too. It came from an idea called Bug
Shooter. I asked her [Bailey] to go ahead and put mushrooms up and use a
trackball. That stuff was my idea, and I did about half the code.

At the time, the mushrooms were not shootable. If I remember right, it
was basically a spider-like creature, a centipede, and the shooter, and that
was really it. The mushrooms were static—you shot the centipede and noth¬
ing was left behind.

Dan Van Elderen reviewed the game and said, "It would be nice if... ” Dan
wanted to shoot the mushrooms and I agreed that something needed to be done.

I thought about it a while and said, "Well, I need to add something that
creates mushrooms and other things to destroy them,” and so on. So that’s
where other ideas like the fleas that brought more mushrooms came from.

—Ed Logg

l 62 The Golden Aje (Part 2:1981-1983)

In Centipede, players used a trackball to move a cursor shaped like a snake’s
head along the bottom of the screen. The goal of the game was to shoot quick-
moving centipedes as they appeared at the top of the screen and snaked their
way down. The centipedes were composed of eleven sections with legs. Each
time a section was hit, it turned into a mushroom, and the rest of the centi¬
pede continued its nimble march.

The playing field in Centipede was covered with mushrooms that could be
shot away. Whenever the centipede collided with a mushroom, the centipede
changed directions. Some players developed strategies in which they set traps
by creating mushroom formations that forced the centipede to drop down
the side of the screen.

Along with the centipedes, players shot bouncing spiders, scorpions, and
fleas that dropped from the top and left mushrooms in their wake.

One of Dona Bailey’s chief contributions to the game was its unusual color
scheme. While other game designers used bright colors, she chose pastels. The
first stage of the game had a lime-green centipede scurrying through a patch
of green mushrooms with orange edges. The next centipede was pink and
traveled through a patch of pink mushrooms with white edges. Nobody knows
precisely why Centipede appealed to women, but several people believe that
Bailey’s pastel colors were part of the attraction.

On October 28, 1981, Tournament Games held a three-day national video-
game championship in the Chicago Exposition Center. Tournament Games,
a company that had extensive experience promoting tournaments for such
bar games as billiards and darts, heralded the event as a major new sporting
contest in which 10,000 to 15,000 of the world’s best video-game players would
go head-to-head on a single game— Centipede.

Tournament Game’s experience with billiards and darts tournaments did
not translate to video games. The company invited the winners of local video-
game tournaments to compete, but contestants had to pay for their own
transportation and lodging. Walk-on contestants had to pay a $60 registration
fee. These expenses were too high for the teenage crowd that frequented the
arcades, and less than 150 people signed up for the competition.

Competitors were invited to practice before the event, but the 250 Centipede
machines that Tournament Games installed were not set on free play. The

The Golden A?e (Part 2:1981-1983)

contestants not only had to pay to practice, but the machines had internal
timers that stopped their games after three minutes.

The “Open Singles” winner of the tournament was Eric Ginner, who re¬
ceived a check for $12,000. Ok-Soo Han, one of less than a dozen women who
entered, won $4,000 as the top female competitor. Both checks bounced. In
the end, Atari covered the checks to avoid bad publicity.

Atari and another company [that] had done tournaments like foosball and
billiards and games of that sort organized the tournament. There was sup¬
posed to be a $50,000 fund, but it turned out that these guys didn't have
enough funds to pay it off. So I guess everybody turned and sued Atari.

—Ed Logg

Despite a growing list of competitors and mounting internal problems, Atari
remained one of the strongest companies in the industry. By this time, so many
new companies were manufacturing arcade equipment that no one company
could hope to control more than half the market as Atari had in the past.

In 1981, Taito America had its first American-made hit— Qix, a highly inno¬
vative game that one reviewer described as a cross between an Etch-a Sketch and
Star Wars; Sega distributed Frogger, a game in which players helped a frog cross a
busy highway and an alligator-filled stream; Stern attracted crowds with Berzerk;
and Midway imported several strong titles from Namco and released domestic
hits created by Dave Nutting and other American designers. Smaller compa¬
nies like Nichibutsu, maker of Crazy Climber, and Konami also made their mark.

Toward the end of the year, Atari released a new game by Dave Theurer,
designer of Missile Command. The game was called Tempest.

Tempest did not start out as an original idea. Shortly after finishing Missile
Command, Theurer went hunting for his next game in the book of game themes
that had been compiled at company brainstorming sessions. The idea that
caught his eye was called “First-Person Space Invaders.”

Since his game would be played from the first-person perspective,
Theurer needed the efficiency of a vector-graphic generator. As it turned

164 The Golden A f. (Part 2:1981-1983)

out, a new X-Y generator that created color lines was under development.
Tempest, Star Wars, The Empire Strikes Back, Gravitar, Black Widow, Space Duel, Quan¬
tum, and Major Havoc were the only games Atari ever released that used the
color X-Y generator.

It took Theurer six weeks to create a preliminary version of First Person
Space Invaders. The project was almost derailed when he demonstrated it at a
coin-op meeting.

I got First-Person Space Invaders up pretty quickly. Gene Lipkin, the head of
coin-op, and Frank Ballouz played it at a meeting and said, "This game is
not that fun. It’s basically Space Invaders from a different perspective.”

They said I should kill the game if I couldn’t do something special with it.

I told them about this nightmare I had about monsters coming out of a
hole in the ground and you had to ki 11 them before they got out of the hole or
they would kill you. "I can take First-Person Space Invaders, put it on a sur¬
face, wrap that surface around a circle to make a cylinder, and rotate the
cylinder to make a different game out of it.”

They said go ahead and try it, so that’s what I did.

—Dave Theurer

In Theurer’s new game, players shot at creatures as they climbed to the top
of geometrically shaped holes. The game was controlled with a heavy knob
that players spun like a dial. The knob originally controlled the hole’s rota¬
tion. When players began feeling nauseous, Theurer adjusted the controls so
that the player’s gun rotated instead of the hole. The game attracted a lot of
attention around the coin-op division.

Tempest took a year and had about 21K [of code].* When I started the game,
the cylinder actually rotated and your player stayed still. People said it made
them sick to their stomach, so I switched it so that the player moved around.

That solved the problem.

K refers to 1,024 units of memory.

The Golden A?e (Part 1. 1981-1983) 165

I wanted to do something special when you got a high score, and I love
fireworks and explosions, so I made fireworks at the end if you got on the
high score table.

People loved it [Tempest], They came into the labs to play it. That’s how
you knew you had something hot—if you had trouble developing your game
because people played it while you were trying to debug it.

—Dave Theurer

Theurer switched from a black and white vector-graphics generator to the
color X-Y generator during the project, but the technology proved some¬
what unstable. Though it created beautiful colors and had the same
high-resolution images created by older vector-graphics hardware, the new
color generator tended to overheat.

I was working on the game, trying to figure stuff out, and al I of a sudden the
monitor stopped working. I couldn’t figure out why it wasn’t working any¬
more. I was just sitting there and all of a sudden it stopped.

I looked up on the bench where the monitor was sitting, and five or six of
the resistors and components had melted themselves out of the PC board.

They had gotten so hot that they had melted the solder.

Those color X-Y monitors were flaky. They were a big problem throughout the
testing period and they continued to be a big problem in the field. They just
don’t last very long. It’s not good for sales if things are continually breaking.

—Dave Theurer

More than any game before it, Tempest seemed to move at the speed of light.
Players used a spinning knob to control a fast-moving C-shaped polygon that
moved around the top of geometric cylinders with a spider-like crawl and shot at
flippers (large red Xs), fuseballs (multi-colored balls), pulsars (yellow lines that
gave deadly shocks) and other enemies as they tried to climb out of the tube.

Tempest was an immediate hit, but some arcade owners complained about
it. It had maintenance problems and broke down frequently. Before long,
Theurer heard rumors about kids playing the game for hours on a single quar¬
ter. One story was that they had found a code that gave them forty free games.

l66 The Golden Aje (Part 1 1981-1983)

In a business that depended on the average player lasting less than two min¬
utes per game, machines that dolled out free credits were a big liability.

When Theurer first heard about the problem, he assumed it was caused by
the “flaky” hardware. Upon further examination, he discovered that he had
created the flaw.

To protect against piracy, a growing problem in the arcade business, Theurer
had imbedded a security code in the game. The code checked the placement
of different objects on the screen and caused the game to shut down if images
were not in the correct space.

Before shipping, Theurer, who had a reputation for repeatedly fussing over
details, discovered that an Atari logo was not perfectly centered. He moved it
slightly. It seemed like an inconsequential change, but if players hit a certain score,
it caused the security code to malfunction and the player received forty credits.

If players got something like 179,480 points, the game would crank a 40 into the
coin counter. It would do other weird things, too, like double the vector genera¬
tor multipliers so everything would be twice as big, but nobody wanted that.

They just wanted to get the 40 free credits, so the kids figured out how to do it.

—Dave Theurer

Around the time that Theurer finished Tempest, Atari announced a new
bonus plan to reward designers for creating hit games. The plan took effect
shortly after Tempest was released.

Atari pissed me off. After Missile Command, they came up with a new bonus
plan that paid about ten times as much, but they weren’t quite sure when
they were going to put it into effect. I was working on Tempest, and they
waited to see how well Tempest was going to do. Then they said the first
game after Tempest would be the first game on the new bonus plan.

Talk about making me mad. It cost me perhaps a million dollars.

I don’t know who made the decision. I mean, Ray Kassar was president of
the company at the time. They were owned by Warner Brothers, so there was
plenty of money to go around.

—Dave Theurer

The Golden A?e (Part z: 1981-1983) 167

The Peak

The growth of the industry continued into 1982, and video games appeared
in unlikely places. The Hilton Hotel in Rye Town, New York, opened Baga¬
telle Place. Named after the forerunner of pinball, Bagatelle Place was a
formal arcade with thirty-three video games, a cappuccino bar, and a strictly
enforced dress code.' 1

In Nevada, casinos cleared out gambling equipment and set up small ar¬
cades. In Hawaii, an enormous arcade took up nearly half of a floor in the
Rainbow Bazaar, a large tourist center in Waikiki. In the early 1980s, Hawaii
experienced record tourist business and Waikiki real estate was among the
most expensive in the world.

The company that earned the most profits was not, however, Atari or
Nintendo—it was Midway. Midway was about to release a product that would
become the most successful game in the history of the American arcade in¬
dustry— Ms. Pac-Man.

MIT Strikes Again

Toru Iwatani, the Namco employee who designed Pac-Man, was not involved
with the creation of Ms. Pac-Man. It was created, instead, by nine college stu¬
dents, led by two MIT students, Doug Macrae and Kevin Curran.

As a junior, Macrae created a small coin-op route on the MIT campus with
a Gottlieb Pioneer pinball machine that he received from his brother and three
Missile Command machines that he bought on his own. The route was very lu¬
crative in the beginning, but Missile Command soon began losing popularity.
One problem faced by small-route operators was the cost of keeping current.
People lost interest in older games as new ones arrived, and before long, the
only people playing them could milk an hour of play out of a single quarter.

Other small-time operators would have had to abandon their machines or
sell them cheaply, but Macrae was studying engineering. He and another stu¬
dent named Kevin Curran decided to update the Missile Command machines
and give them a new life.

The spring of our senior year, Kevin and I got interested in designing games
rather than just operating them. I had a computer graphics background,

168 The Golden A?e (Part z: 1981-1983)

and Kevin had an electrical engineering background, and the two of us kind
of said to ourselves, "Well, how do we get into the design of video games?”

The process was a little bit daunting, in that we looked at mainly the
arcade games and didn’t really know how you’d go about building cabinets
or getting involved in the hardware. ... so we came up with the idea that
we’d do enhancement kits.

—Doug Macrae, cofounder, General Computer

Rather than creating new games, Curran and Macrae decided to build “PAL”
boards that would fit onto the circuit boards of existing games and modify game
play. Their first project was to revitalize Macrae’s Missile Command machines.

Curran and Macrae moved off campus and set up shop in a rental house. The
business at this point was a five-man operation. They borrowed money from
Macrae’s mother and from their coin-op route and purchased equipment. Then
they took apart one of the Missile Command machines and studied its design.

We started disassembling the code to Missile Command on this emulator,
figuring out exactly what all the code did. Then we designed a board that
would mount on top of the Missile Command game and would cleverly over¬
lay code that we wrote onto the original Atari code. The way we did it actually
was we had a board that was watching the addresses and was deciding when
to overlay our code on top of the original Atari code.

We were very concerned about copyright infringement because if we just
modified their code and sold new ROMs, we thought we would be infringing
on the Atari copyrights and end up sued within minutes.

—Doug Macrae

The new game, which they called Super Missile Attack, was basically an accel¬
erated version of Missile Command with a few new enemies. Along with the
usual missile-packing jets and UFOs, the new version also featured a laser¬
shooting UFO and a new color scheme.

The Super Missile Attack modifications brought players around MIT back to Mis¬
sile Command, and Curran and Macrae wagered that it would have the same impact

The Golden kf (Part z 1981-1983) 169

around the country. Missile Command was a fairly expensive game, so Curran and
Macrae decided to try and sell their “enhancement kit” on the market.

And we started selling these boards or these kits out of the back of Play
Meter Magazine and RePlay Magazine for $295 dollars. We were taking phone
calls in the bedrooms, we were producing them in the basement, we were
designing in the living room and shipping out of the dining room of this
house in Brooklyn.

—Doug Macrae

It cost Curran and Macrae approximately $30 to make a board, which they
then sold for $295. They called their company General Computer and sold
more than 1,000 enhancement boards over the summer.

Somewhat pleased with themselves and their new business, they decided
to modify an even more popular game for their next project. They settled
upon the most popular game in the world, Pac-Man.

Modifying Pac-Man was more difficult than working with Missile Command.
Dave Theurer, the designer of Missile Command, had created a very logical and
minimalistic code for his game. It was easy to understand and to work with.
The programmers who worked with Toru Iwatani on the creation of Pac-Man
had not been as efficient, and their code was twice as long.

By August 1981, while Curran and Macrae had disassembled the code and
begun to build an enhancement, a new development threatened to shut them
down. Atari charged them with copyright infringement and took them to court.

We disassembled the code, documented it all and how it worked, etc., and
then looked at how to make modifications to make it a little more difficult
and a little more interesting. And we were developing this enhancement kit
as a separate board and kit again. We were ready to take it to market in
August of 1981, and, at that point, we ended up sparring in court with Atari
in front of justice Keating, who was the original Boston bussing judge. It
lasted almost two months.

—Doug Macrae

IJO The Golden Aye (Part z: 1981-1983)

Though the case was ostensibly about copyright infringement, Atari was
not worried about people altering the code in its games. The bigger issue with
Atari was the concept of enhancement boards. Its arcade business would be
crippled if operators could simply update old equipment instead of purchas¬
ing new machines. From Steve Ross to Ray Kassar, the Atari executive board
wanted General Computer stopped at all costs.

We believed we had very moral high ground, in that we had not copied their
code. We had the game operator pull the ROMs out of the Atari game and put
them into our board, plug our board into the Atari board, and then we over¬
laid our code on top of it, so, we viewed that we were actually relatively free
of copying their code.

As it came out in court, there were some very difficult issues about trade¬
mark dilution and misrepresentation of origin that were going to get sorted
out in court under Justice Keating, which had never really been decided be¬
fore. Up to this point, video-game enhancers had just blatantly copied code,
did all kinds of things wrong, and they were pretty clear cut cases for Atari
and also Bally to go attack and pretty much put out of business. Ours was a
much greater case about whether we had the right to enhance a video game.

We went a couple of rounds with temporary restraining orders and in¬
junctions and, eventually, the general counsel of Atari, Skip Paul, came to us
and said, "What are you guys really after here?”

—Doug Macrae

Skip Paul, Atari’s general counsel and later the president of Atari Coin-
Operated Games, decided to look for an amicable solution. He asked Curran
and Macrae what they hoped to accomplish. When they told him that they
simply wanted to make video games, he made a deal with them. Atari would
drop the case with prejudice—meaning that Atari would admit it was a wrong¬
ful suit—and pay them $50,000 per month for the next two years to develop
games if they would stop making enhancement kits.

Curran and Macrae agreed.

The one thing that got carved out of the agreement was that we actually had an
enhancement kit to Pac-Man in development at the time, and we did not want to

The Golden A^e (Part 2:1981-1983) 171

throw it in the trash. The agreement that was written up stated that we would
never produce an enhancement kit again without permission from the original
copyright holder of the game... or the original manufacturer of the game.

Atari assumed that no one would ever give us permission.

—Doug Macrae

In an attempt to salvage their work on Pac-Man, Curran and Macrae flew to
Chicago and met with David Marofske and other executives at Bally-Midway.
Their plan was to bluff Bally into accepting a deal.

They went to the meeting armed with court papers that showed that Atari
had dropped its lawsuit with prejudice. “We just beat Atari in court,” Macrae
told the Bally executives, “and we’re going to launch this enhancement kit.
We just want your blessing.”

We thought we were being very clever, convincing them that we were going
to launch this enhancement kit, and I think we probably could have gotten
their blessing.

One thing we did not take into account was that Bally had just success¬
fully made Pac-Man the biggest-selling video game of all time. Their
production lines had just shut off and they had nothing to put into produc¬
tion after that. They did not have the next game.

I believe Dave [Marofske] was the one who came up with the idea of say¬
ing, "Well, guys, how about we talk sequel rather than you selling it as an
enhancement kit?"

—Doug Macrae

The enhancement kit designed by General Computer turned Pac-Man into
a new game called Crazy Otto, in which Pac-Man had legs. In the whirlwind
negotiations that followed, Curran and Macrae were told that the new game
had to be faithful to the Pac-Man image and that the legs were not acceptable.

They decided to create a female character.

As we kicked it around and what the sequel should be, we came up with the
idea of, well, it should be the female Pac-Man. We originally burnt the

172 The Golden A^e (Part z: 1981-1983)

ROMs for production under the name Pac-Woman, but as we were getting
ready to go into production, several females inside of Midway objected,
saying, "That’s kind of an inappropriate name” and that we should put a
surname in front of it.

I never understood why.

We chose Miss Pac-Man and got very close to going into production. Then
someone pointed out to us that in the third animation (the cartoons between
levels of the games) Pac-Man and the female Pac-Man get together and have
a baby. We would have had all kinds of people talking about the fact that
they had a baby out of wedlock, which would have been very bad.

We scrambled and came up with Mrs., then changed it to a fifth name,

Ms., because we were trying to make everyone in life happy and all of
«■ this happened in the final 72 hours before the production line was sup¬
posed to start up.

—Doug Macrae

Midway never built an actual Ms. Pac-Man board. It simply built Pac-Man
boards, then added General Computer’s enhancement kit.

By this time, maze chasing had become the most popular theme in the
arcades. Some manufacturers updated the theme by making the characters
move fast or by adding shooting to the game, but most maze chase games still
looked a lot like Pac-Man.

We had thought that the Ms. Pac-Man image gave the game its own identity.

We changed the artwork and changed the speed and presented it to Mr.
Nakamura [president of Namcoj. After going back and forth for a while, we
introduced it to the marketplace.

—David Marofske

Like Pac-Man and Centipede, Ms. Pac-Man appealed to female players. It had
the same basic game play as Pac-Man. The game still involved clearing a maze
while avoiding four mop-like ghosts named Inky, Pinky, Blinky, and Sue—
the latter of which Macrae named after his sister. (The fourth ghost in Pac-Man
had been named Clyde.)

The Golden Aje (Part 2:1981-1983) 173

The biggest difference between Pac-Man and Ms. Pac-Man was that Ms. Pac-
Man featured four mazes instead of the single maze in the original game. Ms.
Pac-Man was also faster. The ghosts in Pac-Man followed preset paths. By run¬
ning in certain patterns, players were able to confuse them and play nearly
indefinitely. There were no known patterns to fool the ghosts in Ms. Pac-Man.

General Computer also created several cosmetic changes. The fruits and
bonus objects in Pac-Man appeared just below the center of the maze. In Ms
Pac-Man they marched around the maze. The main character, Ms. Pac-Man,
was still a yellow ball with a mouth but had comic touches—a red bow and
lipstick. Like Centipede, the pinks and blues in Ms Pac-Man 's color scheme added
a feminine touch.

Midway sold 100,000 Pac-Man machines and more than 115,000 Ms Pac-Man
machines in the United States. Other than Pac-Man and Ms Pac-Man, no ar¬
cade game has ever sold more than 100,000 units in the United States.

General Computer later built Junior Pac-Man for Bally Midway. Later, Bally/
Midway contracted with Dave Nutting to build Baby Pac-Man, a maze-chase
game with a pinball machine attached. At certain points in the game, the
action went from the chase on the video monitor to the pinball machine.

Curran and Macrae sued Midway, claiming that they had come up with
the concept of a Pac-Man family and that they should receive royalties from
all Pac-Children games. They won the suit.

Though Baby Pac-Man was never a popular game and its royalties amounted
to little, the litigation resulted in huge royalties on merchandise with images
of Pac-Man and his family.

Digital Me

In 1980, Ralph Baer, inventor of the Magnavox Odyssey, birthed an invention
to personalize video games—a camera that could shoot pictures of players’
faces, digitize them, and load the images into games. He thought that arcade
manufacturers could place the camera in the marquee of their cabinets and
paste players’ faces on characters in their games. The camera could also snap
a photograph of a high-scoring player and post it next to his score.

The idea was to put a small, inexpensive black and white video camera into the
arcade game and point it down toward the face of the player. The player would

174 The Golden Age (Part 2:1981-1983)

see his own face digitized on the screen, smile until he liked the way he looked,
and push a button, and the digitized picture would be stored in RAM and
available for use, either during the game to become the head of a player or
used in the credits to appear next to the scores and the initials of the player.

I figured every confirmed video-game player in the city of Chicago and
New York would be running around from arcade to arcade to get his mug
up. It seemed like a surefire hit to me, so I built the preliminary piece of
equipment and took it to Chicago to Marvin Glass and Associates.

We had John Pasierb, the chief engineer of Bally/Midway, come over and
look at it. And he got very interested immediately.

—Ralph Baer

Executives at Midway expressed great interest in Baer’s camera and com¬
missioned him to install the prototype into one of their machines. Baer
installed his camera in an arcade machine and rigged it to take pictures of
players who got high scores. Midway set up the game in a Chicago test site.

According to Baer, the game did well the first day. The second day ended in
disaster, and a Midway executive told Baer that Midway was no longer inter¬
ested in his invention.

To make a long story short, they put it on display in an arcade in Chicago and
it did very well the first day. The second day some guy gets up on a chair,
drops his pants in front of the camera, and that’s the end of the product.

—Ralph Baer

During this time, the rock group Journey was one of the most popular
musical acts in the United States. Some Midway designers wanted to make a
game based on the group.

In Journey, the game, players helped drummer Steve Smith jump through
space, using drums as trampolines. They helped keyboard player Jonathan
Cain run through a minor obstacle course, guitarist Neal Schon float through
a low-gravity cave, bass guitarist Ross Vallory jump over several exploding
platforms, and lead singer Steve Perry slip through a maze of deadly gates.

The Golden Age (Part z: 1981-1983) 175

Journey was the first game to incorporate digitized graphics. Black and white
photographic images of the musicians’ faces appear throughout the game.
The images were captured using Ralph Baer’s camera.

There’s a postmortem. We salvaged all that money we put into that game by
digitizing the heads of some rock group that was popular at the time and us¬
ing the heads as characters in a game. That was the outcome, but the concept
of a camera in a machine just went by the board because of that one instance.

—Ralph Baer

The game play in Journey was not particularly innovative, but Midway ex¬
ecutives believed that the digitized likenesses of the band would attract an
audience. In past years they might have been right. By the time Journey came
out, the arcade business was beginning to fade and pictures of rock stars were
not enough of a draw to save a bad game.

Journey was, between you and me, a disappointment. I thought it was a
better game than it got credit for, but the market had started to soften.

Like I say, I was a little disappointed. I thought that from a market stand¬
point, it was a nice piece.

—David Marofske

The Changing Tides

There’s a joke that on june 21, 1982, at approximately 4:30 p.m., the video
game business fell over a cliff. People stopped playing them, and operators
stopped buying them. And that pall lasted for many, many years and
nobody’s been able to figure out why.

To this day, even though it happened well over a decade ago, you still
hear people talking about the bust. Not the boom, but the bust.

Eddie Adlum

l ]6 The Golden Age (Part z: 1981-1983)

The video game industry began its decline in mid-1982. The industry didn’t
crash; it simply stopped growing.

The first people to feel the effects were entrepreneurs who placed games in
restaurants, grocery stores, and fancy hotels. Games in low-traffic locations
no longer earned enough money to pay for their operation. Many of these
entrepreneurs defaulted on the loans they had made to purchase their games.

At the time, several companies had recently built new super arcades on the
belief that the business would continue to expand. Arcades like Castle Park, a
multimillion-dollar 17,000-square-foot operation in Riverside, California,
needed thousands of customers per week to survive. As interest waned, these
large new arcades attracted too few customers to meet expenses. They were
the first casualties of the shake up.

So the fallout from the video bust in mid/late 1982 was a sad one for this
business. People lost money putting games in places where they shouldn’t
have gone. Lobbies of Chinese restaurants, for example. You’re just not
going to make money on a machine in the lobby of a Chinese restaurant,
you’re just not.

When the bloom came off the rose, those machines came out of those
locations.

Unfortunately, a lot of distributors had extended too much credit to new¬
comer-operators and ended up with a lot of debt. A million dollars in unpaid
bills was not unusual from a single distributorship.

The people who devoted much of their money to video games ended up
with a lot of unnecessary cabinetry, hardware, monitors, and games that
had absolutely no resale value whatsoever. They started visiting the city dump
and pushing them over the hill.

—Eddie Adlum

As the big arcades disappeared, smaller ones received enough business to
survive. For a short time, the business seemed to correct itself. Many arcade
owners purchased new equipment and tried to hang on until business picked
up again. It never did. The coin-operated video-game business continued a
fairly steady decline for the next fifteen years.

The Golden A^e (Part z: 1981-1983) 177

No one knew why the business had slumped. Some of the most memorable
games in video-game history arrived after the arcade business began to fade.
Gottlieb released { Then ; Nintendo released Donkey Kong Junior, Sega released Pengo,
and Williams released Joust and Robotron2084, but the business continued to wane.

We could just say it’s a fickle public. We do know that movies got better. We
do know that CD records made their appearances. And we also know that the
stuff that we sell is generally called "novelty," and novelty is not forever,
you have to constantly freshen it.

We tried to freshen it, but apparently not to the point where the public
would play it with the reckless abandon that they were playing before.

—Eddie Adlum

Jungle Who? Jungle What?

Toward the end of 1982, Taito America came out with an adventure game
called Jungle King. In this game, players helped a Tarzan-like hero rescue a
woman from savages. The game involved swinging across a jungle on vines,
swimming through alligator-infested waters, dodging falling boulders, and
jumping over cannibals.

Edgar Rice Burroughs, Inc., the entity that held the rights to Tarzan, claimed
that Jungle King infringed on its property and demanded that Taito change the
title of the game and its content. Rather than face an expensive legal battle,
Taito agreed.

Jungle King became Jungle Hunt. Although Taito did not change the game it¬
self, the Tarzan character was replaced with an explorer in a Patagonian jungle
suit. The original hero had made aTarzan yell as he swung from vine-to-vine,
but the new hero made no sound at all.

In the beginning, most lawsuits over video games involved two game manu¬
facturers suing each other ewer patents. After the golden age of arcades, much
of the litigation involved ideas, titles, and names. The most bizarre suit involved
Universal Studios. The judge handling the trial called it “a tale of two gorillas.”

. . !e for fht Homo

Oh, I mean . . . there are lots of anecdotes from those days. One of them was about this
day I’ll never forget, when I walked across the street to the engineering building on
Borregas, and went into coin-op engineering, downstairs—consumer engineering was
upstairs. This is probably in 1979....

Anyway, they had this Space Invaders machine in coin-op engineering. I looked
at it and went back to Kassar’s office and said, "Ray, take this goddamned Space
Invaders and move it up to consumer. Make a consumer cartridge and license the
goddamned name.”

He just looked at me, and the only thing he said was, "Of course. Why didn’t I
think of that?"

I said, "’Cause you’re very busy running the whole company.”

—Manny Gerard

Those of us who stayed at Atari called ourselves the Dumb Shits Club. They made $50
million and we made $20,000.

—Warren Robinett, former programmer, Atari

l 80 The Battle for the Home

Atari Consumer Division

A core group of four programmers was hired in early 1977 to design games for
the Video Computer System (VCS), Atari’s programmable video game con¬
sole. Within a year, Atari hired four more programmers, and after a few more
months the team grew to twelve. Larry Wagner managed the division.

Nolan Bushnell was already having problems with Warner Communica¬
tions as he prepared to launch the VCS, but he remained at the head of Atari
through the October 1977 launch of the system and into 1978. With Bushnell
in control, programmers frequently came to work late, stayed late, and en¬
joyed the relaxed atmosphere. Bushnell encouraged their laid-back attitude
and had no problem with them partying after, and sometimes during, work
hours. The programmers in the fledgling VCS project genuinely liked
Bushnell, but there were occasional inconveniences.

Nolan would come through the game developers area every couple of weeks
and make comments on the games that made a lot of sense. Then he would
come two or three weeks later and tell you to reverse what he had told you
the last time.

We started taking Nolan’s comments with a grain of salt and asking, "Do
his comments really make sense?” A lot of times we ignored him because he
would frequently spin you around in circles every two to three weeks.

—Alan Miller, former programmer, Atari

The VCS Team

Atari recruited talent for its VCS team in a haphazard way. Instead of visiting
engineering schools and placing employment advertisements around the
country, it simply placed ads in local newspapers. Amazingly, many of the
people Atari selected proved to be masters at pulling a lot of power out of the
Stella chip’s overtaxed hardware. During the VCS’s six-year life span, they
found ways to expand its native capabilities and make it perform tasks that
went far beyond anything that A1 Alcorn and Jay Miner had ever envisioned.
Alcorn may have called the VCS an “empty box,” but the people who made
games for it turned it into a full-fledged computer.

The Battle for the Home l8l

One of the first programmers Atari hired was Alan Miller, a graduate of
Cal-Berkeley who had become addicted to such early coin-op games as Space
Race and Tank during his final year of college. He responded to an Atari em¬
ployment ad in 1977.

My first interview was with Larry Wagner, the guy who headed up the soft¬
ware group, and one of their hardware engineers, |oe Decuir.

The boss of the Micro Electronics Croup, Bob Brown, was away at the time
I was interviewing, so i didn’t have a chance to meet him. Bob was one of the
technology leaders who I really respect. He understood technology and how
to motivate technical people. I was very happy to work for him.

—Alan Miller

Unlike the engineers in the coin-op division who enjoyed socializing as a
group, the people programming games for the Video Computer System
formed cliques and never integrated. Owen Rubin, a coin-op engineer who
helped design computer development systems for the consumer division,
described the environment as “cutthroat.” Coin-op engineers generally stayed
at Atari for years, but VCS people seldom lasted more than a year or two.

I was just there for a year and a half.

There really were kind of two rival cliques when I was there. There was one
group: Al Miller, Bob Whitehead, Dave Crane, and Larry Kaplan, who, for
some reason, kind of formed their own little clique.

Me and my two friends, Tom Reuterdahl and Jim Huether, were sort of
another clique.

—Warren Robinett, early VCS programmer

Life in the consumer division was not as wild as it was in coin-op. The pro¬
grammers did not engage in petty battles with the maintenance department or
go to movies. They did not pull pranks on their managers. Coin-op engineers
worked in teams, consumer programmers worked alone. Most important,
through its first year and a half, the consumer division was a financial black

182 The Battle for the Home

hole. Coin-op earned millions of dollars, much of which was used to cover
losses accrued by the consumer division.

Unlike coin-op engineers, who wrote their code and then gave it to data
entry people to input, consumer programmers entered their own code.
Wagner generally assigned them their first game, but they were usually al¬
lowed to come up with their own concepts after that.

It typically took about 3 or 4 months to make a game, so the process was very
fast paced.

Most of the first games were based on existing coin-op games. I came on
board and they assigned me to do a game called Surround that was similar
to a number of arcade games. At least I didn’t have to come up with a con¬
cept. That helped speed things along.

—Alan Miller

In the beginning, programmers were responsible for creating every ele¬
ment of their games. The same person who created the concept was also
responsible for the programming, art, and even the sound effects. The look of
VCS games improved, however, when an artist named Marilyn Churchill was
brought in from the marketing department to help. A lot of the first games
for the VCS were based on popular arcade and board games of the time.

As they started their second generation of games, Atari’s VCS program¬
mers came up with their own concepts, developed new skills, and accelerated
up the learning curve. To make their deadlines, programmers worked long
hours, for which they felt inadequately compensated.

After my first game, I was given free rein there to come up with all my own
concepts and implement them myself. We did all the implementation in those
days, including the music and the graphics.

We did the music, what little there was. I can’t say I’m a great musician,
but I like music a lot.

I thought making games was a pretty creative, unique act that warranted
compensation. I think I was making $27,000 or $30,000 a year at that time. It
was not aggressive engineering compensation, frankly, even for that era.

—Alan Miller

The Battle for the Home

The first games for the VCS were fairly plain. After designing Surround, Alan
Miller went on to create cartridges based on Hangman and Concentration. Warren
Robinett’s first game was Slot Racers. Other early games included Pong and Breakout.

Within a year, however, the games became more intricate. David Crane
created a football game and Miller created Basketball, a home video game shown
from a 3D perspective.

Of the games I did at Atari, the one I like the best was the Basketball game. It
was one-on-one or one against the computer. VCS hardware was designed
explicitly to do the Tank kind of game, and the basketball game took sports
to a new level of realism on the VCS. It had a really good playability.

I was on the basketball team in high school and loved the sport. Wish I
was better at it.

—Alan Miller

Change limes to Atari

The team had four games ready by the time Atari unveiled the VCS at the Con¬
sumer Electronics Show in June 1977. By the time the system was released in
October, there were nine game cartridges: Combat, Street Racer, Air-Sea Battle, Sur¬
round, Blackjack, Basic Math, Indy 500, Video Olympics (variations of Pong), and Starship.

The Video Computer System retailed for $199 and came with a cartridge
called Combat. Designed by Larry Kaplan and Larry Wagner, GwzTw/supposedly
contained twenty-seven unique games. Most of the games, however, were
variations of the arcade game Tank. In fact, the menu of games on the outside
of the Combat cartridge contained the following list:

1-5 TANK®

6-9 TANK-PONG™

10-14 INVISIBLE-TANK™

15-20 BIPLANE
21-27 JET-FIGHTER™

Most of the variations in the games involved trading out bullets for mis¬
siles and empty battlefields for mazes.

Despite shipping problems and slow sales through Christmas, the VCS
outsold the Fairchild Channel F. This was not enough for Warner chairman

184 The Battle for the Home

Steve Ross. He was disappointed with Atari’s sales and wondered if purchasing
the company had been a mistake. Bushnell’s answer, abandoning the VCS
and developing a more powerful home console, infuriated him.

Bushnell’s struggles were well known throughout Atari. When he was
forced out of the company in 1978, many people believed the company had
lost its soul. They expected Warner to impose a stricter culture. When Ray
Kassar introduced himself as Bushnell’s replacement at a company-wide meet¬
ing, nobody trusted him.

Ray came on to run the company about a year after i was there. I don’t have
positive feelings about him at all. He had no understanding or appreciation
of the industry, no understanding or appreciation of fundamental technol¬
ogy. He was destined to run that company into the ground.

—Alan Miller

Naturally, when I came, they were all very suspicious. People get nervous
when any new guy comes in. They were afraid, I don’t deny that, but I really
had great respect for the programmers because I knew that's where the prod¬
ucts came from. I did everything to encourage them.

—Ray Kassar

Kassar’s East Coast “high society” mannerisms offended many Atari em¬
ployees. The programmers and engineers at Atari did not care about Kassar’s
Harvard credentials or his tailored suits. They viewed these traits as peculiari¬
ties and made fun of them in a rash of Kassar-jokes.

In Kassar’s mind, his job was to raise corporate revenues. As he surveyed
Atari’s situation, he recognized that the company needed a focused market¬
ing plan for its consumer products. He needed to build a quality-assurance
program. Sears was complaining about defective VCS units, and no one knew
how to respond. In fact, according to Kassar, the company’s relationship with
its retail partners was beginning to disintegrate.

Kassar was ready to fix Atari’s problems, but he demanded rewards for his
work. He filled his office with expensive furniture and converted the executive

The Battle for the Home iSjg

dining room into a place of fine dining. Chefs from many of San Francisco’s
most expensive restaurants were brought in to prepare daily meals.

Ray came on board to run the company and, frankly, nobody liked him. He
was just a totally different kind of guy. The tech guys used to wear shorts to
work. Ray was a really high society type and people just couldn’t identify
with him. Didn’t like him. I don’t think it was because of anything that he did
overtly, it’s just that he was different.

He always wore very heavy cologne and you could literally smell if he had
been through the area. People used to joke about that all the time.

—Alan Miller

Like Kassar or hate him, one fact that no one could dispute was that Atari
grew exponentially under his supervision. In 1977, the year before Kassar be¬
came CEO, Atari had $75 million in sales. Under Kassar, Atari became the
fastest-growing company in the history of the United States* as the company’s
sales exceeded $2 billion within three years.

We went from $75 million to $2.2 billion and made a lot of money. They don’t
talk about all the money we made for the company. One year we made $400
million after taxes. It was the most profitable company in the world.

—Ray Kassar

lie First Easier in

They decided that security was really important, so they installed one of
those magnetic keypad systems. It was universally hated by all the tech types,
who were sort of anarchists anyway. You had to have your little electronic
key to get through the doors, and there was no way to get around it.

Since that time, several high-tech companies have surpassed Atari’s record.

86 The Battle for the Home

One night Warren Robinett went down to the cafeteria to get some food.

It was late, and he had forgotten his wallet upstairs. His key, the little mag
card he needed to get back in the office, was in his wallet [so he was stuck].

He started looking around the building for some way to get back in and he
found that the tool room for the coin-op people was open, so he took some
tools out and literally broke down the door to consumer engineering. The
alarms did not go off.

It turned out that the security system recorded the comings and goings of
legitimate employees. You could break down the door and it would not reg¬
ister a thing.

—Alan Miller

Atari’s coin-op engineers felt that Ray Kassar did not appreciate their accom¬
plishments and accused him of paying attention only to the game designers
in the consumer division. What they did not know was that the consumer
division designers also disliked him.

By all appearances, Kassar did not trust his employees. Shortly after taking
over, he had an extensive security system installed. Employees had to carry
magnetic identification cards to enter buildings and secured areas. Though
electronic-security systems were fairly standard in the computer industry,
many Atari employees counted Kassar’s increasing security as one more step
toward destroying the company’s relaxed culture.

Kassar’s policy about programmers not receiving publicity infuriated all of
the company’s designers, but one consumer programmer, Warren Robinett,
found a way around it. He had just finished his first game, Slot Racers, and de¬
cided to make his next project a graphic version of Adventure, the pioneering
all-text computer game created by Will Crowther and Don Woods.

Like the computer game, Robinett’s Adventure would take place in a me¬
dieval world with dragons and caverns. The original game, however, took
place in an enormous universe. In order to beat the game, players had to
create maps. Because Robinett’s game was for the VCS, it was restricted in
size to 4K of code. The VCS, with its memory limitations and joystick con¬
troller, was not suited for text-based games. Robinett had to draw his
dungeon and dragons.

The Battle for the Home 187

I played Adventure at the Stanford Artificial Intelligence lab. One of my room¬
mates was a grad student. He took me over there and we played it and I
thought that it was a really cool, great, amazing thing. I had just finished
Slot Racers and I was trying to figure out what game to do next. I decided to
do a video-game version of Adventure.

It presented several problems because it was all text. You’d get a text de¬
scription of the room you were in and what was around you, and you’d make
commands like, "pick up wand,” "take bird,” "go north,” "go south,” "wave
wand,” and things like that. It was all noun-verb descriptions for movements
or actions, and it took up quite a bit of memory to give these text descriptions.

I decided I’d do the "go north/southeast” thing with the joystick and I’d
show one room at a time graphically on the screen. The rooms were all inter¬
connected. If you drove your cursor off the edge of the screen, you popped
into the next room.

—Warren Robinett

In the original Adventure, players found weapons and other inventory, much
of which they carried with them throughout the game. Because Robinett had
to show graphic representations of each item, he limited players to carrying
one inventory item at a time. Making the proper selection for each situation
was crucial, since a certain sword might defeat one enemy but be useless against
another. Throughout the game, pesky bats tried to fly away with whatever
objects players carried.

I made the decision to allow you to carry just one object at a time, and that
turned out to be a good thing because it meant you had to make strategic
choices. If you had a treasure and a weapon and you wanted to go some¬
where, you had to pick which one you were going to take.

It was also a good choice because the graphics on the 2600 were so lim¬
ited and it kept things from getting too cluttered on the screen.

—Warren Robinett

Robinett began Adventure in the days when programmers were expected to
create their own artwork. He describes his dragons as looking like ducks and

iSi The Battle for the Home

admits that the entire game looked a bit primitive. When he was about half¬
way through, he got bogged down and started another project. He did not
return to finish Adventure for nearly six months.

When he returned, Robinett decided to create a hidden room. The room
would have a special surprise for anyone who found it, and the keys to open the
room would be readily available, but Robinett made the keys and location of
the room so obscure that he doubted that anyone would ever discover them*
To access Robinett’s secret room, you had to find “the dot,” a single gray
pixel in the center of a wall of the exact same color. If your cursor touched the
single interactive dot on that noninteractive wall, it would indicate that you
could pick it up.

I called it "the dot” and it was just one pixel. It was the smallest, most insig¬
nificant little object you could possibly have, and it was gray. It was the
same color as the background. That made it even more insignificant because
[even if you found it], you could lose it and maybe not find it again.

It was hidden in part of one of the mazes in which you couldn’t see very
far. The area was even inaccessible—you had to use the bridge to cross the
wall to get into it. You had to make a map of the whole maze and then you
would discover that there was one little tiny chamber that you couldn’t get
to unless you used the bridge to cross the wall. And then if you went in there,
you’d run into the dot and you could pick it up.

If you picked up this little dot, the one pixel dot that was hidden inside
the inaccessible part of a large maze, and you brought it back and you messed
around with it long enough, you found that it could get you through this
wall and into the secret room in which I filled the screen with the words,
"Created by Robinett.” It [the message] was in every color in the rainbow
because I made the graphics go through the entire color palette. I wanted
my name in colored lights.

—Warren Robinett

* He got the idea from the Beatles’ White AIhum, which allegedly had a message that could
only be found if people played the album backward. According to Robinette, the game
became an experiment to see if anyone could ever find his hidden secret.

The Battle for the Home

No one knew about Robinett’s secret room. He did not tell his friends at
work about his little prank. If word got out, he would have been fired. It cost
approximately $10,000 to manufacture games at that time. Robinett’s secret
room took up 5 percent of the storage on the Adventure cartridge, and he was
afraid that if Atari executives discovered it, they would insist on deleting it
and remastering the game.

I was the only person creating the game, and nobody went through our pro¬
grams with a fine-toothed comb to see what might be in there. The hard part
was keeping it a secret for a year until the game came out. I didn’t even tell my
two buddies, Jim Huether and Tom Reuterdahl. I felt that if I couldn’t keep the
secret myself, how could I expect them to keep a juicy secret like that?

—Warren Robinett

Atari manufactured nearly 300,000 copies of Adventure. In 1980, after Robinett
had left Atari, a 12-year-old boy from Salt Lake City sent a letter to Atari to
inform the company about a strange thing he had discovered in the game
Adventure. He had found the dot and opened Robinett’s secret room.

Robinett’s prank created a sensation. Arnie Katz, Joyce Worley, and Bill
Kunkel, the publishers of a magazine called Electronic Games, reported the story.
They referred to the room as an “Easter egg.” The popularity of Robinett’s
hidden room was also noticed at Atari. In the future, entire games would be
built around hidden surprises.

The Great Migration

The 1978 introduction of Space Invaders ignited interest in consumer video games,
as well as arcade games. Atari’s Video Computer System did not sell particularly
well through the 1977 Christmas season, but its sales were better than ex¬
pected throughout the rest of the year. As Christmas 1978 approached,
however, a new competitor emerged.

Magnavox returned to the video-game industry with Odyssey 2: a game con¬
sole that the electronics manufacturer hoped to pass off as something more by
adding a built-in keyboard. The keyboard did not fool consumers into believing

190 The Battle for the Home

that Odyssey 2 was a computer. Consumers did not see Odyssey 2 as somehow
being on a par with Apple. It was a video game system, and despite having
launched the first home game system, Magnavox could not hope to compete
with Atari. By the end of 1978, Atari had sold its entire inventory of over 400,000
warehoused VCSs and had to step up the production of new units.

I had built the company and I had developed the marketing plan. They never
advertised their products before, so we spent five million dollars in advertis¬
ing and that’s when it started taking off.

—Ray Kassar

Early in 1979, Manny Gerard made a suggestion that further increased
Atari’s leadership in the video-game industry. Like everyone in the indus¬
try, Gerard knew about Space Invaders. One day it occurred to him to license
Space Invaders and convert it into a cartridge for the Video Computer System. Kassar
loved the idea.

Taito agreed to license Space Invaders to Atari. It was the first time that an
arcade game had ever been licensed for home use. Kassar, whose marketing
sense proved nearly uncanny, predicted that a home version of Space Invaders
would be such a major hit that people would buy VCSs just to play the game.
He focused most of his advertising budget into promoting the game. The re¬
sult was the bestselling game of 1980.

When they came out with the Space Invaders cartridge, all hell broke loose.

There were contests. It was a big deal. That was the beginning of licensing
coin-op games as consumer products.

—Manny Gerard

With the success of the VCS, Atari expanded its consumer division as quickly
as possible, but many of its employees were unhappy. Under Kassar, the ex¬
ecutive team knew nothing about technology and corporate policy. Executives
discouraged programmers from taking ownership of their games. Kassar would
not even allow them to see sales figures.

The Battle for the Home 191

Under the Kassar regime, management became sort of brain dead about tech¬
nology. They didn’t know the limitations of technology.

The straw that broke the camel’s back was that we lost respect for Atari.

They were not committed to doing great stuff anymore. That was a huge
change from when we all started there. When we started, we were very ideal¬
istic, hardworking, and committed to creating great stuff.

—Alan Miller

Atari’s first and most significant defection began in 1979 when Alan Miller,
one of the first VCS programmers, left the company. He wanted more money
and more ownership of his products. He considered game designing an art
and wanted to be treated like other popular artists. When he complained about
this to a few friends within the company, they agreed. With the support of
Crane, Kaplan, and Whitehead, Miller tried to renegotiate his job.

By this time, more than twenty programmers were in the consumer divi¬
sion. The VCS had already surpassed all sales projections, and Kassar and his
staff felt extremely comfortable with the system’s future prospects.

I put together a closed contract based on contracts I had read about for [popu¬
lar] writers and musicians. I presented it to management and told them I wanted
to negotiate for more compensation, and we kicked that around for quite a while.

At some point, Larry [Kaplan], Dave [Crane], and Bob [Whitehead], who
were my best friends at Atari, became aware of what I was doing and they
wanted to try to negotiate on that basis, too. The four of us became a group.

We moved up through the ranks, talking with our boss, George Simcock,
then John Ellis, who was first in command of consumer engineering, and
then Ray [Kassar] directly. At one point they told George Simcock that they
would come to some kind of agreement, but ultimately they just put their
feet down and said no.

I remember one guy told us, "For the kind of money you’re wanting I can
go out and hire six guys.”

My reaction was, "You can hire them, but I don’t think they can do the
kind of job that we’re doing." I don’t think I actually said that to him.

—Alan Miller

>92 The Battle for the Home

Joe Decuir, one of the hardware engineers who developed the VCS, left
Atari to open his own engineering firm shortly before Miller submitted his
demands to Kassar. When Kassar rejected his proposal, Miller went to Decuir
and asked him which law firm he used to start his company. Decuir suggested
Wilson, Sonsini, Goodrich & Rosati, a firm with a good reputation for han¬
dling start-up companies.

Miller and his friends visited the law firm and told an attorney about their
plan to open an independent company that made games for the VCS. The
attorney listened to the plan and carefully considered the patent infringe¬
ment ramifications of making software for Atari’s hardware.

The group members clearly had enough technological know-how to make
good products, but their lack of business acumen showed. They had the cre¬
ative talent but needed an administrator.

We went to Decuir’s law firm and talked to some of the attorneys there. They
started looking for venture capital funding for us. They started the process
of getting us incorporated and started pulling us together as a company.

They said that we had an interesting technological opportunity, but they
thought we really needed a management type to handle the administrative
and marketing side of things.

—Alan Miller

Wilson, Sonsini, Goodrich & Rosati eventually recommended Jim Levy, a
businessman with experience in the music industry, as the right person to
handle the business side of the new game company. When they met, Miller
and his friends agreed and asked Levy to join them. They decided to call their
company Activision.

In the meantime, Wilson, Sonsini, Goodrich & Rosati also contacted Sutter
Hill, a Palo Alto venture capital firm. Sutter Hill agreed to invest in Activision
and placed one of its executives, Bill Draper, on its board of directors.

Bill was on our board of directors—really influential and smart guy. He ulti¬
mately became George Bush’s cochairman when Bush ran for president against

The Battle for the Home 193

Ronald Reagan. When Bush became vice president, Bill left our board of di¬
rectors to go to Washington and perform in many high-level functions. I
think he also worked at the United Nations for a while.

—Alan Miller

Activision opened its doors in April 1980, with David Crane, Alan Miller,
and Bob Whitehead as its original programmers. Larry Kaplan joined the com¬
pany a few months later. By the summer Consumer Electronics Show, in June
of 1980, they were ready to show their first products.

I saw )im Levy at the january CES show in Las Vegas, when he announced that
Activision had been formed with Alan Miller and Bob Whitehead. I thought
he was nuts.

There were so many cartridges available to Atari players from Atari, that
we couldn’t imagine that any consumer needed more cartridges. Nobody
thought that they [consumers] would perceive any kind of difference in the
graphics between the Activision cartridges and the Atari cartridges, and we
couldn't conceive of anyone paying $3 to $5 more at retail for cartridges
from a company that no one had ever heard of.

Because of that and the fact that Jim didn’t have any money because he
was in the start up, we bought him dinner on the first night of the show.

—Michael Katz, former marketing director, Mattel Toys

As Activision prepared to release its first games that fall, Atari took the
company to court. It was a simple case. Atari’s lawyers claimed that their com¬
pany had engineered the VCS and held claim to its technology. Activision,
they said, had no right to create games for its hardware.

This was not the first time in history that an independent company had
created software for another company’s computer system; but it was the first
time anyone had sued over it. Atari had no choice. Its entire business model
was built around selling console hardware as cheaply as possible and making
profits from software. Suddenly, Activision was gouging into its profit base.

194 The Battle for the Home

They sued us repeatedly. We were the first independent video-game publisher.

Before us, games were published by hardware manufacturers. I’m very proud
of the fact that we created this independent video-game publishing industry.

We had the best games in the industry, as far as I was concerned. Dave
Crane and Bob Whitehead were fantastically talented. Larry Kaplan joined us
a few months after we started, so we had four designers who were clearly
among the top designers in the world.

The first game I did was Checkers, which was not a big seller. Dave, I
think, did Dragster; Bob Whitehead did Boxing; Larry did a Bridge game.

And those were all good solid games. But the second round [of games was]
much stronger. I did a Tennis game; Dave did Laser Blast; Larry did Kaboom!

—Alan Miller

Atari sued us every six months for the span of a year and a half, and I at¬
tended all the depositions, acting as technical interpreter for our attorneys.

This was all technical stuff.

I met one of the court reporters who was taking depositions at that time,
and we started dating and ultimately got married, and we’ve been together
now for fifteen years. That was a positive benefit of the lawsuit. About the
only positive benefit I can think of.

—Alan Miller

If Kassar ever regretted not negotiating with Miller while he was still at
Atari, he never admitted it. They never met again, and Kassar publicly scorned
Activision as a parasite in the video-game industry. Kassar always believed that
he had treated his programmers with respect.

I always realized that one of the key groups really [was] the programmers,
because without cartridges, without games, we had nothing. I spent a lot of
time catering to those programmers. I think eventually they respected me. I
really favored the programmers. . . . spent a lot of time with them.

—Ray Kassar

The Battle for the Home 195

After every quality designer in the company left, Atari went, "Gee, we’re
gonna lose all our designers.” Talk about closing the barn door after the
horses have left, Atari didn’t just close the barn doors, they wallpapered
them in velvet. Atari started paying royalties to the bums they had left.

—Bill Kunkel, former executive editor, Electronic Games

Atari’s early history was spent creating successful products and fighting off
imitators. With the growing success of the VCS, new companies began enter¬
ing the market. Coleco returned to the market with a bizarre triangular
console, the Telstar Arcade, which had a steering wheel for driving games on
one panel, a pistol for shooting games on another, and knobs for games like
Pong on the third. The games were stored on triangular cartridges that plugged
into the top of the console. The system never caught on.

Mattel, the world’s largest toy manufacturer, also released a video-game
console in 1980, the Intellivision. Mattel had already enjoyed phenomenal
success with a line of unsophisticated handheld video games in which players
controlled light-emitting diodes that represented football players and sports
cars. Mattel executives believed that their marketing position and name would
help them create a niche in video games, so they formed a special division
that specialized in video games called Mattel Electronics.

Intellivision had a newer and more powerful CPU than VCS, slightly more
memory, and played better-looking games. Intellivision games tended to have
more detailed graphics.

Two things made Intellivision good. The graphics [on the Intellivision] were
superior, less stick figure-oriented, with more bright and vibrant colors.

The second thing was the lineup of sports games. Baseball, football,
hockey, soccer, backgammon, bowling. Mattel wanted to have every single
sport under the sun, all licensed from the right organizations, from the Ameri¬
can Backgammon Players Association to the U.S. Chess Federation, to Major
League Baseball. Sports really brought new players to video games.

—Al Nilsen, former electronics buyer, JC Penney

196 The Battle for the Home

Along with more detailed graphics, the Intellivision also played more intri¬
cate games. The controllers on the VCS were paddles and a joystick. The
controllers on the Intellivision included a 12-key button pad. It also had a disk
that worked like a joystick. Players pressed on the disk to make characters
move. Unlike Atari’s joystick, which could only move characters in eight di¬
rections, the disk on the Intellivision controller could move objects in sixteen
directions, adding more precision to games.

We sold about 100,000 units in 1980. By our third year, we did well over a million
units. We progressed upward after that into 1983, which was the peak year. As I
recall, we did something like 3.5 million units on a worldwide basis that year.

—Paul Rioux, former senior vice president of operations,

Mattel Electronics

I remember one top programmer who was on drugs. You know, these were
guys who would come in at 2 a.m. and work till midnight the next night, then
disappear for two days. That’s how programmers operate, and I had to accept
that. I mean, I didn’t say, "You have to be here at eight o’clock and leave [at a
certain hour].” I understood that this was a very talented breed of people.

I remember one guy came in. He was stoned out of his mind. He just wanted
to read poetry to me, and I sat with him for four hours because he was one of
our top programmers, just to let him feel that I understood him and I cared
about him.

At the end he said, "You know, I really appreciate what you’ve done for
me.” I mean, that’s what I had to put up with.

—Ray Kassar

VCS sales continued to grow, despite unrest in the consumer division. By mid-
1979, Robinett, Reuterdahl, and Huether had become the old men of the
division. It was no badge of honor. The programmers who left had formed
their own companies; those who stayed were still making less than $30,000

The Battle for the Home 197

per year. In June, Reuterdahl decided to leave Atari and Robinette felt even
more isolated.

Every time somebody left, we’d go out to lunch and end up drinking beer.

We stayed at the bar until pretty late sometimes.

The Friday that my friend Reuterdahl was quitting, we all went out drink¬
ing. At four o’clock, after I had been drinking for four hours and was pretty
smashed, I started thinking about some of the things that were going on at
Atari and got kind of pissed off, so I went over to a telephone and called up
corporate headquarters and asked to speak to Ray Kassar.

I thought it would be a little bit harder to get through to the president
than it was. I got him on the phone and told him I was pissed off at manage¬
ment, and the next thing I knew, I had driven over to the building, and there
I was, drunk, talking to the president of the company.

—Warren Robinett

Robinett turned in his resignation the following month and took an ex¬
tended trip to Europe.* While he was gone, Activision released its first products
and became an overnight success. During that same period, Bill Grubb, who
had been Atari’s vice president of marketing, formed Imagic, another inde¬
pendent game company. He took several top programmers with him. Like
Activision, Imagic became an overnight success.

Ray Kassar was pissed at Grubb for taking all these people, particularly Mark
Bradley. (Bradley had been the national accounts manager at Atari.) He of¬
fered Mark the world to stay there, but Mark and Bill worked together at
Black and Decker for many years before then and they were very close per¬
sonal friends.

Ray told Mark ... he said, "I promise you, I will do everything in my
power to destroy your company. ” He was furious that Mark was leaving and
that Imagic had taken all these key programmers from him. It was a real
personal vendetta with Ray. That manifested itself not much later.

—|im Whims, former executive, Imagic

* The secret room in Adventure was discovered while Robinett was in Europe.

198 The Battle for the Home

Defections from the consumer division had become a common event by
this time, and Jim Huether was the last of the original programmers who re¬
mained. When Robinett returned from Europe, he applied for a job at Imagic
but did not like the way Grubb treated him. Grubb offered him a job but only
after insulting him. Regarding the pay as too low, Robinett declined the job.

One night I was out with Huether and Reuterdahl, drinking beer. After about
six pitchers, we decided we must be dumb shits to not be millionaires like
the other guys... the eight filthy rich guys who were our coworkers when we
started at Atari. We decided to form the Dumb Shits Club to celebrate our
stupidity and bad choices. The requirement for membership: you had to have
designed games for Atari and never made any money from it.

We later elected Jim Huether the president of the Dumb Shit’s Club be¬
cause he was the only one of the original group of twelve that stayed at Atari
after three or four years had elapsed.

—Warren Robinett

In the end, Robinett was one of four people who received a grant from the
National Science Foundation to create educational software for teaching chil¬
dren math. When the grant money expired, the four formed their own
software publishing firm called the Learning Company. In 1995, SoftKey In¬
ternational purchased the Learning Company for $600 million.

I remember sitting in the Coleco booth (at the Toy Fair trade show in 1981) even before it
was announced. They brought out an 8 x 10 photograph of the new system and said,
"We’re coming out with this. It’s got a Tl (Texas Instrument) chip in it. Stay tuned.”

—Al Nilsen, former electronics buyer, JC Penney

This is a dispute over two gorillas.

■Judge Robert W. Sweet, U.S. District Court, S.D. New York

200 A Case of Two Gorillas

Tiie Beginning if HandMI Bernes

Our big success was something that I conceptualized—the first handheld
game. I asked the design group to see if they could come up with a game
that was electronic that was the same size as a calculator.

—Michael Katz, formeT marketing director, Mattel Toys

In 1976, Mattel began work on a line of calculator-sized sports games that
became the world’s first handheld electronic games. The project began when
Michael Katz, Mattel’s new product category marketing director, told the
engineers in the electronics group to design a game the size of a calculator,
using LED (light-emitting diodes) technology.

The engineers returned with a strip of red plastic that housed several rows
of LEDs, which could be moved and controlled like shapes on the screen of a
video game. Players could control lights as they moved across the strip, mak¬
ing them go forward, backward, up, or down, using four directional buttons.

The unit had built-in collision detection. If the player’s light made contact
with other lights on the strip, the toy registered it.

Simple as this unit was, it became the basis for the first generation of portable
electronic games. With the right packaging, Katz decided that the toy could be
marketed as either a racing game or a football game. He decided to go with racing.

We developed a prototype of an obstacle avoidance game in which you had
to guide your one LED, avoiding two or three other rows of LEDs that were
coming down. It wasn’t themed; it was just game play that we tested that
turned out to be fun. Then we had to theme it.

We could have themed it as football. We could have pretended the LED
was a running back, but we knew we had a better game coming along from
the developers at Mattel that was going to make for a better football game,
so we chose auto racing.

We tested themes with kids by showing them drawings of what the actual
game would look like and having them play the prototype. Racing came in
second [to football], so we themed our first game as an auto race.

—Michael Katz

A Case of Two Gorillas 201

Katz’s team made no effort to make the LEDs look like race cars. They were
simply lights on a vertical plastic strip with three lanes painted on top. The
object of the game was to guide a light from the bottom of the strip to the top
four times without colliding with other LEDs. Each trip represented a lap
around the race course. The game was called Auto Race.

After Auto Race, Mattel released Football. In this game, players controlled an
LED on a horizontal strip with ten lines representing yard lines. The LED rep¬
resented a quarterback who could either pass the ball or scramble across the
strip ten times for a touchdown.

Selling for $25 to $35, Mattel’s handheld sports games were a great success,
generating more than $400 million in sales. Mattel formed an electronics di¬
vision that followed Football and Auto Race with Basketball, Hockey, Baseball, and
eventually the Intellivision game console.

In 1975, Magnavox filed a suit against Atari, claiming that Nolan Bushnell
attended a demonstration of the Odyssey game console in Burlingame, Cali¬
fornia, and stole Ralph Baer’s concept of electronic table tennis. In an ironic
twist, Baer attended a 1976 trade show and stole an idea for a portable game
from Bushnell.

Howard Morrison, who was a principal at Marvin Glass [a firm that designed
toys], and I went to an MOA [Music Operators Association] show and saw a
thing called Touch Me, made by Nolan [Bushnell], It had four buttons and
made some horrible noises.

We said, "This has all the earmarks of a great game.” And we sat down
and came up with the concept for Simon.

—Ralph Baer, designer of Magnavox Odyssey

Bushnell’s toy had a row of lights that flashed patterns and made sounds
that players had to memorize and repeat. Baer, working closely with Marvin
Glass Associates, improved the game by replacing the sounds with distinct
musical notes. His toy had four bright-colored buttons that lit up and played
musical notes when pressed.

202 A Case of Two Gorillas

I went through Compton’s Encyclopedia for Kids to find an instrument that
had four notes that could be played in any sequence without sounding dis¬
sonant. It turned out to be the bugle, C-G-E and B, I think. That’s how I
determined the four notes that are played in Simon; notes that sound har¬
monious no matter what sequence you play them in.

—Ralph Baer

Baer’s prototype had a square case and square buttons. After applying for
a patent for the toy, engineers at Marvin Glass Associates replaced Baer’s
square case with a round one, with four buttons forming a ring. They called
the game Simon.

Simon played three memorization games. All of the games involved repeat¬
ing patterns. In the first game, Tmwplayed musical patterns. Players competed
with the machine by watching the buttons light up and listening to the mu¬
sical notes, then repeating the pattern by pressing the buttons in the correct
order. The game lasted until the player made a mistake.

Game two was exactly the same, except that players added one note to the
pattern after every turn. The pattern simply became longer until the player
made a mistake. In game three, players competed against each other instead
of the machine.

Marvin Glass Associates sold Simon to Milton Bradley Electronics, a toy com¬
pany already in the electronic games industry with CompIV, the electronic version
of the board game Mastermind. Simon was a major hit during the 1977 Christmas
season.* Despite Simon’s success, however, Atari did not file suit against Marvin
Glass Associates, Milton Bradley, or Ralph Baer for copying the idea.

First of all, I don’t think he [Bushnell ] had a patent. Second, I think the scheme
he had implemented was an old scheme—following a sequential light. Simon’s
claim to fame was the association of discrete sounds with each light. A whole
lot of people played Simon by ear.

—Ralph Baer

As of this writing, Milton Bradley is still manufacturing Simon.

A Case of Two Gorillas 20J

Handheld electronics were extremely popular in the late 1970s and early
1980s. Most of the earliest games were either sports simulations or memory
games, though Mattel experimented with electronic handheld versions of
popular game themes such as Sub Chase. In 1980, several companies saw the
success of Atari’s Video Computer System (VCS) version of Space Invaders and
realized that a big demand existed for home versions of arcade games. Soon
afterward, handheld versions of arcade games began appearing in stores.

Nintendo and Mego Electronics created lines of credit card—sized toys with
liquid crystal screens that played games and displayed the time. The Mego
Time Out series featured original games such as the Exterminator, Fireman, and
Flag Man. Nintendo manufactured the Game and Watch series, which included
original games and simplified versions of Donkey Kong and other popular
Nintendo arcade hits.

Not all portable games were the size of paperback books or credit cards.
Joyce Worley, a founder of Electronic Games magazine, dubbed the larger gad¬
gets “tabletop games.” In 1981, three companies introduced new lines of
tabletop games that looked like miniature arcade machines. These games
would have simplified versions of such top arcade hits as Pac-Man and Galaxian,
housed in eight-inch cases that were scale models of arcade cabinets.

Nintendo and Tiger Electronics made some very good tabletop games, but
the company that earned the reputation for making the best tabletop games
was Coleco—the leather company that nearly cornered the market for Pong-
style television games.

Goleco Comes Back

After nearly going bankrupt in 1976 with the collapse of the Home Pong genera¬
tion of games, Coleco barely survived to the end of the 1970s. Arnold Greenberg,
CEO of Coleco, however, had not lost his entrepreneurial ambitions, and he
was impressed with the handheld game industry’s potential for growth. Shortly
after Mattel released Football, Coleco entered the market with a similar game
titled Electronic Quarterback that had a lower price tag and more features.

Whether he was following a set plan or making decisions as he went along,
Greenberg seemed to have discovered a way to ride the market. He hired
Michael Katz, the Mattel executive who had overseen the launch of Auto Race

204 A Case of Two Gorillas

and Football, to establish Coleco’s marketing department. Greenberg became
very aggressive about developing new products.

Arnold knew that I had been responsible for Mattel’s handhelds and he asked
me if I wanted to come to Coleco and be part of what he thought would be a
wonderful turnaround and establish the first marketing department that
Coleco really ever had. He offered to make me vice president of marketing
and to give me stock options that I didn’t have at Mattel.

The timing was good because we got into all kinds of other handheld
games, including the Head-to-Head series, which were two player games
that sold very well. We got licenses and designed tabletop games that looked
exactly like miniature arcade games, like Pac-Man and Donkey Kong. They
sold extremely well.

—Michael Katz

By 1980, the handheld game market began fading, but it didn’t matter to
Greenberg. He no longer cared about handheld games; he wanted to create a
video-game console that could play arcade-quality games. Coleco had made
enough money during the heyday of handheld games to begin the research
and development phase of building the new console, and Greenberg was ready
to try to steal some of Atari’s enormous share of the market.

Greenberg had a tough reputation as an employer. He was known to have
a temper and to browbeat his executives. According to Michael Katz,
Greenberg’s driven nature often caused him to live up to his rough reputa¬
tion, but Katz described him as “tough, smart, eloquent, and fair.”

People give me credit for working for both Arnold Greenberg and [Jack
Tramiel, the volatile founder of Commodore Computers] in one lifetime and
surviving. They ask, "How could you work for jack Tramiel?” and I say, "I
worked for Arnold Greenberg for three and one half years.”

Arnold was incredibly bright and articulate, just a wonderful, spontane¬
ous speaker. I think [he was] a very good leader_dynamic and very tough

and demanding.

■Michael Katz

A Case of Two Gorillas 205

In 1981, Coleco began manufacturing tabletop versions of arcade hits. It
wasn’t just the game play in these tabletop toys that resembled the arcade
originals; the cabinets were scale models of arcade machines, right down to
the artwork on the outside panels. In order to do this, Greenberg arranged
licensing agreements with eight arcade companies, including Sega, Bally/Mid¬
way, Exidy, Centuri, Universal, and Nintendo. These arrangements became
very important to Coleco with later projects.

Greenberg used his relations with arcade companies to expand his business
in another direction. Activision had already launched its first titles by this
time, and third-party publishers had become part of the business. Just as
Greenberg had seen an opportunity in manufacturing handheld games, he
suddenly saw a gold mine in becoming a third-party publisher. Instead of cre¬
ating new games, however, Greenberg wanted to convert arcade hits into VCS
and Intellivision cartridges.

Atari, of course, was out there with its 2600 and Mattel was coming out with
Intellivision, so we decided that we would basically become a third-party
supplier of programming. We decided to program for Atari and Intellivision
at the same time that we were developing ColecoVision.

There were basically two strategies at work. We would take these licenses
and use them not only in the major systems, but also put them into the
handheld category. That was very appealing to Nintendo at the time. That’s
why we got Donkey Kong from Nintendo, because they saw that we could
maximize their potential revenue stream by putting this product across a
number of formats that existed at that point in time.

—Al Kahn, former executive vice president, Coleco

When I found out that we did not take the consumer license to Donkey Kong,
and that Coleco got it, I asked how could that happen. They said, "Well, it
was two dollars a cartridge, and you don’t understand. It would have fucked
up our cost structure. ’’

I remember I looked at them and I said, "Guys, you got an 88 percent
gross margin on cartridges. Don’t you understand that a year from now you
will walk on shards of broken glass to get a two-dollar cartridge deal?” Now

206 A Case of Two Gorillas

that decision basically put Coleco in the business because without Donkey
Kong, they couldn’t have gotten anywhere.

—Manny Gerard, former vice president, Warner Communications

GolecoVision

Arnold, to his credit, felt that the world was ready for a new game system.

Atari had been out with the 2600, and that was replaced basically by
Intellivision, and Arnold thought that Coleco could come out with a game
system that would be better and everyone would trade up.

—Michael Katz

It took nearly two years for Greenberg’s team to develop GolecoVision, its
new super game console. Greenberg began telling retailers about the system
toward the end of 1981, unveiled it at the January Consumer Electronics Show
in 1982, and began shipping it in July.

Though GolecoVision had only the standard eight-bit processor, 8K of RAM
(random access memory) with an additional 16K of video RAM found in other
game consoles, it had several other features. Five years had passed since Atari
began developing the VCS. The price of technology had come down so much
that Coleco could afford a chip with the memory mapping and frame buffers
that Atari left out of Stella, the processing chip in the Video Computer Sys¬
tems. These added features gave the ColecoVision smoother animation and
more arcade-like graphics than the Intellivision and the VCS.

Coleco powered the ColecoVision with a chip set from Zilog that was so
advanced, it could even handle video images. When Hasbro engineers began
experimenting with interactive video in 1985, they used a modified
ColecoVision game console.

The reason we chose ColecoVision to do this kind of down-and-dirty proto¬
type was that it had been designed initially to be able to pass video through
it. You could do what I call the wallpaper game, that is, a game in which you

A Case of Two Gorillas 2§f

have moving video in the background with computer graphics imposed on
top of the video.

—Tom Zito, former president and CEO, Digital Pictures

Even with its technological superiority, Coleco faced a tough challenge
because its fledgling system had very few games. Atari had more than 100
games for the VCS by 1982, and Atari executives offered huge sums of money
for exclusive licensing agreements with arcade companies. Far fewer games
were on the market for the Intellivision, but Mattel had already carved out a
niche with its realistic sports simulations.

Coleco did not have enough money to compete with Atari for big licenses,
but Coleco’s marketers had a knack for selecting small games with strong
followings. Coleco secured licenses for Mr. Do, Lady Bug, Cosmic Avenger, and Ven¬
ture. And Coleco Vision’s powerful processor generated games that looked like
they belonged in an arcade. Coleco’s good relations with Sega resulted in a
Zaxxon cartridge that sported excellent 3D effects.

ColecoVision was a real step forward. It was indisputably the best machine
counting hardware and software ... the best platform of those early con¬
soles. Michael Katz, no relation, was a genius at finding little known coin-op
games that translated beautifully to the home market.

—Amie Katz, former editor in chief, Electronic Games

Katz’s marketing team even invented a way to compete with Atari’s enor¬
mous software library, by creating an adapter that enabled the ColecoVision
to play VCS games.

In some ways, using the adapter defeated the purpose of purchasing
ColecoVision,* as VCS games looked just as primitive on the ColecoVision as
they did on the VCS.

* ColecoVision generally sold for $195. By this time, Atari had cut the price of the VCS to
$135, in preparation for releasing a new game console called the 5200.

208 A Case of Two Gorillas

Coleco’s crowning achievement, however, was a six-month exclusive li¬
cense with Nintendo for Donkey Kong, a game whose worldwide popularity was
surpassed only by Pac-Man*

Nintendo was still a small company in 1981, and Minoru Arakawa, presi¬
dent of Nintendo of America, decided that an outside company with
established contacts would do abetter job marketing Donkey than he would
be able to do. He decided to work with Coleco because Greenberg offered to
do both game cartridges and a tabletop console.

A couple of things popped up [around Christmas of 1981]. One was the
ColecoVision agreement, in which Nintendo was going to license Coleco to
do the home video game. . . . give them the home video-game rights to
Donkey Kong. The Donkey Kong success had been so great that they needed
help with merchandise licensing of their properties.

—Howard Lincoln, former outside legal counsel, Nintendo of America

Once they had made contact with Nintendo, Coleco’s representatives
moved slowly. They preferred to work with executives at Nintendo’s Japanese
headquarters. What they did not know was that Howard Lincoln, the outside
legal council ol Nintendo of America, wrote the contract.

This was all new territory to Lincoln. In creating the contract, he discov¬
ered that companies traditionally accepted all liabilities on their games—

* In 1978, an Atari executive named joe Robbins made a foresighted agreement that gave
Atari exclusive rights to Pac-Man.

Skip Paul and Ray Kassar told Joe [Robbins], "You go over to |apan and talk to Namco, but don’t
sign anything with them.” We [Atari] felt that they owed us money.

A week later Joe comes back. He’s had his picture in the paper, signing this deal with the
Japanese and playing with [Masaya] Nakamura on a golf course. He agreed to give them $1
million, and they got to renew their contract, but we got the rights to their coin-op games. At
that point they had no hits at all.

It was like Jack and the Beanstalk, and Joe came back with these worthless beans.

Well, one of those beans was a little game called Pac-Man. In retrospect, it was the best buy
of the decade, but at the time, I think it pretty much cost him his Job.

—Al Alcorn

A Case of Two Gorillas 209

that is, Nintendo would accept responsibility for any legal action against Coleco
involving Donkey Kong. Since he could see no reason why Nintendo should ac¬
cept such liabilities, Lincoln decided to write a clause that made Coleco
responsible for the content of the cartridge.

I came up with a clause in our agreement that cleared Nintendo of all li¬
ability from Coleco’s product. I hadn't drafted many of those things
[manufacturing agreements], so I was looking in a form book and, typi¬
cally, you would have the licenser indemnify the licensee or at least make
a representation that you own the mark. I asked myself, "Why would we
want to do that?”

We drafted the agreement and sent it to Yamauchi. Yamauchi confronted
Eric Bromley from Coleco and said, "Sign the license agreement.”

He said, "Well, our attorneys haven’t seen it.”

I think Yamauchi basically said, "Sign the damn thing. You guys are get¬
ting ready to ship the product. If you want a license, sign now.”

So they signed it.

—Howard Lincoln

On February 1, 1982, Coleco and Nintendo signed an agreement in which
Coleco paid Nintendo an undisclosed amount of money and promised roy¬
alties of $1.40 for every Donkey Kong cartridge and $1 for every tabletop
machine sold.

Coleco created an excellent version of Donkey Kong that came closer to match¬
ing arcade gameplay and graphics than any earlier game cartridge, selling it
exclusively as a pack-in with ColecoVision as an incentive to purchase the
system, which went on sale in July 1982. After six months Coleco began sell¬
ing VCS and Intellivision versions of Donkey Kong.

We knew that we had to have a hot piece of software to launch the product
because software sells hardware. We got it from a little company called
Nintendo —Donkey Kong. Donkey Kong was exclusive to ColecoVision for the
first six months, and we packed it in with the system. If you owned an Atari
or Intellivision, you couldn’t get Donkey Kong for the first six months.

216 A Case of Two Gorillas

It was a pretty good marketing strategy. Six months later, when enough
people had bought ColecoVision, we wanted the profit from the Atari and
Intellivision owners, so we sold Donkey Kong as third-party software.

—Michael Katz

Fortune magazine later wrote:

The uncontested smash hit of the year was Coleco, which celebrated its
50th anniversary last year (1982) by more than doubling sales to over
$500 million and quintupling earnings to about $40 million. The Hart¬
ford-based toy manufacturer is headed by two brothers: Arnold C.
Greenberg, 49, president and chief executive officer, and Leonard, 55,
chairman. It has long specialized in plastic swimming pools, tricycles,
and hand-held electronic games, but in 1982 it introduced three success¬
ful video products: tabletop games, cartridges that fit Atari and
Intellivision equipment, and its own ColecoVision. 1

Battle of the longs 2

O. R. Rissman, the president of an American handheld game manufacturer
named Tiger Electronic Toys, first saw Donkey Kong while visiting Tokyo in the
summer of 1981. He liked what he saw. When he returned to the United States,
he sent a letter to Universal Studios, requesting a license to make video games
and handheld games based on King Kong.

Loretta Sifuentes, a Universal/MCA vice president involved in licensing
properties such as King Kong, received Rissman’s request. Before entering such
agreements, Universal’s licensing department typically conducted trademark
searches to monitor retail activity.

At the time, Universal’s only active King Kong license was with Ben Coo¬
per, Inc., a company that manufactured King Kong masks and costumes.
Sifuentes ran a trademark search on September 25 and discovered several mi¬
nor uses of King Kong.

This report revealed numerous third-party trademark registrations of
the King Kong name often in conjunction with a picture of a gorilla.

A Case of Two Gorillas 21

Universal’s merchandising and law departments decided not to take any
action against those listed in the report because there was very little ac¬
tivity in licensing King Kong at Universal. 3

Unaware of Donkey Kong and satisfied that everything was in order, Univer¬
sal Studios granted Tiger the license in September 1981.

Nintendo of America began selling Donkey Kong in July 1981. By October, the
game was selling at the rate of 4,000 arcade units per month.

Sifuentes ran another trademark search in January 1982, which revealed a
pending agreement between Nintendo and Coleco for the cartridge and table-
top license of Donkey Kong. She took the information to Steven Adler, another
Universal vice president in charge of licensing, and the two executives de¬
cided to go to an arcade and evaluate the game.

After analyzing the game play, Sifuentes and Adler concluded that no one
was really interested in licensing King Kong and that Tiger probably
planned to use its King Kong license merely to copy Donkey Kong. They
discussed whether they should continue offering licenses for King Kong.

No action was discussed or taken to challenge the Donkey TC’/g'application. 3

In April 1982, Sid Sheinberg, president of MCA and Universal, heard about
Donkey Kong and asked Robert Hadl, a lawyer with copyright experience work¬
ing as the Universal vice president in charge of legislative matters, about the
game in a memo. At Sheinberg’s request, Hadl took his children to an arcade
and played Donkey Kong. Unlike Sifuentes, Hadl decided that Donkey Kong's story
of a giant gorilla breaking loose and carrying a woman to the top of a building
came too close to the story of King Kong.

Around that time, Sheinberg arranged a meeting with Arnold Greenberg to
discuss Universal Studios investing in Coleco. Greenberg had no reason to sus¬
pect that the meeting was about anything else. Video games were in their heyday.
Warner Communications had made a great deal of money through its owner¬
ship of Atari, Gulf/Western had recently purchased Sega, and several other large
companies had expressed interest in breaking into the video-game industry.

The meeting was held on April 27,1982. It began with a splashy Hollywood
luncheon and ended with Sheinberg threatening Arnold Greenberg.

212 A Case of Two Gorillas

Universal called me and Arnold out to California. We thought we were going
out there to meet with Universal people to talk about how we could work
together, you know, maybe even form some kind of venture together or some¬
thing of that nature. We met with Sid Sheinberg and Lou Wasserman, and I
remember they had Steven Spielberg there.

And then Sid pulled Arnold on the side and said, "You know something,
we’re going to sue you if you don’t give us some kind of a royalty on Donkey
Kong because you’re in violation of our copyrights as it relates to King Kong.”

Arnold came back and was very concerned because here we were going to
shipColecoVision, which included DonkeyKonginsidethepackage. Hewas con¬
cerned that Universal might try to get a temporary restraining order or something.

—Al Kahn

On April 28, Universal sent telexes to Nintendo and Coleco, claiming “sole
and exclusive ownership of all rights (except book publishing rights) in and to
the name, title, character, and story ‘King Kong’ and ‘Kong’ . . . including,
without limitation, the right to exploit, license and sell games, toys, video
displays and other forms of merchandising based upon or using the ‘King Kong’
name, title and character.” 5 Sheinberg demanded that Nintendo and Coleco
stop marketing Donkey Kong, destroy all Donkey Kong inventory, and submit a
complete account of profits made through the game. He also threatened to
take the case to court if both companies did not settle within 48 hours.

After considering his options, Greenberg decided to back down. Univer¬
sal Studios was so big and its legal resources were so vast, he could see no
way to stand up to it in court. By May 5, Greenberg agreed in principle,
obligating Coleco to pay royalties to Universal. The formal agreement was
signed one week later.

Arnold was very concerned, so he signed a deal with Universal, which was
really a strange deal. It was a covenant not to sue. It wasn’t really a license
agreement for Universal. Arnold started paying royalties on any shipments of
Donkey Kong to Universal in exchange for Universal’s pledge not to sue Coleco.

—Al Kahn

A Case ot Two Gorillas 21$

Hiroshi Yamauchi, president of Nintendo Co. Ltd. in Japan, was baffled and
angered. First Nintendo could not penetrate the U.S. market. Now that it had,
an enormous and powerful company was threatening to sue him.

Nintendo and Coleco were not the only companies that received threat¬
ening messages from Universal. When Robert Hadl discovered the
licensing agreement with Tiger Electronics, he angrily called a meeting
with Loretta Sifuentes.

He was upset upon learning that Universal had licensed Tiger, and
“wanted to know on what basis [Universal] had made a license,” noting
the Tiger agreement to be a lousy license because it offered only a small
return to Universal and because its exclusivity provision could prevent
Universal from concluding its agreement with Coleco. 6

On May 4, Sheinberg sent a mailgram to Tiger Electronics, threatening to
terminate its licensing agreement unless Tiger submitted its game for approval.
Tiger sent materials explaining the game the following day.

Minoru Arakawa and Howard Lincoln flew down to represent Nintendo
in a meeting with Coleco and Universal Studios on May 6. Robert Hadl
restated the claim that Donkey Kony infringed upon Universal’s trademark
for King Kong. Lincoln responded that Nintendo had run a trademark
search and found numerous unlicensed uses of “King Kong,” and that he
had discovered that Universal had only applied for the name within the
last decade.

Greenberg did not inform Arakawa and Lincoln about his arrangement with
Universal. Instead, he urged Arakawa to sign an agreement with Universal.

I didn’t realize that Coleco had already cut a deal with them behind our back,
prior to the time we had the first meeting. We were puzzled by how Coleco
kept pushing for an agreement. We knew that we had drafted the agreement
with Coleco such that we didn’t have any liability vis-a-vis Coleco, but we
suspected that Universal didn’t know that.

—Howard Lincoln

214 A Case of Two Gorillas

The day after their meeting with Nintendo, executives from Universal dis¬
cussed purchasing $30 million of Coleco debentures in a separate meeting
with Coleco executives.

Sheinberg canceled Universal’s marketing agreement with Tiger Electron¬
ics on May 8, stating that the proposed King Kong game was substantially
similar to Donkey Kong. Rissman not only refused to let Universal terminate
the agreement but also in a later letter began questioning Universal’s owner¬
ship of the name.

During the May 6 meeting, Robert Hadl said he would have a document—a
chain of title—sent to Nintendo. The chain of title was important because it
would establish Universal’s claim on King Kong. The document did not arrive.

Howard Lincoln called Hadl the following week, asking for the chain of
title. Hadl restated his demand that Nintendo pay Universal royalties on Don¬
key Kong but did not send a chain of title.

Minoru Arakawa had great faith in Howard Lincoln. Based on Lincoln’s rec¬
ommendation, he chose to fight LJniversal rather than settle out of court. The
decision could have cost Arakawa his job. Even when his father-in-law, Hiroshi
Yamauchi, questioned this decision, Arakawa continued to support Lincoln.

The next time that Arakawa and Lincoln met with LJniversal was a luncheon
at Universal Studios. Lincoln and Arakawa called Hadl and said that they wanted
to set up a meeting. Hadl arranged a small luncheon with the Nintendo execu¬
tives and Sid Sheinberg on May 21, believing that Nintendo was ready to concede
Universal’s ownership of King Kong and settle the dispute. He was wrong.

Mr. Arakawa and I decided that we would go down and simply tell him that
we’ve come to tell you to your face that we would pay you if we thought we
were liable, but we had done our homework and we were not prepared to
pay anything because we hadn’t done anything wrong. We just wanted to
essentially look him in the face and tell him that. It seemed to be the honor¬
able thing to do.

As it turned out, maybe Hadl had led him [Sheinberg] to believe that we
had come down to reach some type of a monetary settlement with him. And
it was really funny because it was not what he was expecting and his reac¬
tion was shock.

—Howard Lincoln

A Case of Two Gorillas 21J

Lincoln and Arakawa had decided not to give in to Universal’s demands,
even if it meant that they would have to present their case in court. Lincoln
had researched Universal’s claim and come to the conclusion that the claim
on King Kong was weak at best. If he was right, Universal Studios’ lawyers
would not be able to win in court, despite their unlimited legal resources.

Arakawa, Lincoln, Hadl, and Sheinberg had a quiet meal at Universal Stu¬
dios. As the lunch finished, Sheinberg, possibly hoping to win over Arakawa the
same way he had enticed Greenberg, mentioned that Nintendo might have fu¬
ture business dealings with Universal after settling the Donkey Kong affair.

Lincoln responded with a calculated and unflinching statement, telling
Sheinberg that after a full investigation, he did not accept Universal’s claim to
King Kong and that Nintendo would not pay the studio royalties on Donkey
Kong. Sheinberg exploded. “You’d better start saving money to pay your
attorney’s fees,” he shouted, then added that Universal was very litigious and
that the “litigation department even turned a profit.” 7

Realizing that the case would end up in court, Hadl reopened discussions
with Tiger Electronics, stating that Universal would consider issuing a nonex¬
clusive license to Tiger if it altered its King Kong game by: (1) putting a fire hat
on the hero character; (2) replacing the barrels the ape was throwing with
bombs; and (3) making the floors of the building the hero was climbing hori¬
zontal instead of slanted. These changes were supposed to differentiate Tiger’s
King Kong game from Donkey Kong. O. R. Rissman demonstrated the new game
to Hadl at a Sears store in early June, and the changes were approved.

On June 29,1982, Universal filed suit against Nintendo, claiming that Uni¬
versal Studios owned all rights to King Kong by virtue of agreements with
RKO Pictures, Inc., the studio that made the original King Kong movie, and the
heirs of Merian C. Cooper, the man who wrote King Kong. That same day Uni¬
versal also announced its licensing agreement with Coleco.

Sheinberg’s attack did not stop with the lawsuit. By this time, Nintendo
had grossed more than $180 million from sales of approximately 60,000 Donkey
Kong arcade machines. Nintendo had also licensed the Donkey Kong name and
character to more than 50 companies, for everything from cereal boxes and
board games to Saturday morning cartoons.

Determined to make an example out of Nintendo, Universal obtained a list
of all of Nintendo’s licensees, contacted them, and threatened them with liti-

216 A Case of Two Gorillas

gation if they did not abandon their relationships with Nintendo. The only
licensee that stayed with Nintendo was Milton Bradley, whom Universal never
took to court.

As they prepared for their day in court, Howard Lincoln and John Kirby,
the lawyer that would represent Nintendo in court, flew to Nintendo’s Japa¬
nese headquarters to take depositions. At this time, Lincoln first met Hiroshi
Yamauchi. He also took statements from Shigeru Miyamoto, the man who
had designed Donkey Kong.

I met Mr. Miyamoto in connection with the Donkey Kong litigation on my
first trip to Kyoto. I was such a poor international traveler.... My car stalled
on the way to the airport and I almost missed my plane. Then I checked my
bags to Tokyo, even though we were going to Osaka.

I got to Kyoto and met Mr. Yamauchi for the first time. And it was in con¬
nection with the litigation that I first met Mr. Miyamoto. He was a young
guy, really young. I remember that he came into Yamauchi’s office where
there’s a big and very formal conference room. Yamauchi and Arakawa and
other people were there.

The door opened and there was a disheveled—I wouldn’t call it dishev¬
eled—but he was a little bit disheveled and his hair went in ten different
directions. And it was this guy, Miyamoto. At that time, I don’t think I really
knew what it was that he had accomplished in creating Donkey Kong.

He had showed us the drawings and the way in which he had come up
with the game, but he was working for Mr. Yokoi [the head of engineering] at
the time. As I recall, he was new to Nintendo and pretty much a junior guy.

—Howard Lincoln

As they prepared to meet Universal in court, Arakawa offered Lincoln a
job at Nintendo. Lincoln accepted. By the time the case went to court, Lin¬
coln was the senior vice president of Nintendo of America, rather than its
outside counsel.

The case was heard before Judge Robert W. Sweet of the United States Dis¬
trict Court for the Southern District of New York and lasted for seven days,
during which time Kirby had a Nintendo employee demonstrate Donkey Kong
in the court, then compared the game with clips from the movie King Kong.

A Case of Two Gorillas 2IJ

As it turned out, Universal Studios did not own King Kong. In fact,
Universal’s profit-earning litigation department had recently proved that no
one owned the character. In 1975, Universal had taken RKO to court, claim¬
ing that the original King Kong was more than forty years old and was now
public domain*

Judge Sweet ruled that Universal’s claims were not valid. Sid Sheinberg’s
words about profiting through litigation were repeated somewhat ominously
in the judge’s summary of the case.**

Throughout this litigation, Universal knew, as a result of the RKO liti¬
gation, that it had no rights to any visual image of King Kong from the
classic movie or its remake. 8

Nonetheless, Universal, when it seemed beneficial, made sweeping asser¬
tions of rights, attempting to extract license agreements from companies
incapable of or unwilling to confront Universal’s “profit center.” 9

Once Nintendo demonstrated that King Kong was public domain,
Universal’s lawyers were unable to demonstrate that remaking King Kong gave
Universal Studios ownership of it. In the end, no chain of claim was ever de¬
livered, in or out of court. Universal’s lawyers were also unable to prove “the
likelihood of confusion between Donkey Kong and King Kong,” 10 and Universal’s
efforts to scare the companies that licensed Donkey Kong gave Nintendo grounds
to seek extensive damages for lost revenues.

Tiger Electronics did not fare much better than Universal. Judge Sweet ruled
that Tiger’s King Kong game infringed upon Donkey Kong and let Nintendo choose
to collect either statutory damages or Universal’s profits from licensing the game.
Nintendo chose to collect Universal’s licensing fee, which totaled $56,689.41.

.. . Donkey Kon $s particular expression of a gorilla villain and a carpenter
hero (with or without a fire hat) who must dodge various obstacles

* This action was taken to clear the way for Dino DiLaurentis to remake the movie.

** Nintendo’s lawyer, John Kirby, reminded the court of Sheinberg’s angry claim while
cross-examining him.

2l8 A Case of Two Gorillas

(whether bombs or fireballs) while climbing up ladders (whether com¬
plete or broken) and picking up prizes (umbrellas and purses) to rescue
a fair-haired (whether knotted or pigtailed) hostage from the gorilla is
protractible against Universal and its licensees. 11

Judge Sweet’s decision cleared Nintendo and placed Universal in the un¬
fortunate position of having to answer to the companies it had threatened.
Coleco wanted its royalty money refunded. Atari had agreed to pay royalties
on the VCS version of Donkey Kong, which came out a few months before the
case went to court. After Nintendo won, Atari also demanded its money back.
Even Ruby-Spears, the company that did the Donkey Kong cartoon show, lodged
a claim against Universal Studios.

Tiger Electronics released its King Kong game on a cartridge for the Atari
VCS and also as a handheld electronic game.

Suffice it to say that when Nintendo won [its] suit from Universal, Coleco
went back at Universal and said, "Hey, what about us?” And Universal then
bought some Coleco stock and basically as a payback for the moneys that
Coleco had paid to Universal on the royalties side.

—Al Kahn

Nintendo’s counterclaims did not go to court until May 20, 1985. On July
29,1985, Judge Sweet ordered Universal to pay Nintendo $1.8 million for legal
fees, photocopying expenses, costs incurred creating graphs and charts, and
lost revenues.

By the time the case was concluded, the video-game industry had nearly
vanished and Coleco had entered the doll business.

They reached a pinnacle in interactive game design with Robotron. If I was on a desert
island and I had AC, I’d have Robotron. There’s no question.

—David Thiel, former sound engineer, Gottlieb

But Atari’s biggest coup this season will probably be extraterrestrial: this week Atari will
launch its first E.T. video game in time to hit toy shelves in November.

—William D. Marbach with Peter McAlevey, "A New Galaxy of Video Games,”

Newsweek, October 25,1982

Spielberg wanted to make E. T. into a Pac-Man game, but I wanted to do something origi¬
nal. In retrospect... Maybe it wasn’t such a bad idea.

—Howard Scott Warshaw, former game designer, Atari Corporation

220 The Fall

In ilsi Arcades

No one realized that the arcade business had begun to collapse in 1982. Arcade
owners, still believing that all it would take to set the business right was a few good
games, watched for hits and tried to rebuild their businesses. And some of the best
games of all time came out between the end of 1982 and the middle of 1983.

I was thinking about the novel 1984. There was a lot of excitement about the
whole Orwell thing and [the year] 1984 was upon us, and I was noticing that
things were not at all like they were in the book.

I’m kind of a science-fiction guy, and I was thinking about it and . . .
well, decided that probably not too much is going to happen in the next
couple of years. It was really going to be 2084 when the ship runs out and it’s
not going to be humans subjugating humans, it’s going to be robots doing
the subjugating.

—Eugene Jarvis, creator of Robotron 2084

Eugene Jarvis and Larry DeMar left Williams shortly after completing Defender,
the first game Jarvis created as an independent consultant. They started a con¬
sulting firm called Vid Kidz that designed games for Williams. Then, in 1981,
Jarvis crashed his MGB and broke his right hand.

Jarvis’s arm was still in a cast when he and DeMar began their next project.
As they had with Defender, Jarvis and DeMar started by fleshing out a story
about the game. They decided the game would be about an Orwellian world.
Since 1984 was only three years away, it was obvious that the world was not in
sync with Orwell’s timetable, so they set their game in 2084 to give mankind
an extra century to create a viable Big Brother.

Mankind had created a race of robots to use as servants in Jarvis and DeMar’s
story, but the robots had evolved to the point when they no longer needed
humans, so they took over the world.

The idea is that right now we have all these machines that are serving us.
They're getting more and more intelligent, and at some point we’ll see com¬
puter rights activists because these things will be so smart and you’ll be

The Fall 22

talking to them and they'll be your buddy and they’ll be your information
agent on the Internet, and then some guy comes along and unplugs your
computer and screws up your hard disk or something and it's like, wait a
minute, that was murder! It’s like killing your dog or something.

So, computers are running around, trying to help our lives and scooping up
our shit and everything, and finally they realize, "What do we need these guys
for? I mean, they’re nasty people, they build nuclear bombs, they kill each other.

We’re having all these problems with them. What’s the equation here?”

—Eugene Jarvis

When Robotron 2084 begins, robots have conquered the world. Players can¬
not hope to restore mankind. The game has no end; it simply repeats until
the player runs out of lives.

Players control a tiny hero with a large head and thick glasses, whom Jarvis
thought looked like Elton John. The hero and his family are the last humans,
and the robots, according to Jarvis, want to catch them and put them in a zoo.

As usual, Jarvis wanted a game in which players were surrounded by en¬
emies. He prided himself on creating games with nearly unwinnable
circumstances. In this case, every scene in the game began with the hero and
his family completely surrounded by robots. In order to survive, players had
to help the hero dodge and shoot the robots and save family members, while
avoiding mines and projectiles. The game moved at a frantic pace.

In almost every game like Space Invaders or Calaxian, everything comes down at
you. Our idea was that being in the center of something would cause incredible
panic. Things are coming from all sides and you are just like, "Oh, my gosh!”

—Eugene larvis

Jarvis’s car accident played an important role in the designing of Robotron2084.
With his hand in a cast, Jarvis was laid up in bed for a few days. While trapped in
bed, he thought about a popular game from Stern Electronics, in which players
helped a man run through a maze while shooting slow-moving robots. Jarvis
loved the game but hated its joystick-button configuration because the same
joystick was used for moving the character and aiming his shots.

222 The Fall

When Jarvis returned to work, his cast made him unable to handle the
standard joystick and button configuration used with most games, so he and
DeMar rigged a two-joystick controller by attaching two Atari 2600 control¬
lers to a panel. In this configuration, one joystick controlled the hero and the
other aimed his gun.

It was the first game to introduce the twin joystick, which let you fire in one
direction and move in the other. It’s a very challenging control, most people
cannot... probably 80 percent of the population cannot pat their head and
rub their stomach at the same time. You actually have to be fairly coordi¬
nated with both hands, and you have to be able to deal with running away
from something and shooting in another direction.

—Eugene Jarvis

Williams sold less than 20,000 Robotron 2084 machines and considered it a
success. In later years, Robotron 2084 would become one of the most highly
esteemed trophies among video-game collectors.

D. Gottlieb & Company, the group that helped found the coin-operated
amusement industry with Baffle Ball, entered the video-game industry late.
Columbia Pictures owned Gottlieb & Company by the time Gottlieb produced
Reactor. Coca-Cola owned Columbia Pictures, so some Gottlieb employees
joked that Coca-Cola was their boss.

Gottlieb had only one hit video game—a quirky little title named Q*Bert.
The project began when an artist named Jeff Lee drew a stack of cubes on his
computer screen in a tribute to M. C. Escher.

Being a fan of the great Dutch artist M. C. Escher, the master of optical
illusions, I constructed a stack of triad-based cubes. Admiring my de¬
rivative handiwork, it struck me, there’s a game in here somewhere! 1

Lee created an Escher-like pyramid of blocks and a two-legged character
with no arms who hopped along the blocks and shot enemies with projectiles
that he fired from his hose-like nose. He called the game “Snots and Boogers.”

The Fall 223

Gottlieb had recently hired a programmer from Bell Laboratories named
Warren Davis. Though he was assigned to a game called Protector, Davis some¬
times roamed around the office, hoping to try his hand at other projects as
well. One night Jeff Lee’s 3D blocks caught his eye.

Q*Bert was kind of a Skunk Works project. Warren Davis was a good pro¬
grammer who had no track record whatsoever doing games; he just thought
it would be a fun thing to do.

Warren saw this stuff that Jeff Lee was working on, these shaded cubes
that filled his screen, and asked if he could have a copy of the art. He started
playing with it and said, "You know, the problem with this is that it shouldn’t
cover the screen like this.” So he made a pyramid out of it.

—David Thiel

Davis’s biggest contribution to the game was changing its theme from shoot¬
ing to strategy. Davis eliminated the nose-gun and changed the goal of the
game to saving the main character rather than killing enemies.

One night a Gottlieb employee named Ron Waxman saw the game and
told Davis that the blocks should change color whenever the armless charac¬
ter jumped on them. With that suggestion, the game finally had a clear goal:
changing all of the blocks to a particular color while avoiding enemies*

During a meeting, another Gottlieb employee named Richard Tracy sug¬
gested that the game and its main character be named Q*Bert, a name that he
derived from the words “Cube” and “Hubert.” 2

The game began taking shape. Q*Bert’s enemies became more ludicrous
than menacing. They were comic animals that included a bouncing snake
named “Coily,” a mop-headed gremlin named “Ugg,” and a tiny hood in shades
named “Wrongway.” Lee suggested creating two rather harmless imps named
“Slick” and “Sam,” who made extra work for Q*Bert by changing the blocks
he had touched back to their original colors.

Lee and a sound engineer named Dave Thiel came up with a humorous
device for giving Q*Bert a distinctive personality. They set the game up so

* Rick Tighe, a techie, suggested sticking the pinball knocker in the cabinet. It went off
when Coily fell off the cubes, making a loud “thwack.”

224 The Fall

that when Coily, Ugg, or Wrongway caught him, or when players ran Q*Bert
over the edge of the blocks, he gives a trailing-away scream followed by a
sickening thud. At other times he muttered angry gibberish words and a word
balloon appeared above his head with messages like “@!#@!”

Now, in parallel with this, completely independently and having nothing to
do with what Warren and Jeff were up to, I had been tasked with using this
speech chip that was on a pinball sound board. It was a really unpleasant
task because the technology was crummy. You had to manually put together
these units of speech, these little sounds, and try to make it say things. It’s
not the same as joining letters together on paper and ending up with words.

We wanted the game to say, "You have gotten 10,000 bonus points,” and
the closest I came to it after an entire day would be "bogus points.”

Being very frustrated with this, I said, "Well, screw it. What if I just
stick random numbers in the chip instead of all of this highly authored
stuff, what happens?” It sounded alien. It sounded like somebody should
be able to understand it, but, of course, you couldn’t understand it be¬
cause it was gibberish.

By that time, Warren had Q*Bert bouncing around on the cubes, and I
said, "Have I got something for you.”

—David Thiel

(TBertvjzs released in 1983. The game’s popularity resulted in licensing deals
for lunchboxes, board games, and a Saturday morning cartoon. Gottlieb sold
approximately 25,000 (fBert arcade machines.

Dragon’s lair

In 1983, Cinematronics, the pioneering arcade company that led the move
toward vector-graphics games in the late 1970s, released Dragon’s Lair.

The game, which combined computer engineering and a Pioneer laser disc
machine, had animated cartoon graphics that looked like something out ol a
Walt Disney cartoon. Understandably, it resembled a Disney cartoon, because
it was created by Don Bluth, a former Disney animator who had worked on
films such as Robin Hood, The Rescuers, and Pete’s Dragon.

The Fall 22$

Don Bluth had been in Disney’s inner circle, one of the chosen heirs of the
company, and he decided to leave Disney and go off on his own. No one had
ever left Disney’s inner circle before, and Disney did everything it could to
have him blacklisted.

—Rick Dyer, founder, RDI Technologies

In Dragon’s Lair, players helped a knight named Dirk as he rescued Princess
Daphne from an evil castle. The game play was like a cross between an old-
fashioned Saturday morning serial and a series of multiple-choice questions.
The screen would show an animated sequence in which Dirk faced some new
danger and players had to respond by moving Dirk with a joystick or pressing
a button to make him draw his sword.

In one sequence, for instance, Dirk walked into a room in which a boiling
beaker of liquid sat on a table under a sign reading “Drink me.” Left to his own
devices, Dirk would drink the liquid and die, but players could save him by
pulling the joystick to the right, causing him to leave the room.

If he drank the potion, players saw an animation of Dirk gasping. After
three mistakes, the screen showed a picture of a partially skeletal Dirk scowl¬
ing at the player.

Cinematronics had been in Chapter 11 for a year when it released Dragon’s Lair.
To complete the project, Cinematronics established a partnership with RDI Tech¬
nologies, a company that later tried to market a home laser-disc game system.*

Due largely to public fascination with the new technology. Dragon’sLairsNds
an immediate and profitable hit. Cinematronics sold more than 16,000 Dragon’s
Lair machines in 1983, for an average price of $4,300. 3 Coleco purchased the
home rights to the game, giving Cinematronics an additional $2 million.
Dragon's Lair was so successful that Cinematronics released a follow-up game
called Space Ace within a few months.

Steven Spielberg loved Dragon’s Lair. After seeing the game, he contacted
Bluth and they worked together on some films.

—Rick Dyer

* Because Coleco owned the rights to Dragon's Lair, RDI was unable to offer the games as one
of the titles for its new system.

226 The Fall

A battle formed between Cinematronics, Don Bluth, and RDI Technolo¬
gies. Though Bluth began work on Dragon’s Lair II shortly after finishing Space
Ace, the game did not come out until 1991. By the time it did, both
Cinematronics and RDI Technologies had gone out of business. Leland, aTexas-
based company, released Dragon’s Lair II: Time Warp into the arcades.

Mylstar (formerly Gottlieb), Atari, and Williams all joined Cinematronics
in releasing laser-disc games, but Dragon’s Lairvrd& the only game of its kind to
become a hit.

Society Gone Games

By the middle of 1982, even as the arcade industry began its lengthy fall, video
games crept into other areas of American popular culture. Video jockeys talked
about video games on MTV. Walt Disney Pictures made a movie, Tron, in which
actor Jeff Bridges saved the world by entering a super computer and defeating
an evil program in a series of video game—like battles. The first movie to fea¬
ture computer-drawn special effects, it inspired two arcade games from Bally/
Midway— Tron and Discs of Tron —as well as several home game cartridges from
Mattel. Arcade games were also used in the backgrounds of dozens of movies.

Consumers no longer had to go to the store to buy games; they could pur¬
chase them from home. Columbia House, the parent company of the
Columbia Record Club, opened the Columbia Cartridge Club. Other compa¬
nies, such as Tele Soft, Inc., and VideoLivery, set up toll-free lines to let shoppers
call in orders for the latest games. Some companies even began experiment¬
ing with delivering games over modems and cable television.

Software manufacturers also experimented with new topics for games. In
October 1982, Caballero Control Corporation released three X-rated games
for the AtariVCS. The games— Custer’s Revenge, Bachelor Party, and Beat ’Em & Eat
’Em —were more crude than sexual. They retailed for $49.95.

Of the three games, Custer’s Revenge received the most attention. The game
involved helping Custer escape from battle by dodging arrows. Once safely away
from the battlefield, he would find and rape an Indian woman tied to a stake.

Actually, there were several attempts to do adult games in 1982 and 1983.
Caballero, a company that did Swedish erotica, put out three cartridges for

The Fall 227

the VCS under the name Mystique. One was Custer’s Revenge, a game in
which you ran along, left to right, dodging Indian arrows. If you did that
successfully, you got to rape an Indian girl who was tied to a pole.

As you might imagine, Native American groups loved this game. There
were protests all over the country. Women Against Pornography did a lot of
picketing against it.

I remember talking to a representative of that organization and telling her
that in my opinion, the best way to keep the game from selling was to ignore
it. These were games that most people wouldn’t touch with a ten-foot pole.

They trained all their energy on Custer’s Revenge and they succeeded in
helping it sell twice as many copies as the other adult games. Mystique sold
approximately 80,000 copies of Custer's Revenge at a time when games were
starting to sell half a million or more.

—Arnie Katz, former editor in chief, Electronic Games

Another sign of the video-game industry’s growing strength was its con¬
tinuing expansion. In 1982, Activision replaced Atari as the fastest-growing
company in the history of the United States. Riding high with such hits as
Pitfall and River Raid, Activision had $150 million in sales in 1982.

Activision was extremely successful. At one time, before Compaq came along,
it was considered the fastest-growing American company in history. We grew
from zero to $160 million in annual sales in three years.

—Alan Miller, cofounder, Activision

In April 1982, Atari released one of the most anticipated video-game cartridges
of all time—the V CS version of Pac-Man. Demand for the game was so immense
that Atari executives believed that many consumers would purchase VCSs just
to play Pac-Man. Atari manufactured 12 million Pac-Man cartridges.

In 1982 we shipped 12 million Pac-Man cartridges. It was a record. I mean, to
ship 12 million of one product at a retail price of $25.75 was extraordinary.

—Ray Kassar, former president and CEO, Atari

228 The Fall

We were the first retailer ever to go and do national network television ad¬
vertising behind a software title. That was April 6, 1982, the launch of that
little guy called Pac-Man. We sold over a million Pac-Man cartridges.

—Al Nilsen, former toy buyer, |C Penney

The video-game industry became frenzied with excitement with the release of
Pac-Man. Drugstores opened video-game counters, toy stores fought for the latest
cartridges, and Kmart and JC Penney challenged Sears’s claim as the largest video-
game vendor. In the end, JC Penney, led by a savvy toy buyer named Al Nilsen,
narrowly inched out Sears to become Atari’s number-one retail partner.

General Computer and Atari

Kevin [Curran] and I, as we found out later, were naive students. We kind of
misunderstood what they meant and thought they really were paying us
money to develop video games since that’s what the contract stated.

Later, years later over beers, we were all laughing at the fact that the
intent was to pay us $50,000 a month for two years to go away.

—Doug Macrae, cofounder, Ceneral Computer

In August of 1981, Atari took General Computer to court to stop it from making
enhancement boards. The case was settled out of court. General Computer agreed
to make video games for Atari and stop making enhancement boards, and Atari
dropped the suit and paid General Computer $50,000 per month for the next two
years in exchange for first refusal rights on all games they might make.

Doug Macrae and Kevin Curran, founders of General Computer, immediately
set up a larger shop and hired programmers to help design and build new games.
What they did not understand was that Atari did not expect to receive games; the
$50,000 per month was Atari’s way of buying them out of the industry.

Within 90 days, they called Atari, asking how they could submit their first
game—an arcade game called Food Fight.

Atari did not hear from us for about 90 days, and we called them up and
said, "We’ve got our first video game we’d like you to take a look at.” They

The Fall 229

sounded kind of shocked, saying, "We did not really expect it. . . . sure.”

And we brought out to them the game Food Fight.

—Doug Macrae

Food Fight was a fast-paced chase game, in which Charley Chuck, a blonde¬
haired boy, picked up pies, bananas, and other foods and threw them at chefs
as they tried to corner him. It was a simple game in which the goal was to eat
the ice cream cone on the other side of the board. The boy throwing the food
was designed to look like Jonathan Hurd, the lead programmer on the project.
Atari bought the game and published it.

Though Food Fight was not a particularly successful game, the speed with
which General Computer created the game impressed Atari executives. Asked
if they could also make games for the VCS, Curran and Macrae said they could
and began making what turned out to be some of the most popular cartridges
Atari ever offered.

Between 1982 and 1984, General Computer hired a pool of seventy engi¬
neers, making it much larger than Atari’s internal VCS research and
development team. Curran and Macrae produced seventy-two games during
that time, including the VCS versions of Ms. Pac-Man, Centipede , and Pole Position.

Toward the end of 1982, Atari finally made the hardware upgrade that Nolan
Bushnell had suggested in 1978: a new and improved game console called the
Atari 5200. Shaped like a large, rectangular wedge, the 5200 had the same pro¬
cessor as the Atari 400 home computer and retailed for $250.

Atari’s engineering team was particularly unhappy with the 5200. In the
months before its launch, team members passed a petition around the research
and development department to try and get the system dropped unless new
controllers were added. When they gave the petition to Ray Kassar, however,
he decided to ignore it and pushed the system through manufacturing.

At its launch, Atari released translations of Super Breakout, Pac-Man, Centipede,
Space Invaders, Defender, Missile Command, and Galaxianlo support the new system.
(More than half of the games for the 5200 were developed by General Com¬
puter.) In all, twelve cartridges were ready at the time of the launch.

2J0 The Fall

Most reviewers and analysts were impressed. Newsweek called the 5200 “a
quantum improvement over the standard 2600 (with the release of the 5200,
Atari began referring to the VCS as the 2600).” 4 Video Games magazine called
the 5200 “a classy act” and complimented the unit for its special effects, its
high-resolution color graphics, its ability to handle several moving objects at
one time, and its sophisticated sound synthesizer. 5

Despite its strengths, the 5200 had a few strikes against it. It cost more than
ColecoVision, yet its graphics were not as attractive. It had a fairly small li¬
brary of games, and Atari’s programming team could not devote its full
attention to the 5200 because it was still making games for the huge 2600 user
base. According to Arnie Katz, editor in chief of Electronic Games, the 5200 was “a
buggy, unpleasant system with basically the same old games turned up a notch
in terms of audiovisual quality.”

The 5200’s biggest problem, according to Electronic Games executive editor
Bill Kunkel, was its controller. The joysticks on the 5200 did not center them¬
selves, making it harder to control the action. Other joysticks had
self-centering springs, but the joysticks on the 5200 simply fell over.

The 2600 was fading. ColecoVision had already passed it, so they moved to
their next-generation system, which was the 5200.

The 5200 had several strong titles. They ported over all the best 400/800
computer games on to 5200 cartridges.

But the 5200 was a doomed system because of one simple thing: it had
the worst controllers in the history of the business—this non-centering joy¬
stick. Dead fish floppo joysticks. Just try playing Dig Dug or Pac-Man with a
floppo joystick.

—Bill Kunkel, former executive editor, Electronic Games

Vectrex

In 1982, General Consumer Electronics (GCE) released a product that bridged
the gap between tabletop electronics and video game consoles—the Vectrex.
Standing approximately 14 inches tall, the Vectrex had a 9-inch black-and-
white vector-graphics monitor built into its cabinet, a slot for game cartridges,
and an extremely bulky built-in game pad.

The Fall 2JI

Rumor had it that GCE president Ed Krakauer was traveling in the Orient
when he was approached by an Asian businessman. The businessman had a
warehouse full of monitors that had been built for use in cardiogram machines.
According to the rumor, the businessman offered to sell Krakauer the moni¬
tors for less than it cost to build them (the company that originally ordered
having refused delivery). Krakauer bought the monitors and had an engineer¬
ing team design a game console around them. The system name: Vectrex.

Retailing for $199, the Vectrex was a great success, and GCE sold its entire
inventory. Unfortunately, once Krakauer’s supply of monitors ran out, so did
his business. When Krakauer returned to Asia, hoping to secure a good price
on another shipment of monitors, he discovered that ordering vector moni¬
tors from a manufacturer was far more expensive than purchasing them from
a distressed supplier, so he pulled the plug on his business.

According to Hope Neiman, one of the first GCE employees, this legend
about the warehouse of unwanted monitors is completely inaccurate.

The story about the monitors was not true. In fact, it was a real problem for
us to get 9-inch monitors made because nobody really was doing them any¬
more. Everything was going bigger and bigger in those days.

We made the monitors in Hong Kong.

—Hope Neiman, former marketing director,
General Consumer Electronics

Ed Krakauer, Lee Chaden, and Shelly Morrick, the founders of GCE, envi¬
sioned making a game console with a built-in screen from the day they started
their company. There was no chance encounter in Hong Kong and no ware¬
house filled with cut-rate monitors.

Developing the console required capital. Like Coleco, GCE used revenues
from the lucrative handheld-games market of the late 1970s to develop a video-
game console.

Development was very costly. In order to create some additional cash flow,
we created these three game watches— GameTime, ArcadeTime, and
SportsTime. The latter two both featured little joysticks on the watch, in ad¬
dition to a single button.

2|2 The Fall

Each of them had a feature that allowed you to turn the sound off. This
totally endeared us to parents. You could play them in school without your
teacher knowing that you were really playing. I think they sold for $39.95.

—Hope Neiman

Like many small companies, GCE had a small staff and a small budget. Many
of the company’s games were developed by outside programmers since only
three people were on GCE’s research and development team. When Toys “R”
Us refused to carry GameTime on the grounds that GCE was too small to ad¬
vertise, GCE created demand for its products by sending thousands of free
samples to subscribers of Boy’s Life, along with notes that instructed the kids to
request Game Time local toy stores. So many kids went into Toys “R” Us stores
asking for the product that the company began carrying GCE products.

Before GCE could market the Vectrex, the company ran into funding prob¬
lems. Looking for a partner, Hope Neiman flew to Massachusetts and presented
the system to executives of Milton Bradley, a company that had raked in huge
profits from such early portable games as Simon.

We were going to have to get the cost of the unit down and probably lose
money, which is what happens today, in order to get the hardware into
people’s hands. That was going to take a major investor. The industry was
hot and the public markets were bad.

In the mid-1980s, you couldn’t go public and expect to achieve any¬
thing as far as a reasonable return on your investment. The industry was
very hot and Ed was very well connected, so we got a lot of interest. I pre¬
sented before every major studio. I presented to all the major toy companies,
venture capitalists, you name it. We probably did fifty presentations in
the span of a month.

[The executives at] Milton Bradley felt they had really missed the boat on
the business; after all, Mattel had become a major player with Intellivision.

Their management was somewhat stodgy and they sort of knew that this
would be sort of a cool thing to do, but they weren’t sure that they really
wanted to do it.

The Fall 233

They decided to buy the company. They initially bought the company,
saying they were going to leave us alone because we had shown them that
we were a success.

—Hope Neiman

The Vectrex’s vector-graphics screen proved to be both a bane and a bless¬
ing. Hardcore video-game enthusiasts liked its high-resolution images.
Vector-based games like Tempest and Star Trek were still big in the arcades at the
time, so many arcade fans knew about the advantages of vector graphics. Many
parents also liked having a game system with its own monitor because that
made it possible for them to watch television while their children played
games.* A Newsweek author praised the Vectrex’s graphics in a holiday article
about the video-game phenomenon.

The general public, however, considered vector graphics boring when com¬
pared to the colorful arcade translations available for the Video Computer
System (VCS), the Intellivision, and particularly the ColecoVision.

In an effort to add color to its games, GCE borrowed a page from the
Magnavox Odyssey and created plastic overlays for players to place over their
screens. This scheme might have come across as completely ridiculous had
Cinematronics not used a similar scheme to add color to the arcade version of
Star Castle a few years earlier.' H '

Milton Bradley demonstrated the Vectrex at the Winter Consumer Elec¬
tronics Show in 1982 and began shipping it in October of that year. The system
retailed for $199 and had an Asteroids -like game called Mine Storm burned into
its circuits. Additional game cartridges sold lor $30 to $40. The entire ship¬
ment sold out, grossing approximately $80 million.

The Field

Atari, Coleco, and Milton Bradley weren’t the only companies hoping to cash
in on the video-game craze in 1982. Mattel released a voice module that en-

* According to Neiman, one reason Vectrex remained active in European markets after
disappearing in the United States was that most European homes had only one television.

** One of the most popular Vectrex games was an excellent translation of Star Castle.

234 The Fall

abled certain Intellivision games to speak. Magnavox, still trying to reenter
the market with Odyssey 2, also released a voice module. In May 1982,
Astrovision released the Astrocade, a system originally launched as the Bally
Astrocade by Bally in 1978.

The most improbable product of 1982, however, came from Zircon Inter¬
national, which relaunched the Fairchild Channel F, with some enhancements,
as the Channel FII.

In a Newsweek article on October 24, 1982, reporters William D. Marbach and
Peter McAlevey summarized the industry and its best prospects for Christmas.

Here they come. Zaxxon, Smurf, E. T., Donkey Kong and more; a new gen¬
eration of video games—and game machines—is gobbling its way onto
toy-store shelves like so many Pac-Men. By and large, the entries are a
startling leap forward. Manufacturers have taken maximum advan¬
tage of recent advances in semiconductor technology to create
state-of-the-art fun. For the first time, the graphics and play action of
home games are beginning to approach the quality of video-arcade
games. In some cases, home-video makers have even vaulted ahead
with games that “talk.”

The new products will all be out just in time for Christmas. Manu¬
facturers are gunning for each other like starship pilots facing an
onslaught of alien ships. The stakes are huge: the booming video-game
industry has become almost as big as the movie business and a single
top-selling home video-game cartridge may soon be able to outsell all
but Hollywood’s biggest blockbusters. 6

The Big Surprise

On December 7, 1982, Atari announced that it expected a 10 to 15 percent
increase in sales in the fourth quarter. Until that announcement, Atari execu¬
tives had been talking about an increase of 50 percent. Analysts were shocked.
Atari had never given any indication that sales were not on target. The news
set off a panic.

By the time the New York Stock Exchange closed on December 8, Warner stock
had fallen 16 / points to 35 Vs and the video-game industry had begun to collapse.

The Fall 235

Warner Communications was further embarrassed a few days later when it
was discovered that Atari president and CEO Ray Kassar had sold 5,000 shares
of Warner stock 23 minutes before announcing the company’s sales figures.
He said that the announcement had nothing to do with his transaction and
eventually returned the money, but the damage was done.

I sold 5,000 shares of Warner Communications, which represented 1 percent
of my total holdings.

The timing was unfortunate, but the reason I sold those shares was that I
had been working with my investment counselor on a new investment oppor¬
tunity that developed and they needed that amount of money. I think it was
about $82,000. So I sold the stock, and I reported the sale to the company.

There was an SEC investigation. It was resolved, and there was no action.

If I was really bailing out, I would have sold hundreds of thousands of shares
of Warner Communication, not 5,000 shares.

—Ray Kassar

Atari had deeply rooted problems that eventually infected the entire video-
game industry. During its heyday, Atari became top-heavy with marketers and
other executives. As several ex-Atari people later described the situation, the com¬
pany had entirely abandoned its carefree youth and become a home for MBAs.

With the continuing growth of video games, some executives began to be¬
lieve that they could sell anything as long as it came packaged as a video game.
Purina created a game titled Chase the Chuck Wagon, a video-game version of a
television commercial for Chuck Wagon dog food. Atari even released a video-
game version of the Rubik’s Cube.

We had 24- and 26-year-old MBAs running around making multimillion-
dollar decisions. I remember shortly after I first joined Atari, I guess I had
been there for less then a month, and they had just signed up to do a video
rendition of Rubik’s Cube.

There was a woman who was running the marketing for the North Ameri¬
can side of the business, and she came up to me and asked me if International
[the International division of Atari] would be interested in marketing it in¬
ternationally. And I said, "No. Absolutely not.”

236 The Fall

She was quite surprised that I could make a decision that quickly, and she
said, "Well, why wouldn’t you be interested in it?”

I said, "Well, you’re going to have to help me understand why a $40 elec¬
tronic rendition of this product is better than the $3.98 [original] rendition
that is more portable and that I can take anywhere I want. When you can
convince me of that, I’ll be happy to consider this for International.”

Rubik’s Cube went on to be an incredibly bad disaster.

—Steven Race, former vice president, Marketing and Communications,

International Division, Atari

The first indication of trouble came in May 1982, but no one seemed to
notice. Atari manufactured 12 million copies of Pac-Man, even though the
company’s research showed that less than 10 million people actually owned
and used its 2600s. Atari manufactured over two million extra copies on the
theory that millions of people would buy the hardware just to play Pac-Man.

In an effort to get the game manufactured quickly, Atari contracted with a
programmer named Todd Frye, promising him a royalty on every Pac-Man car¬
tridge the company manufactured. With a deal like that, Frye made money even
if the game was bad. According to industry rumors, he made over $1 million.

Whether it was bad programming or a weakness in the hardware, Frye’s
version of Pac-Manh&d slow, jerky animation and the ghosts flickered so badly
that they kept disappearing from the screen. Atari sold seven million copies
of Pac-Man; many people were so disappointed with the game that they asked
for a refund.

The first real chink in the armor, though, was Atari’s edition of Pac-Man,
which was a terrible job. It was amazing that they produced such a flickery,
unresponsive game. And although they sold many copies, paradoxically the
more copies they sold, the more people they turned off.

—Arnie Katz

A few retailers canceled their orders over the summer, but no one at Atari
saw any cause for alarm. The big vendors, JC Penney, Sears, and Kmart, all stayed
on track. Ray Kassar may have discussed these problems with Manny Gerard,

Hie Fall 237

the Warner executive watching over Atari, but both men remained completely
confident. Atari still garnered 70 percent of Warner’s operating profits. 7

Atari’s problems continued with the production of E. T„ a game based on
Steven Spielberg’s blockbuster movie. Many analysts later blamed Kassar for
the disaster, but it actually began with Steven Ross, the head of Warner Com¬
munications.

Steve Ross called me. He was very anxious to have Spielberg make movies
for Warner, and he said he just made a deal with Spielberg to produce £ T.
as a cartridge.

He asked me what 1 thought. I said, "I think it’s a very dumb idea. We’ve
never really made an action game out of a movie.”

And he said, "Well I’ve also guaranteed Spielberg a $25 million royalty
regardless of what we did.”

—Ray Kassar

Atari was poised for another great year when Ross approached Spielberg about
licensing £. T. The Pac-Man cartridge had been a disappointment, but Kassar and
Gerard still claimed that Atari’s sales would be up by 50 percent for the fourth
quarter. Ross might not have known the full extent of the Pac-Man debacle and
had felt confident that a game based on E. T. could be a huge bestseller.

Ross told Spielberg that the game should be out in time for Christmas.
Since they made the deal in late July, that left very little time to design and
manufacture it.

I asked Steve, "When do we have to produce this?”

He said for Christmas of 1982.

This was in July when he called me, the end of July.

I said, "Steve, the lead time to produce a game is at least 6 months between
semiconductor deliveries and programming and all that. It’s impossible.”

He said, "Well, you have to do it because I promised Spielberg we'd have
it on retail shelves for Christmas.”

We had literally six weeks to produce a brand new game, manufacture it,
package it, and market it. It was a disaster. I mean, the programmers hated
it. Nobody liked the game.

2^8 The Fall

Then he [Ross] ordered us to produce almost five million of these games.

I told him, "Steve, that’s crazy. We never make five million of a product until
we have some market testing.”

He said, "Well, it’s going to be a big hit because of Spielberg and E. T .” So
we made five million and practically all of them came back.

—Ray Kassar

None of the VCS programmers wanted anything to do with E. T. because it
came with an unrealistic deadline and high expectations. In the end, Kassar
turned to Howard Scott Warshaw, a young programmer whose other games,
Yar's Revenge and Raiders of the Lost Ark, were both million-sellers* Kassar was so
anxious about this project that he forgot his normally aristocratic preten¬
sions and called Warshaw himself.

It was late July when they first called me up to do it, after my boss, other
programmers, and everybody else told them to forget it. Ray called me up
personally. Because of some other interactions I had had with Ray before, I
think he just had a feeling that i would do it.

So he called me up from Monterey and said, "Howard, we need £ F,” This
was like July 23, and he said "We need E.T. by September 1. Can you do it?”

I said, "Yeah, provided we reach the right agreement.”

—Howard Scott Warshaw, former VCS programmer,

creator of Atari’s E.T.

E. T. became infamous throughout the video-game industry for its dull
play and disappointing story. The game involved leading Spielberg’s cute

* Warshaw’s first game, Yar's Revenge, was the bestselling original game Atari released for the
VCS. It was about Yar of the Rassak Solar System. The joke was that Yar was Ray spelled
backward and Rassak was Kassar. The game was Ray’s revenge on Activision.

Warshaw told a friend in the marketing department that the name was a secret joke
between him and Kassar and that Kassar loved it, even though Kassar had never heard
about it. He asked his friend not to tell anyone, because he didn’t want anything to
influence getting the name approved. The friend immediately made sure the name stuck.
Warshaw’s next game was Raiders of the Lost Ark.

The Fall 23 f

extraterrestrial away from various dangers as he tried to assemble an inter-
galactic device to phone home. The game’s graphics were primitive, even by
Atari 2600 standards, and E.T. spent most of the game falling into holes.

Riding on the heels of the Pac-Man disaster, E. T. was too much. Atari had
managed to sell millions of Pac-Man cartridges, but the majority of E.T. car¬
tridges remained in dead inventory. Atari tried to buy its way out of the hole by
licensing top arcade games, often spending millions of dollars for exclusive rights.

Basically, we’d zap them. They had last right of refusal, so we’d just come up
with a bid that was wild; then, of course, Atari would be forced to beat it.

Atari was getting it from two sides. Atari was getting it from not only the
glut of the market, but also they were paying unbelievable amounts of money
for these software titles. You know, the bidding on these software titles was
just mind blowing.

—Al Kahn, former executive vice president, Coleco

Not even home versions of the latest arcade hits helped. Consumers had
already begun losing interest in video arcades, and in 1983, they stopped pur¬
chasing video games. The industry that had shown such miraculous growth
through most of 1982 suddenly became a black hole.

Warner Communication’s Atari, which pioneered home video games
with such classics as Space Invaders and Asteroids, has lost $356 million so far
this year, dropped 3,000 employees from its payroll of 10,000 and fin¬
ished moving all of its manufacturing facilities to Hong Kong and Taiwan.
Plagued partly by sluggish sales of Intellivision games, the electronics
division of Mattel has run a $201 million deficit in 1983, while laying off
37 percent of its 1,800-member work force. Activision estimated that it
lost $3 million to $5 million in the past three months, despite scoring
hits with its new Enduroaxid Robot Tank games. At Bally, the leading manu¬
facturer of arcade video machines, profits are off 85 percent. 8

I think I’m responsible for some of the problem. I think Ray is responsible for
a lot of the problem. Neither one of us is responsible for the fact that a mar¬
ket just went away in an eye blink.

240 The Fall

Steve Ross blamed me to some extent. He blamed Kassar. The truth of the
matter is, you can't blame me for the market imploding, but you can cer¬
tainly pin some of the blame for the Atari problems on me and I in turn will
tell you that you have to blame Kassar for some good chunk. He was running
the show. It was on his watch and tangentially on my watch.

—Manny Gerard, former vice president, Warner Communications

Atari was stuck with enormous inventories of worthless game cartridges.
With no hope of selling them, Atari dumped millions of cartridges in a land¬
fill in the New Mexico desert. When reports came out that people had
discovered the landfill, Atari sent steamrollers to crush the cartridges, then
poured cement over the rubble.*

By the end of 1983, Atari had racked up $536 million in losses. Warner Com¬
munications sold the company the following year.

* This was not the first time Atari destroyed unwanted cartridges. The practice had gone on
for years. According to several sources, the concrete slab under Atari’s Borregas Street
warehouse is filled with crushed cartridges.

jrmath

I went to visit Nolan at this small toy company he owned called Axlon. I walked in and
asked to see him and was told, "Mr. Bushnell’s in a meeting.”

About three minutes later a door bursts open and Nolan comes through with a big
smile on his face. He says, "Manny Gerard, the man who fired me from Atari.”

I said, "Right, Nolan. And the guy who made you a millionaire.”

Nolan stopped in his tracks and said, "I guess you’re right.”

—Manny Gerard, former vice president, Warner Communications

"My name is Nolan Bushnell, but I'm not God,” he told them. "I need to build factories.”

If not God, then Prometheus—about to be unbound. At midnight on September 30,
1983, a seven-year noncompete agreement, which Bushnell had signed when he sold his
pioneering Atari Inc. video game company to Warner Communications Inc. in 1976, was
due to expire, and a grand party had been organized to celebrate his release.

—Steve Coll, "When the Magic Goes,” Inc. Magazine

242 The Aftermath

The Rich and Famous

With the unlikely and unqualified successes of Atari and Chuck E. Cheese, Nolan
Bushnell became a Silicon Valley legend and a world-renowned high roller. He
purchased two personal jets, bought mansions, took up yachting, and devel¬
oped a taste for the finer things in life. When he decided that Northern California
needed a truly fine restaurant, he had one built—the Lion and Compass.

Bushnell mingled with the biggest names of his time, entertaining actors and
politicians and doing frequent interviews with financial publications. He even con¬
sidered making a bid for a seat in the United States House of Representatives.

I met Nolan in the late 1970s. I was a reporter at the Washington Post. My
recollection is that I met Nolan at a party at Bob Woodward’s house. Bob was
his next-door neighbor in Washington.

Nolan used to own a Learjet and he loaned it to George Bush when Bush
was Ronald Reagan’s vice presidential running mate, and he sort of got in¬
terested in politics that way. And he got put on some Presidential commission
as a result of what he did.

—Tom Zito, former reporter, the Washington Post

In 1981, Bushnell founded Catalyst Technologies, an incubator firm that
housed and funded several high-tech start-up companies. In exchange for
building space, access to office equipment, and funding, Bushnell received a
piece of each company.

The companies he selected reflected his tastes. Through Catalyst, Bushnell
became involved with companies working on high-resolution television moni¬
tors, cable television, and robotic toys. For him, the Catalyst building was a
kind of dream factory that was funded by the ever-growing success of Chuck
E. Cheese and Pizza Time Theaters.

In the three years since Bushnell had started Pizza Time Theaters, the com¬
pany had opened 204 restaurants, and he expected that number to grow to
277 by the end of 1983. Behind the scenes, however, Bushnell’s empire faced a
previously unforeseen danger in the form of a new restaurant chain that would
challenge Chuck E. Cheese. The chain, ShowBiz Pizza, was nearly identical to
Chuck E. Cheese.

The Aftermath 243

Like Chuck E. Cheese, ShowBiz restaurants served pizza in a cafeteria-like
theater, in which customers watched musical reviews performed by robotic
animals. Chuck E. Cheese had a streetwise rat, ShowBiz had a bear named
Billy Bob leading a band called the Rock-a-Fire Explosion. Both chains fea¬
tured large arcades in which patrons played video games and children rode
coin-operated rides while waiting for their orders.

The similarity was no accident. ShowBiz Pizza was founded by Robert Brock
of the Brock Hotel Group—the largest Holiday Inn franchise in America at
the time. 1 Brock first became aware of Pizza Time Theaters in 1978, shortly
after Bushnell opened his second location in San Jose. He contacted Bushnell
the following year and inquired about opening a chain of200 Chuck E. Cheese
restaurants in the Midwest.

Brock decided against licensing Chuck E. Cheese, however, when he met
Aaron Fletcher, an inventor manufacturing robotic characters similar to the
ones in Chuck E. Cheese that looked better and cost less. Instead of buying
Bushnell’s franchise, he decided to compete against it.

Two weeks after returning to [his corporate headquarters in] Topeka, Brock
no longer wanted to be a franchisee; he wanted to be a franchiser. Brock
demanded that Nolan tear up the contract. Nolan refused. Brock went ahead
anyway and negotiated a contract with Fletcher. N olan sued Brock for breach
of contract, and Brock countersued Nolan for misrepresentation. 2

Bushnell successfully demonstrated that Chuck E. Cheese had been a
unique idea and that ShowBiz was an imitation, and the courts ruled in his
favor. Although he was not successful at shutting Brock’s chain down,
Bushnell received a percentage of the annual revenues from the first 160
ShowBiz restaurants. 3

ShowBiz wasn’t the only problem. More concerned about robots and video
games than food. Pizza Time executives had their restaurants serving cheap
pizza at premium prices. With poor quality food and the popularity of video
games evaporating, people had no reason to go to Chuck E. Cheese, and the
company’s revenues began falling by the end of 1982.

Pizza Time Theaters was operating in the red by the middle of 1983. The
company’s repeat business fell off,' 1 and one-time business was not enough to

244 The Aftermath

cover the costs of running the restaurants. Amazingly, Bushnell claims that
he was unaware of the problems. A professional management team ran the
company while he developed Catalyst industries and traveled.

I was aware that some store sales were dropping in certain parts of the coun¬
try where we had built too many operations. The professional managers were
the problem, not the solution.

The rap that really pisses me off is being characterized as an inept man¬
ager. I believe that the real story of Atari was one of real sound financial
management because I don’t believe that there are 100 people, certainly not
any of the people who are so critical of me. Not one of them could have built
that company with no cash.

—Nolan Bushnell

Adrift at Sea

Nolan bought a yacht. He built a special yacht and he entered that big race,
but he wasn’t a great sailor. No matter what you say about Nolan, he is one
colorful dude.

—Manny Gerard

As far as Nolan Bushnell was concerned, Chuck E. Cheese was doing well, his
Catalyst companies were going to pay off, and the end of the noncompete agree¬
ment Warner Communications had him sign before purchasing Atari was at hand.

Behind the scenes, Bushnell had already reentered the video game indus¬
try. In January, eight months before he could officially enter the business, he
closed a deal to purchase Videa Inc. for $2.2 million. Videa was a game com¬
pany founded by three of Atari’s brightest alumni—Roger Hector, Howie
Delman, and Ed Rotberg.

Hector, who had worked with A1 Alcorn on Cosmos, was a natural leader
and had experience working with holographic images. Delman, a brilliant
engineer, built Lunar Lander, Atari’s first vector-graphics game. (Atari’s later
vector-graphics games were also built around Delman’s hardware.) Rotberg,

Hie Aftermath 24 $

widely considered one of Atari’s best game programmers, was the man who
designed Battlezone.

Nolan purchased Videa about 18 months after Rotberg, Dilman, and I started
it, then changed the name to Sente. We had actually put together a really
good group of people and were working on laser discs.

—Roger Hector

The name Sente held a special significance for Bushnell—like the name
Atari, Sente came from a Japanese strategy game called Go. In chess terms,
Atari meant “check,” Sente meant “checkmate.” In Bushnell’s mind, naming
his new company Sente was a way of telling the world that he was going in
direct competition with Atari.

Bushnell purchased Sente as a subsidiary of Pizza Time Theaters. He hoped
to distribute the games he made throughout the restaurants, possibly releas¬
ing them to Chuck E. Cheese restaurants first, as away to draw new customers.

As he waited for the moment in which he could begin working with Sente in
the open, Bushnell took up yachting and entered the Transpac Yacht Race. By
this time, he had amassed a fortune estimated to be over $200 million dollars;
he could afford a hobby like yachting. Bushnell invested a lot of money into
hiring a top crew and constructing a special yacht, which he christened Charlie.

The Transpac is a race between California and Hawaii that takes place in
July. With an excellent crew and a well-designed boat, Bushnell won the nine-
day race his first time out.

According to a popular electronics industry legend, Bushnell received a tele¬
gram upon docking. The message began, “Bad News in the Second Quarter, Stop.”

According to the story, Bushnell didn’t even wait to receive his trophy.
Upon reading the message, he went straight to the airport and flew home on
the next available flight.

The stories are absolutely true. I found out about the problems right after the
race. I didn’t know about it until I called from Hawaii.

We had hired a guy to run the restaurants named George Hellick, who
really screwed things up. He changed many of my operating ratios, and when

246 Hie Aftermath

I got back from the Transpac was when I had the fights with the board to go
back to the same ratios that had generated the profits.

—Nolan Bushnell

In March 1984, Pizza Time Theaters filed for Chapter 11 bankruptcy pro¬
tection. Bushnell retired from the company later that year.

In a strange twist, ShowBiz Pizza absorbed Pizza Time Theaters and main¬
tained both chains for several years. In 1990, Show Biz adopted Chuck E. Cheese
over Billy Bob Bear as its mascot.

Ironically, the keel broke loose from Nolan’s yacht as his crew sailed it back
to California. Without its keel, Charlie drifted listlessly and had to be rescued.
The same thing was about to happen to Nolan Bushnell’s career.

We wound up selling games to Atari. I think Ray’s [Kassar] final act at Atari
was buying our games.

I went to his office and we struck a deal. We had created three VCS game
cartridges and I brought them to him. I said, "Here, check it out. They’re
done. We’re making them available to you.”

He said, "I’ll buy them,” and the deal was done. He said, "Come in next
week. We’ll have a check for you.”

I came in next week and they had a check, but he was gone.

—Roger Hector, Videa Inc.

Ray Kassar resigned as CEO of Atari in July 1983. His last months with the
company were tainted by the revelations that he had sold 5,000 shares of
Warner Communications stock right before making the announcement that
Atari’s profits were lower than expected. Steven Ross, the chairman of Warner
Communications, never stopped blaming Kassar for Atari’s problems.

Ross’s problems did not stop at Atari’s doorstep. The financial roller coaster
Atari put Warner through shook many investors’ confidence in Ross, and
Rupert Murdoch, the Australian publisher baron, was poised to attempt a
hostile takeover of Warner Communications.

The Aftermath 247

Ross turned to Herbert Siegel, chairman of Chris-Craft Industries, for help
in fighting off Murdoch’s takeover; but that placed 29 percent of Warner vot¬
ing stock in Siegel’s hands. Ross needed to make Atari profitable or cut his
losses. Against this backdrop, Ross hired James Morgan to replace Kassar.

Morgan was only forty-two years old, but he had already developed a big
name in business circles. Before going to Atari, he worked in the tobacco¬
marketing division of cigarette giant Philip Morris, where he managed such
brands as Virginia Slims and Merit. Morgan was a chain-smoker who openly
criticized Atari’s past management team.

According to Time magazine, Morgan was promised $8.5 million over a
seven-year period to move to Atari, along with performance bonuses that
could raise his pay to over $25 million. 5

Like Kassar, Morgan had no background in technology and knew nothing
about computers. He had no idea why the average American would want a
home computer and was appalled to discover that few people at Atari had
any answers either. One of Morgan’s heroes was Lee Iacocca, the maverick
businessman who had turned Chrysler Corporation around and made it prof¬
itable a few years earlier. Perhaps one reason Morgan accepted the job at Atari
was to see if he could follow Iacocca’s example.

If Atari’s offer seemed baffling, Morgan’s acceptance was even more un¬
expected. By all accounts, he was on a very short list for the presidency
of Philip Morris. Yet Morgan, who had previously never even listened to
outside offers, resigned 48 hours after having lunch with Warner chair¬
man Steven Ross. 6

Morgan’s first order of business was to cut back Atari’s excess expenses. In
his opening months as CEO of Atari, he cut Atari’s domestic workforce from
9,800 employees to 3,500 and made preparations to move manufacturing from
California to Hong Kong and Taiwan.

It would take more than austerity to save Atari.

One major force changing the market was a new line of inexpensive home com¬
puters. Cheap and only marginally more powerful than the game consoles of

248 The Aftermath

the time, these stripped-down processors did word processing, played games,
and cost twice as much money as an Atari 5200 or a ColecoVision.

Atari had been selling inexpensive computers for years, and IBM introduced
the $699 PCjr in 1983, but it was another company—Commodore Interna¬
tional—that broke the market wide open.

Jack Tramiel

Commodore International was founded by Jack Tramiel—possibly the most
complex person ever to enter the computer industry. He was a Polish Jew, a
survivor of the Nazi concentration camps who came to America and worked
his way from poverty to fortune.

As a teenager, Tramiel was sent to Auschwitz, a particularly savage Nazi
concentration camp. While the people around him died, Tramiel discovered a
way to survive. The Germans were building the Autobahn and asked for vol¬
unteers to help with the roadwork. It was unpleasant work, overseen by guards
who sometimes took pleasure in beating their workers. Even as a teenager,
however, Tramiel understood that the Germans had to feed their volunteers
to keep them working, so he volunteered and survived six years in Auschwitz.

After being liberated at the end ofWorld War II, Tramiel moved to the United
States and became a Horatio Alger story. He joined the U.S, Army and was
sent to Fort Dix, in New Jersey, where he learned how to repair typewriters.
He saved his money and in 1954 started a typewriter repair store in the Bronx.

In 1955, Tramiel moved to Toronto, where he founded Commodore Inter¬
national and won a contract to assemble typewriters for a foreign firm. In a
few years, Commodore began manufacturing its own adding machines. Com¬
modore ran into trouble several years later and Tramiel had to close his
manufacturing plant. Rather than go out of business, he worked with Ricoh
to get his products made.

As his business grew, Tramiel developed an eye for catching trends. Realiz¬
ing that calculators would replace electromechanical adding machines, he
set up a partnership with Casio in the 1960s. By 1969, Commodore owned its
own calculator manufacturing plant.

In 1976, Tramiel purchased a small chip manufacturer named MOS Tech¬
nologies for $800,000. This was Tramiel’s biggest break. MOS made the 6502

Hie Aftermath 249

microprocessor, the chip that would become the heart of the Apple II and
Atari 400 and 800 computers. 7

Jack Tramiel, and later his sons, entered Silicon Valley with cutthroat East
Coast business techniques that earned them enemies throughout the computer
industry. Tramiel was well known for hardball business practices and notorious
for purposely paying company debts late. Around Commodore, he referred to
his business philosophy as “the religion.” Executives who were unprepared to
practice Tramiel’s religion quickly found themselves unemployed.

This arrangement may seem a little like loan-sharking, but Commo¬
dore always knew how to make good use of other people’s money. The
company’s accountants routinely crunched cash, cut costs to the bone,
stretched out payables to vendors, and made dealers pay up fast.

A good example came in 1981 when the prime rate topped 18 per¬
cent. To take advantage of the high interest, Commodore practically
stopped paying bills so it could deposit as much money as possible in
interest-bearing accounts. That year, Commodore earned substantial
interest income. 8

Commodore struggled to stay solvent but lost $4 million on $56 million
in sales in 1976. Jack refused to pay vendors. Why should he? He was
losing his shirt. Lawsuits flew in all directions. 9

Commodore did its usual jack Tramiel stunt—not paying the bill.

If your guys are dumb enough to keep shipping him product, he lets
them keep shipping. Pretty soon Commodore owes them so much money
that they run out of cash flow and they find themselves out of business. At
that point, Commodore comes in and buys the company for a song, then
forgives its own debt.

—Al Alcorn, former vice president, Atari

Tramiel had an explosive temper. He was known for pounding desks as he
spoke, yelling at employees, and doing mass firings. California magazine once
listed Tramiel third on its list of “Bosses from Hell.”

2 J 0 The Aftermath

The darkest accusation about Jack Tramiel, however, dates back to his early
days in Canada. During that time, Commodore became associated with the
Atlantic Acceptance Corporation and one of the biggest financial scandals in
Canadian history.

In 1965, a financial firm named Atlantic Acceptance collapsed, leaving be¬
hind millions of dollars in unpaid loans. A four-year investigation into the
collapse revealed fraud on the part of C. Powell Morgan, the president and
controlling stockholder of Atlantic Acceptance, who was also the chairman
of Commodore. 10 The investigation also showed that Atlantic Acceptance had
made large loans to Commodore.

What was wrong with that? The Canadian report said there had been
heavy insider trading of Commodore stock for the apparent purpose of
bolstering share prices. It also stated that Commodore issued mislead¬
ing financial statements and letters to shareholders. The report said
Tramiel and his partner had created two companies “with nominal capi¬
tal and no assets,” borrowed from Atlantic and re-lent to Commodore
at a higher interest rate, pocketing the difference. The report went on to
say that Powell Morgan had paid a “notoriously fraudulent stock pro¬
moter with established links in the world of organized crime” to tout
Commodore stock in Europe through a financial newsletter, with
Tramiel’s knowledge and consent. 11

Tramiel was never indicted, and C. Powell Morgan died before the com¬
mission investigating the Atlantic Acceptance collapse concluded its work.
He later moved his headquarters back to the United States.

Tramiel made up sayings that were bandied about his company. One of his
sayings was, “We need to build computers for the masses, not the classes.”* Mak¬
ing computers for the masses meant finding a way to sell a low-cost, fully
functional computer. To do this, Tramiel bullied his engineers to find cheaper
ways to manufacture components and stripped costly luxuries from products.

He also saved money through vertical marketing. Owning MOS Technolo¬
gies provided him with an inexpensive source for computer chips. Years later,

* Another Tramielism was “Business is like sex—you have to be involved.”

The Aftermath 2 $l

when he wanted to sell dot matrix printers with his computers, Tramiel pur¬
chased a printer manufacturer and was able to market printers at
stripped-down prices. When Commodore unveiled the Pet Computer in 1977,
it was the first home computer to retail for under $1,000.

In 1980, Jack Tramiel survived a .mid-flight airplane fire while entertaining
two important software developers on his corporate jet, which was jokingly
referred to as the Commodore “Petjet.” During the flight, the wiring on a
coffeemaker caught on fire while the jet was headed from Chicago to
Commodore’s California headquarters.

They didn’t smell the smoke until it was too late. They grabbed the fire
extinguishers, but they didn’t work. Within minutes, the entire right
side of the jet was engulfed in flames. The jet shot through the sky like a
Roman candle. Only the thin air and altitude kept the whole thing from
exploding in mid-air. Smoke began to fill the cabin.

Most horrifying of all, no airports in the area could handle
their landing. 12

By skill or by luck, the two men flying the jet managed to keep it together
until they reached an airport in Des Moines, Iowa. With the electrical system
destroyed, the pilot had to stop manually. The jet skidded past the end of the
runway, but all of the passengers were able to walk away from the scene.

Tramiel later told an employee that the near-fatal incident was God telling
him “not to fly so high.” 13

In 1981, Commodore released a home computer called the VIC-20 that-
sold for under $300. The VIC-20, which came with 5K of RAM and 16-color
graphics, was a pricing coup for its time. Backed by commercials with William
Shatner* as its spokesperson and sold through regular retail outlets instead of
computer stores, the low-end machine was a major success. While Atari be¬
gan faltering in 1982, Commodore sold over 800,000 VIC-20s worldwide.**

In August 1982, Commodore launched the Commodore 64 (C64), a per¬
sonal computer that company executives claimed rivaled the $1,000 Apple II

* Atari hired Alan Alda as a spokesman for its computers and Mattel hired George Plimpton.

** Commodore had a particularly strong following in Europe.

252 The Aftermath

in power but sold for $600. By the following January, Commodore was ship¬
ping 25,000 C64 computers per month. 14 The Commodore 64 went on to
become a turning point in the history of home electronics, propelling Com¬
modore into practically unheard of financial success.

People lucky enough to have purchased 100 shares of the [Commodore
International] stock in 1977 for under $2 a share would hold over $70,000
worth of stock [as of 1983], 15

The public’s interest in video games seemed to have been replaced by a
fascination with home computers. Atari, Mattel, and Coleco now scrambled
to find ways to compete.

Though 1982 was a banner year for Coleco, the crash of the video-game mar¬
ket made Coleco CEO Arnold Greenberg nervous. Going into the future, he
wanted something more than ColecoVision. Greenberg’s drive took his com¬
pany in two directions.

Greenberg’s pet project was the Adam Computer, and he abandoned the
ColecoVision to manufacture it. Adam was a complete computing solution.
It came with a master console that contained an audio cassette like high speed
data recorder and a slot for playing cartridge games, a letter-quality printer,
and a 75-key keyboard, all in one box. The complete Adam setup sold for $600,
but Coleco also built a partial Adam kit that could be plugged into a
ColecoVision, which retailed for $400.

Coleco unveiled the Adam computer in 1982, promising to ship 500,000
units in 1983. Production took longer than expected, however, and less than
100,000 Adams reached store shelves that year.

No one had a word-processing package at that time. This was the first one
that was bundled. . . . You had the printer, the computer, and the CPU and
everything, including the software at about $6oo, so it was an unheard of
price for that kind of equipment.

Basically, there was no one out there really competitive in terms of price,
and we had done a terrific marketing job and everybody wanted one.

The Aftermath 253

Arnold was convinced that Adam was going to be a billion-dollar busi¬
ness, so he decided to make two companies out of Coieco. He was going to
make a toy company on one side and an electronics and computer company
on the other side.

—Al Kahn, former executive vice president, Coieco

Coieco also ventured into the toy business.

In 1982, Greenberg heard about a small toy company near Cleveland, Geor¬
gia, called Appalachian Artworks. Xavier Roberts, the 28-year-old owner of
the company, was a dropout from nearby Truett-McConnell College, where
he’d studied sculpting. Before dropping out, Roberts had created a line of
pudgy baby dolls that he called “Little People.”

Roberts’s Little People were so popular that he left school and set up a busi¬
ness selling Little People out of an old clinic that he called Babyland General
Hospital. Roberts’s dolls were not manufactured at Babyland General, they
were “delivered.” Employees dressed like doctors and nurses (i.e., assembly
workers) brought them into viewing rooms in beds of cabbage.

Instead of selling his dolls, Roberts put them up for “adoption.” Adoption
rates ranged from $125 to $2,000, depending on the doll. The more expensive
adoptees came with furs or diamonds. One thing Roberts stressed was that
each doll was unique and had its own name and identity. They even came
with adoption papers and birth certificates. More than 250,000 people had
adopted Roberts’s handmade dolls by the end of 1983.

Greenberg heard about the dolls and decided to introduce Babyland Gen¬
eral Hospital to the world of mass production. Coieco licensed Roberts’s
concept and renamed the dolls “Cabbage Patch Kids.” Under the direction of
Al Kahn, senior vice president of marketing, Coieco manufactured 2.5 mil¬
lion Cabbage Patch dolls in 1983. Kahn and Greenberg had grossly
underestimated the appeal of their pudgy little dolls.

Cabbage Patch Kids sold out as quickly as Coieco could ship them. Stores ran
out of stock as Christmas rolled around, and shoppers sometimes broke into near¬
riot frenzies as they tried to grab the dolls wherever they could find them. Even
stores that jacked up the price of the dolls from $25 to $50 sold out, and many
enterprising scalpers found that they could resell the dolls for over $100. Accord¬
ing to Kahn, Coieco hoped to do $1 billion in Cabbage Patch sales in 1984.

254 The Aftermath

The news was not as positive on the electronics side of Coleco’s operations.
Committed to meeting his 1983 shipping date, Greenberg pushed the Adam
into production before it was ready. More than half of the computers Coleco
shipped in 1983 were returned as defective.

Dave Rosen [the founder of Sega] tells me that he went to see the Adam at
the CES show. When Eric Bromley explained what was inside the Adam, Dave
said it became clear to him that Eric didn’t have a clue what he was talking
about, and he knew it was time to sell his Coleco stock because it was about
to drop 20 points.

—Michael Katz, former executive, Coleco

He [Arnold] didn’t really think the toy company was going to mean much
because he was really banking on Adam being the big slam dunk.

It certainly was marketed beautifully. Everybody wanted Adam, but it
wasn’t ready to ship, it had glitches in the programming, etc., which cer¬
tainly should have been fixed before the machine was released.

The program wasn’t totally debugged, and the printer still had some issues
that had to be worked out. Arnold was fully committed to bringing Adam to
market for Christmas, and he was not going to let anything stop him.

—Al Kahn

Wall Street was not impressed. Over the next year, Coleco’s stock dropped
from 22 points per share to 13. Greenberg claimed that his company had fixed
the problems when he released his next shipment of Adam computers, but
the public wasn’t interested. “It’s almost impossible to resurrect a lemon like
that,” one analyst told Financial World . 16

By this time, Coleco’s electronics sales were nearly nonexistent. When Atari
dropped the price of the 5200 in 1984, Coleco responded by dropping the price
of the ColecoVision and giving a Cabbage Patch doll to people who purchased
both a console and a game cartridge.

Adam sales were equally dismal. Unable to re-ignite public interest in its
computer, Coleco discontinued the Adam in January 1985. Cabbage Patch Kids
were still popular at that time, but their popularity peaked that year.

The Aftermath 1 $$

Still hoping to save his company, Greenberg acquired the company that
published Trivial Pursuit in 1986. He was too late to catch the Trivial Pursuit fad. In
1988, Coleco filed for bankruptcy.

Mattel Drops Out of the Race 17

The hardware price spiral really impacted the hardware manufacturers, who
were breaking even before that on the hardware system. As things started
to spiral down, they spiraled down very, very quickly. . . . The hardware
came down $50 or $60 or $70 in an 18-month period. If you’re selling 2
million units or 3 million units and you’re losing $70 a unit, you’re talking
about significant losses.

—Paul Rioux, former senior vice president of operations,

Mattel Electronics

It is impossible to piece together the conflicting stories surrounding the col¬
lapse of Mattel Electronics. According to former Mattel Electronics vice
president Paul Rioux and other former employees, 1983 was a banner year for
the Intellivision.*That October, however, Time reported that Mattel had a $201
million deficit and a layoff of over 600 employees. 18 Asked about rumors that
they planned to close the electronics division in 1984, Mattel executives told
Fortune that they would not. 19

By the end of the year, Mattel canceled all new hardware projects. The
following March, Mattel closed the division down and sold it to Terrence
Valeski, Mattel Electronics senior vice president of marketing and sales, for
$20 million. Valeski believed that the 3 million people who owned Intellivisions
still constituted a viable market. He and his partners renamed their company
Intellivision Inc. and later changed it again to INTV, but after 1983, Intellivision
was never a major force in the video game industry again.

* According to Leonard Herman (Phoenix: The Fall & Rise of Video Games ), video game sales
were actually up in 1983. He reports that Atari, Mattel, Coleco, and other competitors sold
a combined 7 million consoles and 75 million game cartridges in 1983, 15 million more
cartridges than they sold in 1982. Herman also claims that only 27 percent of those games
were purchased from clearance bins.

256 The Aftermath

“Freedom Day”

Yeah, Bushnell is quite a showman. He had this huge party to which he brought
safari animals from a game park. There were animals all over. The food was
great, but the place stunk of elephant shit.

—Eddie Adlum, publisher, RePlay Magazine

With the end of his noncompete agreement in sight, Bushnell dropped too
many hints about his planned reentry into video games, and Warner Com¬
munications filed a lawsuit against him for breach of contract. Warner
executives didn’t mind his involvement with the video game industry through
Pizza Time Theaters because it was an arcade and a big customer, but Sente
Technologies was a direct competitor.

Bushnell held a party to celebrate the end of his noncompete agreement
on September 30, 1984. At 12:00 midnight, the moment that the agreement
expired, he officially announced his involvement with Sente Technologies.
(He even referred to this event as his “Freedom Day party.”) He might also
have unveiled his new line of games at that time, but the suit knocked him off
schedule. His next “magic” hour, he announced in several trade papers, would
be on December 9, 1984.

Nolan sort of came back into the games business with great hoopla. There
was a huge warehouse over in Fremont that was rented, and we had jungle
animals from the local wild animal theme park that were brought in. The
whole warehouse was dressed with palm trees and volcanoes and rivers and
tons of dirt brought in and these animals and their trainers were walking
around. And this was all part of, sort of the showbiz presentation of the whole
Sente system.

—Roger Hector

Bushnell held a larger party to mark the unveiling of the Sente line. He
rented game animals from Marine World’s Africa U.S.A. and had them walk
around the floor to create atmosphere. At 10:00 a.m., the guests gathered
around a stage.

The Aftermath 257

There was a large box on stage with an alarm clock on it. When the clock
struck 10:08, Bushnell burst out of the box to celebrate his freedom. He then
introduced his customers to his new Sente concept—arcade machines that
played games stored on cartridges.

Bushnell came along with an idea that was in his head right practically from
the early 1970s, and that was to make a universal cabinet and just change the
software with a cartridge.

He wasn’t the first to come up with such a "system”; that was Nintendo.
Nintendo had some wonderful games like Hogan’s Alley and so on, where
you just changed the cartridge. Made a lot of money.

Nolan came out with the Sente system. As he said, instead of two grunts
on a truck moving video games around, one girl in a Pinto with an attache
case could change the game. What was wrong with Sente system was that
while everything made sense, the games weren’t any fun to play.

—Eddie Adlum

Bushnell needed money to build his games, so he tried a new tactic—he strong-
armed the distributors who came to his show. Instead of simply showing his games
and asking for orders, he told the distributors that no companies could buy into
his system unless they ordered hardware ahead of time. Because he was Nolan
Bushnell, the father of video games, founder of Atari, and genius behind Chuck E.
Cheese, several companies gave in to Bushnell’s strong-arm tactics.

And so there was this big hoopla presentation and Nolan stood up at the
right moment and pitched the deal. And the industry, the buyers, the dis¬
tributors out there were just lathered up. And they wrote checks on the spot
for all of this stuff. We had a tremendously successful launch.

—Roger Hector

Unfortunately, Sente Technologies was doomed to fail before it ever got
started. Bushnell purchased it through Pizza Time Theaters before the finan¬
cial problems became apparent, so Sente was a subsidiary company. When
Pizza Time Theaters declared bankruptcy in March, 1984, Sente was tainted.

258 The Aftermath

Bally purchased Sente Technologies from Pizza Time Theaters, but Sente’s
hardware was expensive and all but one of its games got bad reviews. Shortly
after purchasing Sente, the president of Bally shut it down.

I thought to myself, "Yeah, boy, if you are going to be able to get computers from retail
stores, this is going to become a mass market. Let’s see now, I want to start a company to
make entertainment software. When can I do that?”

That afternoon I did some analysis and I decided that by 1982 the technology would have
made enough progress that I could start an entertainment software company. By that time
there would be enough of these devices in homes to support a software company.

—Trip Hawkins, founder, Electronic Arts

I wound up writing a New Yorker profile on Nolan. We sort of remained friendly, then lo
and behold, in November of 1984, Nolan called me up and said, "Hey, I’m starting a toy
company and I’d like you to come be vice president of marketing.”

I had covered the toy business a bit as a reporter and I said "No way. I don’t know
anything about marketing.”

He said, "Sure, nobody does, just come on out and do it.”

—Tom Zito, former vice president of marketing, Axlon Inc.

260 Album Covers

The success of the Commodore 64 was previously unheard of among home
computer manufacturers, In 1983, Commodore surpassed Apple in overall
sales and became the first computer company to report a $1-billion sales year. 1
At the January 1984 Consumer Electronics Show, Commodore posted an enor¬
mous back-lit sign boasting sales of more than two million VlC-20s and one
million Commodore 64s.

Unlike Atari and Coleco, companies that barely broke even on their hard¬
ware and recouped their investment by selling software, Commodore sold
hardware profitably and did nothing to discourage outside software develop¬
ment. As Tramiel saw' it, every time a developer created a good program, he
created a new reason for people to buy a Commodore computer.

But the key factor was our manufacturing cost, which in the end deter¬
mined whether we w'ould make money or not.

The cost of making a VIC was estimated by the press at under $60,
while the Commodore 64 was thought to be slightly more expensive.
One reporter estimated that Commodore could sell the Commodore
64—introduced at $595—for as low as $99 and still make a profit. 2

The Commodore 64 had a slot for game cartridges, and the manufacturer
also sold a separate floppy disk drive. Since floppy disks cost less to make and
held more information than cartridges, both entertainment and serious soft¬
ware makers preferred publishing their products on disks, even though the
overall install base of users with disk drives was smaller.

Commodore’s success attracted a new breed of game companies.

The biggest and most successful game company that emerged during the
Commodore 64’s reign was Electronic Arts, a company with a central tenet
that ran counter to the entire fabric of the computer and video game indus¬
tries—promoting game designers.

Electronic Arts was founded by Trip Hawkins, a visionary man who could
generally be described as half salesman and half technophile. In many ways,
Hawkins was the antithesis of the computer industry executives who preceded

Album Covers 261

him. Other executives had engineering and business backgrounds; Hawkins
was a marketer—Harvard educated and outwardly cultured. He was the kind
of man who fits in better with Wall Street analysts than engineers. It wasn’t
just education that set him apart, it was his handsome facial features, his taste
in suits, and his polished public demeanor. In 1995, People magazine included
Hawkins in its annual list of the fifty most attractive people.

Hawkins’s sense of style, learned or natural, had an air of sophistication.
Other industry executives threw huge parties for the press and buyers at trade
shows; Hawkins held small dinners at trendy restaurants.

Hawkins first got the idea to enter the computer industry in 1975, during
his time at Harvard. While at school, Hawkins struck up a friendship with a
home computer enthusiast. One day the friend told him about a home com¬
puter he had seen for sale. Whereas the friend was excited by the technology
that home computers represented, Hawkins was intrigued with computers
becoming a consumer item.

I thought about how many of these computers there were [in people’s homes],
and what they cost, and market penetration rates, and how people would
purchase them, and how big an audience you might need to support if you
opened a software company, and how big of a fraction of them [computer
owners] would be interested in the kind of things that I wanted to do.

I don’t remember a single number from the analysis, but I remember de¬
ciding that 1982 was the year it could all be done. I never forgot that, and
from then on, I was always thinking in the back of my mind, 1982,1982,1982.

—Trip Hawkins

After graduating from Harvard, Hawkins enrolled at Stanford, where he
earned an M.B.A. Both opportunistic and persuasive, Hawkins used his status
at Stanford to establish himself around Silicon Valley. As part of his graduate
studies, he researched projects on the future of personal computing and used
these projects as excuses to introduce himself to top executives.

I did a study on personal computing. I used it as a calling card, so I had an
excuse to call up every company in the business. I got to know all the pio¬
neers in the business at that time, guys like Chuck Peddle, the guy who

262 Album Covers

designed the 6502 microprocessor and ... the Commodore Pet. You know,
guys like Steve Jobs.

Apple actually called me to ask me about the study, and I said, "Well I’m
looking for a job. Why don’t I come in and we can talk about the study?”

That’s how I got in for my job interview at Apple. Of course, they thought
that they were basically acquiring an instant market-research department.

—Trip Hawkins

Hawkins, Apple Computer’s 68th employee, was involved in many of the
company’s biggest projects. He helped to formulate the strategy Apple used
to establish the Apple II as a business machine. Hawkins was with Steve Jobs
when Jobs made the fateful visit to Xerox and saw a prototypical workstation
with pop-up windows for menus and a mouse controller.

Once at Apple, Hawkins worked his way into the company’s inner circle.
When the company went public, the 26-year-old Hawkins became a multi¬
millionaire. He also made valuable contacts, including Don Valentine, the
venture capitalist who helped Nolan Bushnell expand Atari and Jobs and
Wozniak start Apple. When 1982 rolled around and Hawkins prepared to start
his company, he went to Valentine for funding.

I heard about Don Valentine and thought, this is the guy who I want on my
board, so I went to see him. I said, "Well, you know, here’s what I’m doing at
Apple, and I’m thinking about leaving to start this company and do this
other stuff. ”

I was nervous that he would be critical of me because I was leaving a big
company like Apple, you know, "Who the hell am I to think I’m ready to start
a company?” And "Gee, you’re leaving Apple in the middle of your project?

Aren’t you a follow-through kind of guy?”

Instead, he said, "Quit dragging your feet. Get the hell out of Apple. When
you’re ready, I’ll provide an office for you.”

—Trip Hawkins

We knew Trip Hawkins a little bit at Apple as one of the marketing guys. He
went to Harvard. He looked like he went to Harvard.

Album Covers 263

We invited him to come live in our office while he was organizing his com¬
pany, writing his [business] plan, and hiring people. The first territorial people
at Electronic Arts all began working in our office, and the company was started
in our office.

Sequoia (Valentine’s venture capital firm) was not an especially large com¬
pany at that time. At one point they had twice as many people as we did.

—Don Valentine

With Valentine’s backing, Hawkins began to assemble his company. He hand¬
picked people he thought were dynamic and smart, invited them to meetings
at his home, and persuaded them to join his team. Hawkins also actively pros¬
elytized game designers.

The best way to find game developers at the time was to attend computer
trade shows. Hawkins walked the floors of these shows, looking for the de¬
signers he wanted and then talking to them about his plans. He found Bill
Budge, David Maynard, and Dan Bunten, the programmers who became the
heart of his design team.

Hawkins and crew decided to name their new company “Electronic Arts”
during one of the evening meetings at Hawkins’s house. They chose this name
to emphasize the artists and artistry of the games he would publish.

In the meantime, Hawkins continued meeting with Budge and other de¬
signers he hoped to attract. He told them that game designers should be treated
like stars. In an industry that was still rife with the stories of Atari’s abusive
attitude toward designers, Hawkins’s message sounded very attractive.

Promoting designers was only one of several innovations Hawkins had
planned. In the early 1980s, computer game makers still sold their games in
plastic bags with labels. Hawkins found the situation laughable and proceeded
to apply his marketing wizardry to revolutionize the way computer games
were packaged.

Hawkins referred to his packaging as “album covers.” Album covers were
custom-made boxes with professional art and the designers’ names placed
prominently on the label. In Hawkins’s mind, having the best games in the
store meant nothing if the packaging didn’t attract buyers. With better pack¬
aging and a stable of established designers, he would create a following to make
Electronic Arts the industry leader.

l6lf Album Covers

Of all of Hawkins’s progressive proposals, the one involving the most risk
was his decision to challenge the distribution system. At the time, companies
that distributed software to retailers kept most of the revenues from software
sales. Hawkins didn’t like the distributors’ stranglehold on the market and
wanted to pay them a smaller commission. When he proposed the idea at a
board meeting, Don Valentine objected.

Everyone was selling [their games] to distributors at a 55 percent discount. I
said, "We’re going to go to some of these distributors, and we’re going to
offer them 52 percent.”

Valentine said, "Who the hell are you people to think that you can just
rewrite any of the rules of the industry? What makes you think you can get
away with that?”

I said, "We really don’t have any choice. Either we’re going to pull this off
or we’re not going make it.”

Pushing a lower discount worked. Don pounded his fist on the table at
our next board meeting and said, "You people have to continue to chal¬
lenge convention.”

—Trip Hawkins

Electronic Arts shipped its first products on May 21, 1983. Of the six prod¬
ucts launched, three quickly became bestsellers.

In terms of commercial success, Hard Hat Mack was a bestseller, Archon was
a classic bestseller, and Pinball Construction Set was a classic bestseller. It
was a really remarkable debut set of products.

We just started cranking out products. The next month we released more,
and within six months we had 25 or 30 different products. By that time we
were supporting Apple II, Commodore 64, and Atari 800.

—Trip Hawkins

By 1984, the video game industry had collapsed and Commodore 64 sales pla-
teaued. Toward the middle of the year, Commodore started reporting Atari-sized

Album Covers 265

losses, and Apple, for all of its market strength, was not proliferating the way Com¬
modore or Atari had. Shortly after Electronic Arts made its splashy debut, the
computer-game industry looked as soft as the video game industry.

It was a really brutal period for the industry. I wouldn’t de-emphasize that.

You’d put out a product on the Apple II and be pleased if you sold 15,000 units.

When I started EA, I made a list of all the companies I had ever heard of
that made video games or floppy disk games, and there were something like
130 or 131 other companies. Today I would say that maybe 6 of those guys are
still in the business.

—Trip Hawkins

During this period, Hawkins abandoned his strategy of promoting game
designers. He still treated them with respect and gave them credit for the work
they did, but the emphasis at Electronic Arts clearly shifted from populariz¬
ing designers to promoting games.

In 1984, that new emphasis led Electronic Arts to place new names on its
labels, the names of famous sports figures. Hawkins had a friend who had a
friend who knew the agent handling the Philadelphia ’76ers basketball star
Julius Irving—better known as “Dr. J.” Using this connection, Hawkins asked
Irving’s agent if his client would be willing to let Electronic Arts use his name
and likeness in a computer basketball game.

It was the first time a computer game company had licensed an athlete’s
name. Though earlier games had been made based on movies such as Tron,
Krtill, and Star Wars, and Mattel had acquired licenses from the NFL and the
NBA, no one had ever approached an individual sports star. Electronic Arts
paid Irving a $25,000 fee for his name and image.

Of course, you’d be lucky to do anything today for even ten times that amount.

Anyway, he agreed to do it, making it possible for us to have his agent
ask Larry Bird’s agent, why don’t you do it and why don’t you do it on the
same terms that we’re doing it?

—Trip Hawkins

266 Album Covers

The game was called Dr. f and Larry Bird Go One-on-One. Though the game had
cutting-edge graphics for the time, the limited processing power of the Com¬
modore 64 and Apple II could only support characters that looked like bad
doodles and moved like cardboard cutouts. The people designing the game,
however, got several pointers from Irving (Bird was less involved and less in¬
terested), which helped them add some finer points to the game.

Dr. J and Larry Bird Go One-on-One was a huge bestseller for its time, leading
Electronic Arts to begin work on a game based on another sports legend—
John Madden. Though no one knew it at the time, John Madden Football would
become the most enduring sports series in computer and video game history.
It would also play a decisive role in determining the leaders of two future
generations of video game consoles.

The 1965 collapse of Atlantic Acceptance left Commodore with substantial fi¬
nancial problems. Short on capital and tainted by scandal, Tramiel turned to
Canadian investor Irving Gould for help. Gould purchased a controlling share
of Commodore stock for $500,000. ;i Though he later sold 8 percent of his stock
back to Tramiel, Gould remained the power behind the scene at Commodore.

According to a few reports, Gould scrutinized Tramiel’s every move.
Tramiel could not borrow money without Gould’s signature, and Gould
kept Commodore on a strict leash. The relationship was rumored to be tur¬
bulent. Fortune magazine once reported that the volatile Tramiel often
threatened to quit the company.' 4

At a Commodore board meeting on January 10, 1984, Tramiel made the
threat one final time.

The board had met to discuss the company’s future. Tramiel went to the
meeting planning to unveil his dream of bringing his sons together to run
Commodore. He wanted to name his oldest son, Sam, as president. He wanted
his next oldest, Gary, to run the company’s finances, and his youngest son,
Leonard, who had just earned his Ph.D. from Columbia, to work in
Commodore’s software division. 5

Gould had other ideas. He wanted Marshall Smith, a 54-year-old finance
specialist from the steel industry, to take over the company. According to one
report, Tramiel threatened to quit the company, and Gould said, “Fine.”

Album Covets 267

On Friday, January 13, 1984, Jack Tramiel officially resigned as the CEO of
Commodore International. On February 21, Marshall Smith moved into
Tramiel’s office.

Changing Times at Atari

When James Morgan took over Atari in September, 1983, he found a company
in complete disarray. Atari was now composed of dozens of departments that
seldom communicated with one another, housed in nearly fifty buildings
spread throughout Silicon Valley. The departments’ animosity and political
infighting were crippling the company. Alan Kay, the head of Atari’s research
center, described the venomous brinkmanship to a Time reporter in terms that
made the company’s executives sound like spoiled children playing on a small
boat. “For a while the company was playing 'Ha, ha, your end of the boat is
sinking.’” 6 In the article, the reporter concluded with the statement that “it
turned out that everybody was on the same boat.”

Morgan’s first move was to cut the domestic payroll down from 9,800 employ¬
ees to 3,500. Next he turned to foreign labor for manufacturing, sending 3,000 jobs
to Hong Kong and Taiwan. He also sold ofl Atari’s excess buildings, condensing
the company’s sprawling operations down from forty-nine buildings to four.

A few months into his new job, however, Morgan discovered that he could
not turn to Warner Communications for help. When he submitted his 1984
budget in March, Warner executives vetoed it. According to Ross, Atari would
have to find its own funding.

Morgan revised his budget, trimming his operating expenses from $600 mil¬
lion to a mere $150 million. He cut an additional 550 jobs, and dumped 20 million
old cartridges into the marketplace at $2 each to clear out old inventory.

Realizing that simply cutting expenses would not save Atari, Morgan
pushed for new products. On May 21, Atari announced the development of a
powerful new game console, the 7800 ProSystem, and a deal to create games
with LucasFilm, the company that made the Star WarsdxxS IndianaJones movies.

The 7800 just sort of showed up at our door one morning. It was developed by an
outside firm, and I think it was originally called the 3600 or something like that.

—jerry jessop, former engineer, Atari

268 Album Covers

The 7800 had actually been developed by General Computer, the same
Boston company that had designed Ms. Pac-Man and made nearly half of the
cartridges for the 5200.

In the summer of 1984, Atari announced plans to release a new game con¬
troller called the Mindlink. Mindlink was a bizarre product—a game controller
that supposedly directed game play by reading electrical impulses in players’
heads. It would come packaged with a Breakout -style title, Bionic Breakthrough.

Companies frequently incur losses while downsizing and cutting inven¬
tory, but Warner Communications was completely unprepared for the $425
million second-quarter losses Atari reported in 1984. When Morgan returned
to New York, claiming he needed more money to run the company, Ross
decided to rid himself of Atari once and for all.

In June, rumors started floating around Atari that Warner planned to sell
or close the company. Morgan held a meeting in which he promised his em¬
ployees that Ross still had confidence in Atari and that he had no plans to sell
out. Morgan was wrong.

In early July 1984, Warner Communications announced an agreement to sell
Atari Corporation to a new owner—Jack Tramiel.

Tramiel did not acquire all of Atari. Warner retained the coin-operated
games division and renamed it Atari GamesA

The final agreement was extremely convoluted. On the surface, Tramiel
paid $240 million dollars for the home computer division of the failing video
game giant. This, however, was only part of the story.

Tramiel and his company, Tramiel Technologies Limited, paid Warner Com¬
munications $240 million in promissory notes, based on Atari’s future performance.
In effect, Warner had loaned him the money to buy the company.

The deal also involved exchanging stocks. Tramiel Technologies, JackTramiel’s
company, received warrants for Warner stock and a promise from Warner to
cover certain debts and expenses. (That promise proved to be significant. Tramiel
contacted Warner on at least one occasion and received a multimillion dollar

* Warner retained Atari Games (the coin-op division), which later sold technological assets
to Mitsubishi and BSR.

Album Covers 269

cash infusion.) In exchange for Atari and warrants for stock, Warner received
warrants for 14.3 million shares of Tramiel Technologies’ stock.

Although Warner certainly offered Tramiel good terms for purchasing Atari,
the interesting question was why did Tramiel want the company? Atari had
good facilities and tremendous name recognition, but within the industry,
the company’s name carried negative connotations.

Several analysts believe that Tramiel wanted to use Atari as a vehicle for wreak¬
ing revenge on Commodore. While later developments showed that he had no
qualms about using Atari to jab at his former company, some ofTramiel’s friends
believed that he reentered the computer business for the sake of his sons.

In his book The Home Computer Wars, former Commodore employee and
Tramiel confidant Michael Tomczyk suggests that Tramiel purchased Atari to
bring his sons and his Commodore family together. Bernie Stolar, another
friend of the Tramiels, believed he made the move to ensure his family’s fi¬
nancial security.

Imperial Storm Troopers

Everybody was expecting something draconian to happen. When they first
walked in the building, someone got on the PA system and did the line from
The Empire Strikes Back. I think it went, "Attention, Imperial storm troops
have entered the base. ”

—Kelly Turner, former employee, Atari

In the beginning, Atari Corporation and Atari Games were headquartered
in adjoining buildings, and the people working in the newly independent coin¬
op company silently watched as their former associates were demolished.

The Tramiels cared little about soothing nervous employees’ feelings. Jack
and Sam Tramiel set up offices, interviewed workers, and decided how to re¬
align the company. The people who witnessed their takeover described them
as tireless, energetic, and merciless. Within a short time, the number of em¬
ployees on Atari’s worldwide payroll was reduced to 1,500.

Everywhere he looked, Tramiel saw excesses. He had inherited a 300-per-
son marketing division. In contrast, during its heyday Commodore had 25

2 J 0 Album Covers

employees in marketing. Tramiel wanted to reduce the number of secretar¬
ies, engineers, and administrators.

I sat there and watched Atari go from 5,000 people in 25 buildings back
down to like 200 in coin-op, 200 in consumer in three or four buildings. It
was the Tramiel fire sale of Atari.

It was an interesting split. He [Tramiel] had control of his side for prob¬
ably a day or two before he realized that we were two different companies.

Our buildings had connecting doors and they decided to seal them up.

It became a very "us and them’’ kind of atmosphere, which was too bad.

I hated watching the consumer people have to go through interviews be¬
cause it was a bloodbath.

I was happy to be at coin op.

—Kelly Turner

In typical fashion, Tramiel did not care whom he offended. According to
one story, he once stopped a demonstration of existing Atari products by shov¬
ing them onto the floor. When a programmer Tramiel supposedly wanted to
keep mentioned that his wife had a job, Tramiel told him that his wife should
stay home. Offended by Tramiel’s chauvinistic attitude, the programmer be¬
gan looking for another job later that evening.

We made several successful games for the 2600 and most of the big games
for the 5200. When the Tramiels came in, we quickly realized that we were
not going to be able to forge a profitable relationship with them, so we started
making programs for the Mac.

—Doug Macrae, cofounder of General Computer,
codesigner of Ms. Pac-Man

The "Tramiel Fire Sale” was not restricted to the wholesale reduction of jobs.
Atari’s new management sent crews to evaluate the company’s assets. Carts
filled with computer and office equipment soon lined the walls. Equipment
deemed unnecessary was either sold off or stolen. According to one ex-employee,
equipment theft reached epic levels.

Album Covers 2J1

It’s funny, I was actually in Greece the day that Atari sort of went "tapi¬
oca" and was sold to the Tramiels, so I missed it. The way I had it described
to me, it sounded like the last days of Vietnam, in which people were push¬
ing helicopters off aircraft carriers so they could get the fighters down,
because the fighters were worth more than helicopters. Well, it sounded like
the same thing at Atari.

I heard stuff was just flying out the doors and out the windows, if it wasn’t
nailed down in the last couple of days there, people were walking out the
door and stuffing it in their cars.

—Steve Race, former vice president, Atari Europe Division

On September 13, Jack Tramiel described his plans for resurrecting Atari at
a closed-door meeting for venture capitalists in a luxurious San Francisco hotel.
During that meeting, Tramiel reportedly told his audience that he planned
to build Atari’s sales from $500 million to somewhere between $1.2 and $1.5
billion within one year. 7

As the meeting progressed, Tramiel was reportedly asked if he seriously
believed that he could keep Atari afloat even through Christmas. He responded
that he could and that he planned to release a new line of high-quality, low-
cost home computers the following year. Amazingly, Tramiel seemed to
believe that he could turn Atari around. Even more amazingly, he convinced
several venture capitalists attending the meeting that he could as well.

I grew up in the New York area. I think I was six or seven when I started going
to the movies every Saturday. In high school I was just fanatically interested
in movies. In fact, when I got out of high school I decided that I wanted to go
to film school and enrolled in NYU. Of my fellow students, the guy who’s
become the best known, is Brian DePalma. Marty Scorsese was my cinema¬
tography professor.

—Tom Zito, former vice president of Marketing, Axlon Inc.

The Washington Post gave Tom Zito one of the most enviable jobs in America, just
a few days after he graduated third in his class from Georgetown University.

2J2 Album Covers

The first four years I was at the Washington Post, I was the rock critic. I went
to 250 rock and roll shows a year and got every record ever made for free. It
was like every kid’s dream! It was great.

After about four years, I went to my editor and said, "You know, I'm out
of adjectives. I can’t do this anymore.” I’m partly deaf now as a result of all
that rock and roll, but I still love music.

I did that for four years, then there was other stuff that I wanted to do besides
write about rock and roll, so I became a general assignment reporter. I covered
the first couple of space shuttle shots. I covered Gary Gilmore’s execution.

—Tom Zito

While working at the Post, Zito began writing articles for the New Yorker and
Rolling Stone on the side. As video games came into vogue, Zito often found
himself writing about the industry.

In 1984, the New Yorker assigned Zito to profile Nolan Bushnell and the video
game phenomenon. Bushnell was focusing most of his attention on Sente
Technologies at the time. Always gracious to reporters, he showed Zito around,
and they struck up a friendship. A few months later, Bushnell called Zito and
asked him to move to California and work at one of Bushnell’s pet compa¬
nies—Axlon Inc.

Axlon was a manufacturer of high-tech toys. The company’s products in¬
cluded a line of hand puppets called Party Animals that had sensors in their
mouths. When you opened their mouths, the sensors activated a little sound
chip that produced howls or barks, depending on the animal.

Zito’s first project was A. G. Bear, a mechanical teddy bear whose sound
sensor enabled it to mumble in response to noise. The idea was that if chil¬
dren talked to A. G. Bear, it mumbled back to them. Unfortunately, Axlon’s
intelligent teddy bear was no match for Teddy Ruxpin, a more articulate talk¬
ing bear released by Worlds of Wonder that same year.

Interestingly enough, Teddy Ruxpin killed us. When you stripped everything
away from Teddy Ruxpin, it was basically a television set for little kids. Kids
would put a tape in Teddy and put it on its chair and sit down in front of the
chair to watch Teddy tell a story.

Album Covers 273

We had all kinds of child psychologists telling us how good A. C. Bear was
and what a wonderful product it was for kids; but if you put kids in a room
with Teddy Ruxpin and A. C. Bear, they’d run in and grab Teddy Ruxpin. I
learned this in horror in focus groups. . ..

Fortunately, our first year at Christmas, Teddy was very much in short
supply. I think a lot of people bought A. C. Bear because they couldn’t get
Teddy Ruxpin.

—Tom Zito

Zito, a bachelor whose family and friends lived on the East Coast, developed
a close relationship with the Bushnell family. He visited their home often and
thought of their children as nieces and nephews. It was a relationship he valued.

In 1985, Zito’s fascination with movies and video games merged into the
idea of creating interactive games using video footage instead of animated
characters. He believed that controlling real people instead of cartoons would
give games impact.

Zito asked Bushnell for permission to explore “interactive television.”
Bushnell liked the idea and told him to assemble a small team. Zito’s team
included Steven Russell, the man who made Spacewars while studying at MIT;
Rob Fulop, the Atari programmer who designed the VCS versions of Missile
Command dead Night ZVmv/David Crane, the charter member of Activision who
created Pitfall; and other industry pioneers.

As they explored ways of interlacing video images and computer graphics,
the team discovered that the ColecoVision’s graphics chip had been designed to
allow it to place video game images over a clear background. They learned later
that Coleco engineer Eric Bromley had hoped to do games with video images in
the background, but the company abandoned the idea because of costs.

Zito and his team hoped to take advantage of Bromley’s design. They wanted
to stream video images transmitted through a cable signal into a ColecoVision,
then add interactive images. The team was able to build a prototype for testing its
ideas with a limited budget but needed more money to take the idea any further.

We basically finished the design of the ColecoVision machine and added
syncable video. When I put together a budget, it looked like it would cost

274 Album Covers

about seven million dollars to get a machine, along with a couple pieces of
software, ready so that we could introduce this thing. Initially, it was a game
machine, but the vision all along was that it would basically be a cable box,
and you’d be able to get video games or any kind of interactive program¬
ming over cable.

Nolan said to me, "Well, if you want to do this, you’re going to need to
raise the seven million bucks, ’cause we don’t have it.’’

—Tom Zito

If Zito was going to complete his project, he needed to take on a partner
who could fund it. That partner turned out to be a toy company—Hasbro.
Hasbro agreed to spend the $7 million to fund the project in exchange for the
video game rights to the technology. Zito named the venture Nemo.

Within six months, however, the partnership was strained. Hasbro wanted
the Nemo project to move at a faster pace, but delays in engineering pre¬
vented it. After some discussion, Hasbro told Zito that he could either continue
the project on his own or Hasbro would take it over, but the company would
no longer finance Nemo while under the Axlon umbrella. Forced to choose
between Bushnell and Nemo, Zito went with his project, costing him an im¬
portant friendship.

Upon leaving Axlon, Zito formed a company of his own called Isix. Be¬
cause of the amount of space required to store digitized video footage, Isix’s
games could not be stored on computer diskettes or in a game cartridge. Isix’s
engineers developed two solutions for the problem—broadcasting the foot¬
age as a cable signal or storing it on video cassettes. Either way, the video footage
had to be looped from an outside source and through a console that added
the interactive programming before it could be played.

By the middle of 1986, Zito’s team had produced three short trial games.
They made a four-minute interactive mystery called Scene of the Crime, a base¬
ball game called Bottom of the Ninth Inning, and an interactive music video using
the song “You Might Think I’m Crazy” by the Cars.

Zito’s next step was to make an interactive movie. He hired a director and
had members of his team write the script. His original plan was to do an inter¬
active movie based on the Nightmare on Elm Street movies—a series of popular

Album Covers 275

horror films featuring a maniac named Freddie who shredded people to death
in their dreams. Negotiations with the studio fell apart, however, so Zito de¬
cided to create a script with original characters. He hired Terry McDonell, a
future editor of Esquire and Men’s Journal, to write the script.

The final version, titled Night Trap, was about fledgling vampires attack¬
ing a group of teenage girls during a slumber party. As apprentice vampires,
the villains did not have fangs; in fact, they wore black stockings over their
heads. They simply sneaked around the girls’ house, trying to trap them,
then sucking their blood with a device that used a power drill. The game
was more silly than violent.

Night Trap was not a typical video game. The point of playing was to pro¬
tect the girls by catching the vampires with booby traps. One of the girls
was the late Dana Plato, the actress who played the older sister on the NBC
sitcom Different Strokes.

Players would scan the rooms of the house, looking for vampires and try¬
ing to spring traps at the right moment to catch them. If players’ timing was
right, the game would show a video clip of a vampire being trapped. If they
missed, the game would show a clip of the vampire leaving the room and
possibly even catching a victim.

In 1987, Zito made a second full-sized game called Sewer Shark. In this game,
players guided a futuristic fighter craft through tunnels. The game showed
clips of the fighter streaking toward junctions, at which point players had to
direct it toward openings. If they guided it in the right direction, the game
showed a video clip of the fighter going through the opening. If the player
made the wrong choice, the game showed video clips of spectacular colli¬
sions. Zito hired a special-effects wizard who had worked on the movie 2001
to help produce the game.

Hasbro stopped funding the Nemo project shortly after the filming of Sewer
Shark. Zito toyed with the idea of marketing the games as arcade laser-disc
games, but the laser disc fad had ended. With no funding and nowhere to sell
his ideas, Zito packed Night Trap and Sewer Shark in a warehouse. Several years
passed before video game technology caught up with Tom Zito’s dream.

In the meantime, a new force was emerging in the electronic entertain¬
ment industry.

Album Covets

Prior to working on Nemo, i went back to New York for Christmas [in 1985],
and I needed film so I went to a camera shop. All these boys were crammed
around this counter, playing with a new toy. I went to see what they were
playing, and they had this new video game system by Nintendo. It looked
better than anything out before it, and I thought, this could be big.

,M e Tried to Keep
from Laughing

All the headlines said, "Video games are dead,” and here was this little upstart company
that no one had ever heard of called Nintendo that said they were going to bring video
games back again. Everybody seemed to think that it was a joke. "Oh yeah, they say they
can bring video games back again.”

—Herb Weisbaum, consumer affairs correspondent, CBS News

Here it is 1985, Christmas of 1985, and Nintendo has just introduced the NES in the New York
market, as well as in FAO Schwartz stores nationally. It’s a home run... a hit! It’s a sell-out.

So I’m saying, "Who’s gonna be interested in this?” And I said, "Well, I’ll bet the toy
companies are gonna be very interested in something like this because .. . Nintendo is
gonna clean your clock next year. I mean, Nintendo is going to launch nationally and
they’re gonna be represented by Worlds of Wonder.

•Tom Zito, founder, Digital Pictures

278 We Tried to Keep from laughing

The Rising Sun

The American video game market may have crashed in 1983, but the interna¬
tional market continued almost unimpeded. Atari marched on in Europe and
Japan. Even the Canadian market remained fairly active throughout most of
1984. Atari, Mattel, even Vectrex sales continued in foreign markets.

Nintendo, the arcade giant that created the games Donkey Kong and Popeye,
introduced a new game console to the Japanese market in May 1983* Chris¬
tened the Famicom (for Family Computer), the new console was a testament
to innovation and economic engineering.

Nintendo built the Famicom around the 6502 processing chip, a close cousin
of the 6507 that Atari used in the original Video Computer System (VCS).
Technology had evolved, however, and Nintendo’s engineers were able to reap
more power from the chip. Along with added memory, the Famicom had a
number of components (including a second processor for generating graph¬
ics) that had been either unavailable or too expensive in 1976, when Miner
and Alcorn designed the VCS. This upgraded architecture allowed the
Famicom to produce more colors and more detailed graphics than the VCS
or any system before it.

It was amazing because it was basically a re-warmed VCS, even going so far
as having the same processor in the box as the VCS. [The Famicom had] a
better graphics display chip, but the basic processor was the same. And the
reason that they could have a better look was that addition of slightly more
RAM in the thing so you could address more pixels; that’s all.

—Tom Zito

Of the Famicom’s many innovations, the most important was its control¬
ler. The VCS was initially designed to play sophisticated versions of Pong and
Tank and came with both paddles and joysticks, but most of its games used a
joystick. That turned out to be a weakness. VCS joysticks were versatile for
their time but were uncomfortable to hold. To use them, most players had to

* For a full account of the design and launch of Famicon, read Game Over\y David Sheff. Mr.
Sheff’s book is a 400-page account of the history of Nintendo from 1889 to 1994 and offers a
thorough account of the Nintendo story.

We Ttied to Keep from Laughing 2J9

grip the square base with one hand and move the stick with the other. People
often complained that their hands cramped or their fingers locked around
the base after long stretches of game playing. Also, the stick, not designed to
withstand the kind of stress players often placed on it, often broke.

Mattel had added a measure of ergonomics, durability, and sophistication to
game controllers with its Intellivision game pad, which featured a flat disk that
players pressed with their thumbs. Though it took players a while to get used to
the disk, most felt that the Intellivision controller added precision to gaming.

For the Famicom, Nintendo designed a new kind of controller that was
derived from the +-shaped direction pad that its lead engineer, Gumpei Yokoi,
developed in the late 1970s lor the Game & Watch LCD games. Somewhat
similar in concept to the disk on the Intellivision controller, the Famicom
controller allowed players to maneuver characters by pressing on the + pad
with their left thumb.

The design of the Famicom’s controller was both elegant and functional.
The joystick, once the symbol of video gaming, was about to be replaced by a
newer and more universally applicable device. Most people found the Famicom
controller easier to use and more comfortable to hold*

The Famicom controller was easier to use than the Intellivision controller.
Nintendo’s + pad was more intuitive than Mattel’s disk. Intellivision’s con¬
troller also included a twelve-button membrane keypad that was cumbersome
to use. The Famicom controller had a simple two-button design.

The Japanese launch of the Famicom was not without problems. A bad
chip set in the original design caused the system to crash during certain gam¬
ing conditions. Hiroshi Yamauchi, president of Nintendo, decided to recall
the entire first shipment of Famicoms and replace the chips. Though it cost
Nintendo a small fortune and alerted retailers to problems with the new con¬
sole, Yamauchi decided that protecting the Nintendo name was more
important than preserving the initial momentum of his sales.

After that initial setback, the Famicom became a spectacular success.
Nintendo sold more than 500,000 Famicoms within two months of introduc-

*Two medical conditions were later attributed to prolonged use of the Nintendo control¬
ler. Thousands of people developed calluses on the tips of their thumbs. The second and
more serious condition was sore wrists, a condition later dubbed “Nintendonitus.”

280 We Tried to Keep from Lankin j

ing the system into stores. Encouraged by his success with Japanese consum¬
ers, Yamauchi set his sights on exporting his game console to the United States.
The only problem was that no one in America seemed particularly interested
in video games any longer. As far as retailers and software makers were con¬
cerned, the U.S. video game industry was dead.

It seemed like all the print media wanted to keep writing about was the death
of video games. I mean, they just loved to write that story. "Video game
sales are dead, video games are gone, video games are history.”

Then I’d go to CES [the Consumer Electronics Show] and see all this stuff,
and think, "Where are these people coming from? It isn’t dead.” It was
very interesting.

—Herb Weisbaum

Retailers took a tremendous financial beating because of the way the Atari
business had fallen apart. I mean, with the demise of the old 2600 business,
you wouldn’t even try bringing up the words video game with some of these
buyers, it was like they were going to pull you out to the parking lot and
shoot you if you said the words video game.

—Jim Whims, former vice president, Worlds of Wonder

Left at the Altar

Mr. Yamauchi said, "Why don't you contact the Atari people?"

So I called Ray [Kassar], and the next thing we knew, we were going down
in a corporate jet to Warner.

—Howard Lincoln, chairman, Nintendo of America

One lesson Hiroshi Yamauchi learned from his attempts to break into the U.S.
arcade market was that popularity in Japan did not automatically translate
into success in America. Ron Judy and A1 Stone, the men who represented
Nintendo’s products to arcade distributors, struggled to get people to take their
products seriously. Even Radarscope, one of the top arcade games in Japan, had

We Tried to Keep from Laughing 28f

gone unnoticed in the United States. Had it not been for the runaway success of
Donkey Kong, Nintendo might have never carved a niche in the U.S. market.

Yamauchi had heard the stories that the U.S. video game industry was col¬
lapsing. Atari had already announced its low earnings by this time, and Warner
Communications stock had already dropped. The worst was yet to come, but
Yamauchi certainly knew that the 1982 Christmas season had not lived up to
expectations. Even so, he believed that the Famicom was different, that it was
the best video game console ever made. What he needed, however, was a pow¬
erful network to market the system on a worldwide basis. Even with its strong
presence in the arcade business, the name Nintendo meant very little to re¬
tailers outside of Japan.

With no presence in the retail channel and no way of making inroads, Yamauchi
decided that Nintendo needed a partner to represent the Famicom in America.
He decided that the best partner would be Atari. At Yamauchi’s suggestion,
Nintendo of America vice president Howard Lincoln contacted Atari early in 1983.

Ray Kassar was still running the company when Lincoln called, but his ten¬
ure was coming to an end. The call came four months after Kassar’s
announcement about not reaching sales goals, and Warner stock was still in
decline, due to investor doubts about Atari’s future. Investors also had doubts
about Kassar himself. The allegations of insider trading were public by this time,
and Kassar, Atari’s once lofty CEO, was fighting for his corporate existence.

Lincoln called Kassar to suggest a partnership. He had been authorized to
offer Atari a license to sell the Famicom internationally in every market ex¬
cept Japan. Lincoln’s offer was fairly straightforward. In exchange for allowing
Atari to sell the system under its own label, Nintendo would receive royalties
on every unit sold and have unlimited access to sell software for the system.

The offer placed Atari in a no-lose situation. Licensing the Famicom did
not necessarily equate to making a good faith effort to market it. What Lin¬
coln and Yamauchi did not know was that General Computer, the
Massachusetts game developer that had produced most of the games for the
5200, had begun work on a new game system for Atari—the 7800.

If the new system proved to be more powerful than the Famicom, the li¬
cense would have enabled Atari to smother the Famicom globally. If, on the
other hand, the 7800 did not sell well, a partnership with Nintendo could pro¬
vide Atari with an escape hatch. Kassar asked for a meeting.

282 We Tried to Keep from Lau jhin?

Lincoln and Minoru Arakawa, president of Nintendo of America, flew from
Seattle to Atari headquarters in Sunnyvale, California, to explain the details
of the partnership.

A meeting was set up, and Kassar told Arakawa he would send the Warner
Communications corporate jet, a Gulf Stream, to collect him and
Howard Lincoln. En route to the airport, Arakawa asked Lincoln if he
expected lunch to be served on the plane. Lincoln said there would prob¬
ably be no food on the short hop between Seattle and Sunnyvale.
Arakawa was starved, so the two headed to a restaurant before meeting
the jet at a private airport.

The jet, fitted with leather couches and gold-plated ashtrays, was
empty except for Arakawa, Lincoln, and the crew. Once it was airborne,
the pretty attendant set up dining tables with linen tablecloths and asked
if the two were ready for lunch. Arakawa threw Lincoln a dirty look
when she served pate, fresh poached salmon, and Dom Perignon. 1

Lincoln and Arakawa received royal treatment during their visit at Atari.
Not only did they meet with Manny Gerard and Ray Kassar, but Steve Ross,
president of Warner Communications, stepped into the meeting to shake their
hands. When they finally sat down to discuss the partnership, several of Atari’s
top executives crammed into the conference room to listen. As far as Lincoln
and Arakawa could tell, things were going better than expected.

We got down there and, god, what a cast of thousands: Ray Kassar, Manny
Gerard, Steve Ross, Skip Paul. . . . And we were just getting hammered with
one question after another.

—Howard Lincoln

Everybody said, "Oh, that’s a good idea. We’ll buy it.”

The negotiations started, but the price . . . they didn’t buy it. After we
started negotiations, we created games to show them . . . Defender, Centi¬
pede, those [kinds of] games.

—Minoru Arakawa

We Tried to Keep from Lau^hin? 283

The next step in the negotiation process was for Nintendo to demonstrate
the Famicom. Yamauchi sent several Famicom consoles to Atari’s research
and development labs and invited members of Atari’s executive staff to watch
a demonstration of the system at his corporate headquarters in Kyoto, Japan.
Kassar did not attend that showing but sent a delegation led by Skip Paul,
Atari’s legal counsel.

After the initial demonstration of the Famicom console, negotiations
evolved into a three-day struggle over prices and royalties. Paul claimed that
Kassar and Gerrard were interested in making a deal but wanted to make some
changes in the contract. Lincoln had to make sure that Nintendo’s best inter¬
ests were not compromised. Both Kassar and Yamauchi, the only men with
the authority to approve a final deal, appeared anxious to iron out the details.

On the third day of negotiations, Lincoln warned Paul that Yamauchi was
getting annoyed with all of the haggling and delays. Paul excused himself to
call Kassar. When he came back, he said he had received final approval and
that a contract should be drawn up.

I mean, it was a done deal. We spent a week putting this thing together, this
elaborate agreement in Kyoto. Skip Paul was over there.... we had the whole
thing put together. It was a deal.

—Howard Lincoln

The deal never went through.

The collapse began at the 1983 Summer Consumer Electronics Show in Chi¬
cago. While all appeared to be moving smoothly, Coleco debuted the Adam
Computer. It was playing Donkey Kong, a game Nintendo had licensed to Coleco*
Yamauchi, Arakawa, and Lincoln went to the show expecting to finalize
their marketing arrangement with Atari. Instead, they received an angry
message from Kassar, claiming that Coleco’s use of Donkey Kong on the Adam
breached the licensing agreement Atari had made with Nintendo for the home-
computer rights to the game.

* Nintendo sold the video game console rights to Coleco. Atari purchased the home
computer rights for the game.

284 We Tried to Keep from Lau^hin^

You have to understand that Donkey Kong was the main reason anyone would
be interested in working with Nintendo. Mario Bros, and our other games
were good B-titles, Super Mario Brothers had not come out yet, and the only
game that did better than Donkey Kong was Pac-Man.

If Coleco had Donkey Kong, Atari had no reason to work with us.

—Howard Phillips, early employee, Nintendo of America

And then at the June 1983 CES, Coleco introduced Adam. And they had Don¬
key Kong running on Adam. They only had the home video game rights. And
the next thing we knew, they [Kassar] were screaming and yelling at us and,
oh ... they claimed that they couldn’t go through with the Family Computer
deal until we straightened out the mess with Donkey Kong.

—Howard Lincoln

In an effort to pacify Atari, Lincoln called for a meeting that evening with
Arnold Greenberg, president of Coleco. Perhaps Arakawa and Lincoln remem¬
bered how quickly Greenberg had backed down when threatened by Universal
Studios, or they may simply have been enraged that Coleco had made a new
version of Donkey Kong without clearing it, but they sat back and watched as
Hiroshi Yamauchi put on a show for Greenberg.

Yamauchi entered the room abruptly and, without addressing anyone, stood
at the end of a table. He became, as one of those present put it, “unglued.”

He began with a breathy, high-pitched tirade in a Marlon Brando
monotone and quickly became loud and abusive. With a piercing cry, he
swung his arm in an arc in front of him, shooting his outstretched index
finger toward Greenberg.

Yamauchi’s diatribe, all in Japanese, completely stunned everyone
in the room, with the possible exception of the Arakawas. 2

Yamauchi demanded that Coleco refrain from showing or selling Donkey
Kong on the Adam Computer, and Greenberg backed off, though he had legal
grounds to challenge that demand. Atari had purchased only the floppy disk
license; the Adam version of Donkey Kong was cartridge-based.

We Tried to Keep from Lau^in? 285

Even with Coleco out of the way, the deal between Atari and Nintendo never
took place, Kassar was fired the following month, and no deal was ever signed.

First Impression

We kind of all looked at it and chuckled as we walked through the show
because we all knew that video games were dead. This was the age of the
floppy disk, the Commodore 64, the Apple lie, the IBM PC, and the little one,
what did they call it? . . . it was PC Junior.

Everybody was talking about the Amiga and the Atari ST. That was
where everybody thought the business was, really. Nobody thought that
Nintendo had much of a chance, and they kind of all laughed at what
[Nintendo was] doing.

—Creg Fischbach, founder, Acclaim Entertainment

Nintendo was a company ruled by strong personalities. Back at Nintendo Co.
Ltd. (NCL), the Japanese parent, Hiroshi Yamauchi controlled his company with
an imperial hand, seldom complimenting workers’ successes and often criticiz¬
ing them harshly for mistakes. One person he openly criticized was Minoru
Arakawa, who was both his son-in-law and the president of Nintendo of America.

When Nintendo could not break into America’s burgeoning arcade busi¬
ness, Yamauchi blamed the failures on his son-in-law. Though he never accused
Arakawa of ruining the deal with Atari, he did not hesitate to voice his opin¬
ion that a more competent person would have no trouble marketing the
Famicom in the United States.

Minoru Arakawa was quiet-natured, sometimes jovial, and very deter¬
mined. He surrounded himself with friends in whom he had complete
confidence. During his tenure as president of Nintendo of America, Arakawa
sometimes sided with his employees even when it put him in direct opposi¬
tion with Yamauchi himself.

The Famicom continued to sell extremely well in Japan through 1984.
Nintendo managed to sell more than three million game consoles in the eigh¬
teen months since its release. As 1985 rolled around, Yamauchi decided to make
another attempt at breaking into the American market. There would be no

286 We Tried to Keep from Lau^hinj

more discussions of partners. However, he now believed that the best course
would be to market the system through his American offices.

In the 1980s, the ideal place to unveil new consumer electronics products
was at the Consumer Electronics Show. CES was held twice a year—January,
in Las Vegas, and June, in Chicago. Both shows were held in enormous con¬
vention centers, with sprawling show floors large enough to hold row after
row of spacious one- and two-story booths.

CES served the entire electronics industry, not just the video games branch
of it* During the CES’s peak years, video and computer game companies re¬
served nearly half the floor space for the show; the other half sported televisions,
stereos, video cassette recorders, refrigerators, car alarms, and the like.

CES had the atmosphere of a carnival. Large companies such as Sony,
Panasonic, and RCA generally set up huge, flashy booths with walls of televi¬
sions displaying their latest achievements. Stereo and record companies blared
music in their booths, and auto alarm companies brought in cars to broadcast
their goods. Many companies hired attractive models in sexy outfits to work
their booths. Some even brought in actors or actresses.** One section of the
floor was sectioned off for adult film and software makers. It was not unusual
for exhibitors in this section to bring in actors and actresses from pornographic
movies to work in their booths.

Companies often spent as much as $5 million on a single show. They could
spend up to $1 million alone on floor space and another $500,000 to host a
spectacular party one night of the show. CES gave electronics companies an
opportunity to impress retailers and journalists, and no expense was spared
in that attempt.

Arakawa decided to officially unveil the Famicom at the January 1985 show
in Las Vegas. Instead of calling the system the Famicom, a name that both
Arakawa and Lincoln agreed might not appeal to American consumers, they
decided on Advanced Video System (AVS).

* In fact, for many years, people organizing the CES treated video game makers like the
industry’s ugly stepchildren. Computer game and video game companies eventually
formed their own trade show, the Electronic Entertainment Expo (E3).

** One year a company called 3DO hired the San Diego Charger’s cheerleaders to appear in
its booth. A few reporters described this as gratuitous, because 3DO did not publish a
football game that year.

We Tried to Keep from lau^hin? 287

At the time, Arakawa had serious doubts about Nintendo’s ability to re¬
start the video game market. He did not know if retailers would bother
looking at a new system, and he had no idea what kind of competition he
might face at the show.

Nintendo rented a small booth in a corner of the Las Vegas Convention
Center and set up a simple display that included a basic Famicom (with an
AVS label), a computer keyboard, a music keyboard, and twenty-five games.

We didn’t even know if we really wanted to get into the home video game
business in the United States. We got a mixed reception at the show.

The reaction, as I recall, was that anybody who would get into the video
game business was nuts. They liked the hardware, though, and the games.

—Howard Lincoln

In January 1985 we introduced the Advance Video System with the music
keyboard and keyboard and computer exercise, and it wasn’t popular at all.
Everybody really thought we were crazy or dumb.

—Minoru Arakawa

Arakawa manned the booth himself. One person who saw him there de¬
scribed him as a small Japanese man who looked completely lost. Although a
few retailers stopped by the booth and several people commented on the qual¬
ity of the games, no one placed orders.

After returning to Seattle, Arakawa and Lincoln decided to reposition the
Famicom. The people who played Nintendo’s games liked them, but buyers for
big department stores and toy stores were not interested in reentering the video
game business. If the Famicom was going to break into the U. S. retail circuit, it
would have to be marketed as something other than a video game system.

The solution came in the form of a light pistol and a little robot.

Nintendo’s arcade division had two successful arcade shooting games called
Hogan’s Alley and Duck Hunt. (. Hogan’s Alley was popular enough to have been
used in Steven Spielberg’s film Back to the Future. The hero of the movie, played
by Michael J. Fox, was supposed to be completely addicted to the game.) By
adding a light gun, which was called “the Zapper,” to the Famicom, Nintendo

288 We Tried to Keep from Lau^hin^

turned the system into a virtual shooting arcade—allowing Lincoln and
Arakawa to position it as a gun game instead of a video game.

The robot, called Robot Operating Buddy (ROB), was developed by Gumpei
Yokoi and the engineers of Nintendo’s Research and Development Team number
1, the same team that developed the Game & Watch handheld games and the
arcade hardware for Donkey Kong. ROB was a small plastic robot that worked in
conjunction with two Famicom games —Gyromite and Stack-Up. Technologically
speaking, ROB was a pretty simple toy that offered very little play value. It was
mostly a decoy designed to prove that the Famicom was not just a video game.

When we first got the robot, it did not look like anything that you could
associate with the fun and excitement of our arcade games. When you put
the batteries in, he made this horrible grinding sound and his arms slowly
closed and slowly opened. It was scary.

At the same time, he did this really cool thing. He did this technology
thing where he would look at the screen. It was new technology; he could
somehow read what was going on on the screen.

That allowed the consumer retailers to think about it as a new toy.

—Howard Phillips

As they prepared for Summer CES in June, Lincoln and Arakawa came up
with a new name for the Famicom. Instead of calling it the Advanced Video
System, they changed the name to the Nintendo Entertainment System (NES).

In the spring of 1985, we added this robot. At the )une 1985 show, we had a
booth, and we launched the product as the Nintendo Entertainment System.

We changed our position. We were selling a robot game, not a video game.

It also let you play Duck Hunt, Wild Gunman, and Hogan’s Alley.

—Howard Lincoln

As he had done in January, Arakawa chose to run a small, quiet booth at
the 1985 show. Although this booth, about 600 square feet, was larger than the
one he had rented in Las Vegas, it was tiny compared to most booths on the
floor. Arakawa purposely positioned ROB as his center attraction.

We Tried to Keep from Lau^hincf 289

Though the NES was far from the hit of the show, several buyers expressed
interest in it. As Lincoln and Arakawa had predicted, retail buyers were more
receptive to gun and robot games than they were to video games. They in¬
spected the NES carefully, and many commented that they liked the games.
At the end of the show, however, there were again no orders.

Though he was disappointed by the lukewarm response, Arakawa did not
give up. In an attempt to test whether the retailers’ hesitance reflected con¬
sumer opinion, he hired a marketing firm to test the NES on focus groups.
The response was disappointing.

Arakawa observed sessions as they took place. From behind a one-way mir¬
ror, he watched a random sampling of young boys play the NES and heard
them say how much they hated it. Typical was the comment of an eight-year-
old who said, “This is shit!” J

Arakawa faced several low points during his career with Nintendo of
America. He faced hardship when he tried to establish Nintendo’s arcade
games. He faced another low point when Ron Judy and A1 Stone, the men
distributing Nintendo arcade games, wanted to leave him. Fle’d also braved
the threats of Sidney Sheinberg, president of Universal Studios, but his latest
challenge was the toughest. This was the first time Arakawa ever actually talked
about backing away.

After the focus tests, Arakawa called his father-in-law and suggested giv¬
ing up. He began to believe that the American video game market had shut
down for good.

The Beginning of Rare

There was a certain situation that took place right around 1983. I happened
to go to Japan and see the Nintendo Entertainment System. ... the Family
Computer. As soon as I saw the Famicom, I said, "That’s it. This is the system
that we’ve been waiting for.” So I purchased a system and sent it to the UK,
and that was the start of that latest and greatest group called Rare.

—Joel Hochberg, former Allied Leisure executive,
former coin-op repairman, cofounder of Rare Ltd.

290 We Tried to Keep from laughing

By 1983, Joel Hochberg had been in the arcade and coin-operated game busi¬
ness for twenty-seven years. He had started as a repairman in 1956 and worked
his way into the executive team of Allied Leisure in the 1970s.

While at Allied, Hochberg traveled to Europe and Japan to attend amuse¬
ment industry trade shows and seek out international partners. One
relationship he created was a partnership with Zilec, a small British company
that made arcade conversions.

During one of his frequent trips to England, Hochberg attended a trade
show and met Chris and Tim Stamper. Chris Stamper was a 19-year-old game
designer for Zilec. Tim, his 16-year-old brother, was still in school.

The Stampers were a unique team. Chris was an electronics genius who, as
a boy, had built an oscilloscope. Chris often took Tim to work with him. Both
brothers—Tim in particular—had an air of confidence. They felt that they
knew what made some games good and others bad.

There’s a dispute about this. Tim doesn’t agree with me. But I’m almost posi¬
tive, unless that was his charming personality I’m thinking of, there was an
ATE show—Amusements Trade Exhibition Show. Chris attended it as a mem¬
ber of Zilec. I attended it as an independent, and Tim was there as an
interested individual without any direct association. Very young guy. And I
was very taken aback because here was a young man, very bright, very set in
respect to what he thought a very good, successful product should look like,
what it should represent on screen.

—Joel Hochberg

Hochberg met the Stampers during the end of the Space Invaders era. A lot of
changes were taking place within the industry. Centuri had bought Allied Lei¬
sure, and Hochberg decided to start his own business. Although the game
business had fallen off in the United States, the worldwide market was still fairly
strong. The Stampers wanted to leave Zilec and start their own company.

During one of Hochberg’s visits, Chris Stamper revealed that he wanted to
leave Zilec. He wanted to start a company with Tim, now nineteen, for more
creative freedom and larger rewards. Hochberg’s first reaction was to try and
convince him to stay at Zilec, but Chris was determined. When that failed,
Hochberg decided to set up a partnership with the Stampers.

We Tried to Keep from Lau^hin^ 29

Chris and Tim Stamper set up a game company called Ashby Computer
Graphics (ACG) and began publishing games for the Sinclair Spectrum, a tiny
computer that sold very well in Europe but never caught on in the United States.

I visited with Tim and Chris and we discussed certain possibilities. Chris was
absolutely set on the fact that he wanted to do games for Sinclair Spectrum (a
smal I personal computer that Timex unsuccessful ly tried to market in the United
States). They did a host of games for the Sinclair Spectrum in 1983 and 1984.

—Joel Hochberg

One of Tim Stamper’s first games, JetPac, was a major success by Sinclair
standards. Nearly one million people owned Sinclair Spectrum computers in
1983, and ACG sold more than 300,000 copies of JetPac.

It was incredible penetration for a single product.

We had an advantage—we'd been working on an arcade product. We just
took that expertise and transferred it directly to the Sinclair Spectrum.

—Chris Stamper

Toward the end of 1983, Hochberg visited Tokyo. While there, he saw a
Famicom and instantly recognized it as the future of video games. He pur¬
chased a console and sent it to the Stampers to get their reaction.

The Stampers were not immediately impressed. Nintendo had not begun
exporting Famicom from Japan at the time, and the Stampers were not con¬
vinced that they wanted to deal with the Japanese market. They preferred to
work on computer games. At the time, it seemed as if computers were the
only viable market for electronic games. With a little prodding from Hochberg,
the Stampers agreed that they would design games for the Famicom system if
Nintendo started shipping to the United States and Europe.

In order to make games for the new system, however, they needed to ob¬
tain system specifications, schematics, and a license to make games from
Nintendo. As an arcade owner, Hochberg was familiar with Nintendo of
America. He made an appointment with Minoru Arakawa and flew out to
Redmond, Washington, to propose a partnership.

292 We Tried to Keep from Laughing

I contacted Nintendo and found out that they were not completely inter¬
ested in sharing the technical specs with us. My question to Mr. Arakawa
was, "Why?”

He said, "You have to prove that you have the technical expertise, ” which
was not a bad answer.

Chris spent a good deal of time, practically six months, reverse engineering
the hardware and then proceeded to do for me an audiovisual display, very
simple but utilizing graphic and other capabilities of the hardware that would
show what we could do. We really weren’t interested in giving Nintendo a
product; we were interested in giving Nintendo a view of what could be done.

When I sent that off to Nintendo, Mr. Arakawa said, "I like what I see. Now
please do a game.”

But he still did not give us the technical specs at that point.

—Joel Hochberg

Joel came to me and I said, "If you are so good, why don’t you make a game
without tools?” It was a good test.

—Minoru Arakawa

i reverse engineered the NES. I had an understanding of the coin-op hard¬
ware that was out there, so I had a very good idea what the Nintendo
actually contained.

We got about 99 percent correct. There were just a few things we didn’t
know about. But the interesting thing was the stuff that we discovered in the
machine that was not documented. That instantly gave us an advantage
that other developers didn’t have.

—Chris Stamper

The Test

We decided to test the American market in New York. Everybody thought
that we were going to die, that it was suicide.

—Minoru Arakawa

We Tried to Keep from lau^tiiny

By the summer of 1985, Nintendo of America president Minoru Arakawa had
become convinced that Americans no longer had any interest in video games.
When he called Hiroshi Yamauchi to recommend pulling out, however,
Yamauchi refused to consider the idea. He didn’t care about CES shows or
focus groups. The Famicom was flying off shelves in Japan, and as far as he was
concerned, the NES would sell just as well in America.

To prove this, he suggested testing the NES in the toughest market in
America, That market, everyone agreed, was New York City.

I don’t know who came up with the idea of starting out in New York. It was
clear that New York would be the toughest market; New York was the enter¬
tainment capital. Mr. Yamauchi made the comment, "Well, then, it would be
a really fair test because if you could do a good job in New York, you could
pretty much do anything anywhere.”

■Howard Lincoln

The Seels of Son ion

We visited Activision at that time, Greg Fischbach was the head of their international
department, so he attended the meeting. After the meetings we tried to sell Greg Fischbach
on why he wanted to become a licensee.

Later we found that Fischbach reported to the president or chairman of the company
that Activision should not get involved with video games.

—Minoru Arakawa, president, Nintendo of America

This also wraps back to another story that they [Howard Lincoln and Minoru Arakawa]
love to tell about a memo that I wrote when I was at Activision. After having met with
them sometime in 1986, I sent a memo to ]im Levy (president of Activision) saying the
business, in essence, doesn’t work because there’s no margin in it.

They never knew about the existence of this memo until several years later when it
came out in a court case.

■Greg Fischbach, former vice president of the International Group, Activision

296 The Seeds of Competition

Hitting It Big in the Big Apple

The last vestiges of the Atari VCS era had crumbled by the beginning of
1985. JackTramiel, the man who purchased Atari from Warner Communi¬
cations one year earlier, had already announced his intention to concentrate
on home computers instead of video games. By the end of 1985, Coleco had
abandoned the Adam Computer and squandered its Cabbage Patch Doll
earnings just to stay afloat.

Against this tumultuous backdrop, Nintendo sent a small team of execu¬
tives and seasoned employees to spearhead the American launch of the
Nintendo Entertainment System (NES) in New York City. 15 Everything about
Nintendo’s New York test marketing efforts seemed small, except the $5 mil¬
lion advertising budget.

The effort began with Nintendo of America president Minoru Arakawa per¬
sonally leading a group of thirty employees to the small New Jersey warehouse
he had leased through the end of the year. The group included Ron Judy, one of
the two entrepreneurs who had been with Nintendo of America from the be¬
ginning; Don James, who had been with Nintendo of America since its early
New York days; and Gail Tilden, who was in charge of advertising.

We sent a number of our employees back to Hackensack. We rented houses

Jor them or we rented apartments. And we also had an apartment in New

York City, but the warehouse was in Hackensack.

—Howard Lincoln, chairman, Nintendo of America

We sent thirty or forty people from Redmond [Washington] to New York.

Most of them were married persons, and they left wives or husbands behind.

They were there for three or four months.

—Minoru Arakawa, president, Nintendo of America

The first shipment of NES systems arrived in a neat stack that barely took
up half of the trailer on which it was transported. The boxes were stored in
the warehouse, and the team began the arduous task of trying to get retailers

For a more complete account of the New York launch, see Game Over.

The Seeds of Competition 297

to accept Nintendo’s products. Most store owners did not want to look at
video games, let alone waste floor space selling them. In fact, team members
were cautioned not to use the term video game. The NES was to be sold as an
“entertainment system.”

At this point, the biggest selling points for the Nintendo Entertainment
System were the Zapper gun and the games Duck Hunt and Hogan’s Alley. Some
retailers also liked the Robot Operating Buddy and some of the early arcade
translations, like Donkey Kong, Baseball, and Tennis. When Nintendo went to New
York, Super Mario Brothers, which would become the linchpin during the na¬
tional launch of the NES, had not been introduced.

As often was the case with Arakawa, he surrounded himself with exceptional
people. Whether visiting the headquarters of major chains or stopping by the
manager’s office of a local shopping mall, Judy and the rest of the team were
tireless. The advertisements Tilden arranged with a local advertising agency were
so effective that they set the tone for Nintendo ads well into the next decade.

Even so, most of the 500 retailers who sold the NES that Christmas might
not have taken the merchandise if it were not for a risky offer made by Arakawa
himself—a money-back guarantee. Going against the wishes of Nintendo Co.
Ltd. president Hiroshi Yamauchi, Arakawa authorized his sales force to say
that Nintendo would buy back any merchandise that retailers wished to re¬
turn. The only thing retailers provided was floor space. Nintendo lugged in
the merchandise, set up the displays, and bought back any unsold product.

We rented a truck so that we could deliver orders, and we let people order
the systems risk-free. We did the merchandising. We trained their people.

We did everything. Then we really spent a lot of money on TV.

—Minoru Arakawa

They shipped it in the New York area in the Christmas of 1985. And it worked.

I mean, they sold through. And they sold through with the little robot thing
that they had attached, much to everybody’s surprise.

I think one of the gutsiest things Arakawa ever did was to take the inven¬
tory risk with respect to the launch of that product.

—Greg Fischbach, president, Acclaim Entertainment

298 The Seeds of Competition

The Nintendo team’s hours were exhausting. Team members approached
retailers and demonstrated the system to customers by day, then delivered
products and set up displays by night. One night, two team members went to
deliver a merchandising display at a Macy’s store in an area that Howard Philips
described as a scary part of town. While Philips went into the store to arrange
for the delivery, his partner remained outside to guard 19-inch televisions that
would be used in the display. While he waited, a knot of aggressive young
men gathered around. When Philips returned, he found his partner nearly
frantic but still guarding the televisions.

After three months of exhaustive work, the Nintendo Entertainment Sys¬
tem could be found in hundreds of stores throughout the New York area,
including FAO Schwartz and Toys “R” Us.

I went home to New York to spend Christmas with my parents that year. I
went to Willoughby's, a camera shop on 32nd Street, to buy some film for
my father, and there were all of these kids, these boys huddled around this
counter at the shop. I went over to see what they were looking at, and it was
a new video game system from Nintendo.

—Tom Zito, founder, Digital Pictures

The NES was not a smash hit, but Nintendo did manage to sell 50,000 units,
about half of the systems that had been shipped from Japan. It was enough to
prove Yamauchi’s point that video games were not dead. Amazingly, a large
percentage of the retailers that carried the NES decided to continue carrying
it after the holidays.

In February, Arakawa expanded his test to Los Angeles. But this test had
none of the urgency of the one in New York. Nintendo continued its policy of
offering to buy back merchandise and provided displays for stores, and re¬
ports of the company’s success in New York made Los Angeles retailers more
receptive than their New York counterparts had been.

The success of the Los Angeles test is best gauged in terms of the number of
stores that accepted Nintendo’s offer. Spring and summer are typically slow
times for toy retailers, many of whom expect to incur small losses throughout
the year, then cover their losses with highly profitable holiday sales. A large

Hie Seeds of Competition 299

number of local department stores, electronics stores, and several toy stores
began carrying the NES at that time. Though the system only sold moderately
well, Arakawa interpreted retailers’ willingness to stock his product as a sign of
future success and expanded his test to include Chicago and San Francisco.

The Return of Jumpman

Shigeru Miyamoto, the man who designed Donkey Kong, built the game
around two main characters. One was the eponymous villain, a giant ape
that stole a woman and hurled barrels at the man trying to save her. The
other was Jumpman, the chubby, mustachioed carpenter who leaped bar¬
rels, climbed ladders, and saved the day. Over time, Jumpman underwent
an interesting evolution.

The first step in Jumpman’s evolution was a name change—he became
Mario in his next outing, a game called Donkey Kong Junior. Next, Miyamoto
gave Mario a brother named Luigi and converted him from a carpenter into a
plumber in the 1983 game Mario Bros. Up to this point, Mario always appeared
in small games in which you could place the entire field of play on a single
screen. That changed in 1985, with the release of Super Mario Bros.

Super Mario Bros, took Mario out of his single-screen setting and placed him
in a huge, vivid world. Instead of simply climbing ladders and moving around
on platforms, players now controlled him as he ran through a seemingly end¬
less, brightly colored countryside filled with caverns, castles, and giant
mushrooms. The landscape was much too expansive to fit on a screen. In this
new game, the camera followed Mario as he ran forward through his two-
dimensional world. Arnie Katz, editor of Electronic Games, dubbed it a
“side-scrolling” game.*

The goal of the game was to help Mario rescue a princess from a dragon
named Bowser. To do this, players had to fight or slip past walking turtles,
flying turtles, and little mushroom-shaped men called Goombas.

Super Mario Bros, contained several elements that attracted attention. It had
bright cartoon-like graphics, fast action, and a sense of humor. It also took

* Super Mario Bros, was not the first side-scrolling game. Scramble, Defender, Super Cobra, and
several others predated it by several years.

300 Tlte Seeds of Competition

Warren Robinett’s concept of hidden “Easter eggs” to a new level with entire
hidden worlds.* Most people continued playing Super Mario Bros, to find all of
Miyamoto’s Easter eggs long after they finished the game. If players knew
where to look, they could find free men and coins hidden in mid-air, not to
mention beanstalks that took Mario into the clouds, mushrooms that made
him big, flowers that enabled him to spit fireballs, and stars that made him
invulnerable. Super Mario Bros, did very well in Japanese arcades and attracted
some attention to the failing U.S. arcade industry.

By the end of the year, Nintendo engineers succeeded in creating a home
version of Super Mario Bros, for the Famicom. This product defined the differ¬
ence between games for the old Atari systems and games that could be played
on Nintendo cartridges. Although the home version of Super Mario Bros, was
not identical to the arcade game, it was an extremely close approximation.

By the end of 1985, Nintendo began packaging Super Mario Bros, with the
Famicom. This marketing move was so successful in Japan that Yamauchi and
Arakawa decided to do it in the United States. It took a few months to create
an American version of the game, and the cartridge was available by the time
Nintendo of America went national—the end of 1986.

A Partner

Although 1985 was not a great year for video game sales, it was an excellent year
for the five ex-Atari executives who had started a toy company called Worlds of
Wonder. The head of the company was a man named Don Kingsborough, a
former Atari vice president, who decided to start his own business when he ran
across an invention that he believed would be a surefire hit as a toy.

There were a lot of former Atari guys putting together this company called

Worlds of Wonder. I didn’t really know Don all that well.He was really

on the domestic side of the business, and we had very little interaction.

I joined Worlds of Wonder as the executive vice president of marketing
and then eventually the managing director of international. You know, we
started the company up literally around Don’s swimming pool.

* At one point in the game, players could even walk through a brick wall to enter a
seemingly endless underwater world.

The Seeds of Competition £01

There were some guys from Disney who did the talking presidents. They
wanted to do this talking teddy bear. Well, he was not nearly the incarnation
that we finally brought out. When I first saw him, I called him Biafra bear
because he was like this little skinny bear that looked like he needed fatten¬
ing up. He looked like he was a refugee from Biafra or someplace.

—Steven Race, former director of international marketing,

Worlds of Wonder

Building off the original animatronic technology, Kingsborough and com¬
pany designed a plush teddy bear with a tape recorder built into its back.
Children could place tapes in the recorder, and the bear’s mouth would move
as it appeared to tell stories and talk. The bear was named Teddy Ruxpin.

Once they had their product, the founders of Worlds of Wonder next set
out to build a sales force. They could have tried to hire salespeople from within
the toy industry but instead decided to go with people they knew who would
be aggressive. They hired ex-Atari sales representatives.

We hired most of the old Atari reps to represent us because we knew that if we
hired the toy reps, we’d have to go through channels. These guys ran Atari.

When it came to selling Teddy Ruxpin, they went right over everyone’s
head and got right in to see the senior people. All the key retailers we showed
Teddy Ruxpin to, to the man with one exception, all just melted and said,

"Holy shit, this is it! This is it. This is the product this year.”

—Jim Whims, former executive vice president, Worlds of Wonder

Teddy Ruxpin was the toy sensation of the 1985 holiday season. Stores could
not keep it in stock; public demand was too great. The following year, Worlds of
Wonder came out with another major hit, Laser Tag. With these two products,
the company became a major player in the toy industry and an attractive part¬
ner to Minoru Arakawa, who wanted a marketing partner to distribute the NES.

They approached us in 1986. They approached us. Kingsborough and Arakawa
got together with Howard [Lincoln] and the senior management team and
[they] said, "Listen, Whims and Bradley come from the video game business.

J 02 The Seeds of Competition

You obviously have a strong relationship with the retailers, both with Teddy
Ruxpin and Laser Tag."

The rumor was that Toys "R” Us gave us a $100,000,000 order at Toy Fair
that year.... Actually, they did; it wasn’t a rumor. With that type of clout,
we were able to work closely with the buying community to ensure that
Nintendo didn’t get put on the back burner and that, in fact, it was a priority
for the buying community.

—Jim Whims

The offer Arakawa made to Kingsborough bore no resemblance to the one
he had made to Atari. The Atari offer involved licensing—Nintendo would
allow Atari to manufacture the NES and sell it as an Atari product. Arakawa
wanted Worlds of Wonder as distributor. He simply wanted Worlds of Wonder
representatives to market the NES, along with Teddy Ruxpin and Laser Tag.
He hoped that being associated with the two hottest toys on the market would
open doors to stores such as Sears, and he was willing to pay a fee for the help.

As former Atari employees, Kingsborough and many of his executives were
very familiar with the NES. They had seen it launched as the Famicom in
Japan, and most of them agreed that it was much more powerful than prior
console systems. With this in mind, Kingsborough accepted the offer.

I will always remember the first sales meeting we had where we introduced
the Nintendo 8-bit to the sales force. Arakawa came down, and we had the
Nintendo people presenting the product, and we said, "This is a product
we’re going to be supporting on a nationwide basis. ”

Everyone was sitting in the bar after dinner that night, and these guys who
had been Atari’s three biggest reps grabbed me and said, "Can we talk to you?"

They pulled me aside and said, "We want to let you know that we think
you’re making an enormous strategic mistake by getting involved in the
video game business again.” Now these are three Atari reps who made mil¬
lions of dollars in the video game business already. They said, "Listen. WOW
is the hottest company in the world right now. You’ve got the hottest toy
company in the world right now. The video game business is a black smear
and it’s just gonna drag you down into the abyss.”

The Seeds of Competition JOJ

And I’ll always remember that discussion.

The obvious answer was, "Well, listen, I’m glad you feel that way, but I
have to tell you, if you want to sell Teddy Ruxpin and you want to sell Laser
Tag, you’re gonna sell Nintendo as well. And if you feel that strongly about
it, then you ought to just resign the line now.”

—Jim Whims

As Arakawa expected, the association brought new clout to Nintendo. Worlds
of Wonder representatives had access to all of the top buyers. Suddenly, demon¬
strations of Teddy Ruxpin and Laser Tag expanded to include the NES as well.
By that time, however, a new competitor had arrived on the scene.

An Old Competitor

Yes, the Master System was a better piece of hardware than the NES. Remem¬
ber, they had two extra years to develop it.

—Peter Main, vice president of marketing, Nintendo of America

The NES was not the only Japanese game console introduced in the United States
at that time. In October 1986, Sega introduced a console called the Master Sys¬
tem that featured the Zilog Z-80 processing chip and 128K (“K” in this case stands
for kilobits which are one-eighth the size of the kilobytes normally referred to
as “K”.) nearly twice the memory of the NES. The Master System’s additional
memory and microprocessor made it more powerful than the NES.

Though it was a more powerful unit, Sega’s Master System, marketed as
the Mark III in Japan, had not fared well in that country, where Nintendo
controlled more than 90 percent of the market.

Unfortunately, it was probably launched about a year and a half to two and
a half years, maybe two years after Nintendo. By that time, it was a Nintendo
culture in Japan, and it was very, very difficult to launch a similar technol¬
ogy in Japan.

—David Rosen, chairman, Sega Enterprises, Ltd.

304 The Seeds of Competition

The controllers that came with the Master System appeared to be patterned
after NES controllers—rectangular, with a directional pad rather than a joy¬
stick. In what appears to have been a small concession to the previous
generation of game systems, Sega also manufactured tiny joysticks that could
be screwed into the center of the directional pads.

Sega planned to market two forms of game media for the Master System.
The first was standard cartridges. The other was a plastic card that looked like
a credit card with little metal connections on one end. The cards could not
store as much data as cartridges, but they sold for less. In the end, however,
Sega published very few games on cards.

Like Nintendo, Sega was a company with a strong arcade presence. Sega’s
long line of hits included early favorites such as Astro Blaster, Monster Bash, and
Turbo, as well as classics such as Pengo. Sega distributed Frogger in the United
States, though the game was created by Konami. One difference between the
two companies is that while Nintendo slowly pulled away from its coin-
operated games business, Sega remained very committed to making arcade
games. Within the next few years, Nintendo focused all of its development
efforts into making cartridges for the NES. Sega, on the other hand, had never
launched a consumer product in the United States. Instead, it had licensed
games to companies such as Coleco, while continuing to create games for
arcades that could then be translated into home games.

To attract consumers, Sega packed a home version of Hang On, the num¬
ber-one game in arcades, with the Master System. Hang On was a motorcycle
racing game that did not translate well to the constraints of a home system.
The arcade game had handlebars for controllers. A deluxe version even had a
model of a motorcycle upon which people sat as they played. The home ver¬
sion seemed slow and plain in comparison.

The Battle

Now you are playing with power!

—Nintendo’s advertising slogan

Now there are no limits!

—Sega’s advertising slogan

The Seeds of Competition 305

The marketing arm behind Sega’s American release was considerably smaller
than Nintendo’s. Formed in April 1986, Sega’s consumer products division
consisted of two men, Bruce Lowry and Bob Harris, working with a couple of
administrators out of a small room in the back of the company’s coin-operated
games offices.

Lowry and Harris arranged for advertising and set up demonstrations for
retailers. Harris, who had come from the J. Walter Thompson advertising
agency, helped create the packaging for the Master System. Within two months
of joining Sega, Harris and Lowry had to set up and man an 1,800-square-foot
booth at the Summer CES in Chicago. Some show attendees had never heard
of Sega, and a few mistook the company for Saga Foods, commenting that it
was strange that a food distributor would enter the video game business.

Although the Master System was not as widely distributed as the NES, it
could be found in most major cities across the country in time for the holi¬
days. Many electronics stores displayed the NES, the Master System, and the
recently re-launched Atari 7800 side by side. Of the three game consoles, the
Atari 7800 was the least expensive. Since it played both 2600 and 7800 games, it
also had the largest library. The problem was that all of the games for the 7800
looked obsolete when compared to the top games for the two newer systems,
and the 7800 eventually disappeared from store shelves.

The Master System was the most expensive of the trio, selling for about $10
more than a similarly equipped NES. The NES Control Deck, which included
the console, two controllers, and a Super Mario Bros, cartridge, sold for $129.95;
the basic Master System package sold for $139. The Nintendo Action Set, which
included everything in the Control Deck packaging plus the “Zapper” light
gun and the game Duck Hunt, sold for $149, as did the Master System and gun
set, which included the “Light Phaser” and the game Safari Hunt.

Nintendo had several advantages right from the start. The marketing clout
Nintendo received from its association with Worlds of Wonder opened doors
to retailers, w'hich remained closed to Sega. Anyone who wanted to sell Teddy
Ruxpin and Laser Tag, including Sears and Toys “R” Us, was going to hear
about the Nintendo Entertainment System.

Nintendo also had a stronger identity. In 1981, the biggest year of arcades, Donkey
Kongvcds second only to Pac~Man in popularity. A Donkey Kong cartoon show had
aired on television, and Nintendo made succeeding games that featured Donkey

306 The Seeds of Competition

Kong and Mario as heroes. Also, Nintendo arcade games all looked very similar.
They had similar cabinet designs, the same style of art, and often the same themes.
When Nintendo broke from its traditional Mario-style game with Punch Out in 1983,
Donkey Kong could still be seen sitting in the audience. By doing this, Nintendo es¬
tablished an identity and created mascots that would remain valuable through
the next decade. Though Sega broke into the U.S. arcade market before Nintendo
did and had more games in its library, no theme ran throughout these games.
They included everything from race cars to jet fighters.

Nintendo’s biggest advantage was its library of games, and the advantage
was apparent right from the start. Super Mario Bros, was more popular in ar¬
cades than Hang On, and Nintendo did a much better job of capturing its game
in the home version. People went to stores asking for the “new video game
system that plays that Mario game.” Very few people ever seemed aware of
the Hang On cartridge.

There were seventeen games—all Nintendo games or games that Nintendo
had licensed—that we were marketing as Nintendo games. The hardware had
some software, along with the robot, packed in. But there were seventeen
cartridges created, including Super Mario Brothers, Baseball, Tennis, and
Coif. There was a karate game, Kung Fu, and Donkey Kong Math. It was our
educational series.

—Howard Lincoln

Nintendo’s software advantage ran deeper than just the packed-in game.
With Donkey Kong, Donkey Kong Junior, Golf, and Popeye, Nintendo had a substantial
list of its own arcade games. Internally developed products, later referred to
as “first-party” games, would eventually become a defining component in the
operation of a video game company.

Hiroshi Yamauchi recognized the importance of setting up strong re] ation-
ships with successful game publishers and arranged exclusive partnerships
with Bandai, Capcom, Hudson, Konami, Namco, andTaito. (Although Bandai
[a leading Japanese toy manufacturer], Taito [publisher of Space Invader y], and
Namco [publisher of Pac-Man\ were the most respected names at the start,
Capcom and Konami eventually emerged as Nintendo’s most influential part¬
ners during the 1980s.)

Tiie Seeds of Competition |®y

Shortly after the NES’s national launch, Capcom released home versions
of such arcade games as Trojan, Ghosts ’N Goblins, and 1942. The text in many of
these games was hastily translated and often contained grammatical errors.

I think there may have been three or four licensees in the marketplace at that
point, but no more than that. We were the seventh licensee that Nintendo
had in the U.S. and the first U.S. company that Nintendo did business with.

—Greg Fischbach

Although several top Japanese game companies signed licensing agreements
with Nintendo, the American companies showed little interest. Game pub¬
lishers such as Sierra On-Line, Broderbund, and Electronic Arts were more
interested in making games for computers than for consoles, and toy compa¬
nies like Milton Bradley and Mattel had left the industry entirely.

And the entertainment companies like 20th Century, Paramount, and some
of the other companies that had been involved in the video game business
in 1982, 1983, and 1984 had been burned badly and therefore weren’t too
interested in coming back into the business again. So they wanted to shy
away from it.

—Greg Fischbach

We spent a lot of time in the spring of 1986 trying to convince American
software publishers, Electronic Arts, Broderbund, and Activision as an ex¬
ample, [to make games for the NES]. We were trying to say, "Hey, we got this
great licensing program, and we want you to be part of it. This is the deal. ”

And none of them took it.

We ended up with four companies, all of whom were actually subsidiaries
of Japanese companies. They were all coin-op companies—Data East, Konami,
Capcom, and Bandai—and all of them were licensees of Nintendo Company
Ltd. in Japan.

•Howard Lincoln

308 The Seeds of Competition

One interesting twist from the early days of Nintendo occurred when Lin¬
coln and Arakawa visited Activision. They demonstrated the NES and discussed
their business model and how they planned to avoid the traps that destroyed
Atari. One of the executives at the meeting was Greg Fischbach, vice presi¬
dent of Activision’s international group. Fischbach approached Arakawa after
the meeting, and the two men discussed Nintendo’s licensing deal. Not long
after the meeting, Arakawa received a call letting him know that Activision
was not interested in making games for the NES.

Greg Fischbach was president of the international department, and he attended
the meeting. Then after the meeting we tried to sell Fischbach on why we wanted
them to become a licensee. Later we found out that Greg Fischbach reported to
the president of the company or chairman that he shouldn’t do it.

—Minoru Arakawa

One reason companies would not sign licensing agreements with Nintendo
was that the terms of the agreement seemed entirely one-sided. Yamauchi
had analyzed Atari’s downfall and decided that Atari had allowed it to hap¬
pen by letting the market flood with mediocre games. To prevent this from
happening to Nintendo, Yamauchi implemented strict controls. Atari was
caught off guard when companies like Activision and Imagic began making
games for the 2600. To prevent this from happening to his system, Yamauchi
protected it with a security chip that locked out unauthorized cartridges. This
meant that the only way to make games for the NES was to allow Nintendo to
manufacture them, and Nintendo maintained final authority in deciding
which games would be manufactured and in what quantities.

Most U.S. businesses weren’t too interested in Nintendo’s trading charges, which
required that you purchase all of your inventory requirements from Nintendo,
that you purchase them in Japan, and that you purchase them for a fixed price.

In essence, Nintendo really controlled how much inventory was put into the
marketplace. [The company] also made you open up a letter of credit guaran¬
teeing payment for the goods at the time that you made the order.

The Seeds of Competition 309

If you came out of the toy business, like Hasbro and Mattel, that really
wasn’t the way you did business... especially if you were the size of Hasbro
or Mattel.

—Creg Fischbach

At the same time that he courted established companies, Arakawa was not
entirely cooperative with the lesser-known companies that approached him.
When approached by small design houses, he sometimes authorized compa¬
nies to make games for the NES without giving them the design specifications
they needed to understand the system.

The first American company to sign a licensing agreement with Nintendo
was Acclaim Entertainment. The agreement was signed in 1988. Amazingly,
Acclaim got the agreement before it ever published a game.

Three ex-Activision executives—Jim Scoroposki, Rob Holmes, and Greg
Fischbach—founded Acclaim. Fischbach, the vice president who wrote the
memo cautioning against involvement with Nintendo, left the company in
1986 and moved to New York to take a job with RCA Records as president of
RCA International. When the company was bought out seven months later,
Fischbach lost his job.

During his tenure with RCA, Fischbach kept in touch with Holmes and
Scoroposki and met with Scoroposki socially. One day over lunch, Scoroposki
mentioned Nintendo. He had visited the Nintendo booth while attending the
Winter CES in Las Vegas, and had come to the conclusion that the company
really might restart the video game business. He believed that Nintendo might
sell two or three million NES decks and that retailers would be clamoring for
software. They could meet that need by starting a company that would im¬
port popular titles from Japan.

I got on the phone that next week and called Arakawa. He wasn’t available.

Then Howard [Lincoln] called me back, and I told him what I wanted to do. I
said that we didn’t have a name for this company, but I was interested in
setting up a company and we were interested in becoming a licensee.

—Creg Fischbach

31© The Seeds of Competition

Arakawa had not taken Fischbach’s telephone calls because he was attend¬
ing the annual Toy Fair trade show in New York. Lincoln arranged a meeting
with Fischbach in Arakawa’s hotel room. After a long discussion, Arakawa
agreed to extend a license to Fischbach’s still-unnamed company, and Lin¬
coln faxed the agreement the following day. Once he obtained the license,
Fischbach flew to Japan to find some games.

As president of Activision’s international group, Fischbach had visited Ja¬
pan several times and had several contacts in Tokyo. He began his search in
Akihabara, Tokyo’s electronics district.

The Akihabara is like 42nd Street in Manhattan—big, wide boulevards, about
six lanes across and with buildings on either side that are anywhere between
eight and fourteen stories high that are just chock full of any kind of electronic
gizmo or gadget that you could ever think of, from capacitors all the way up to
television sets and washing machines and refrigerators. It’s kind of like this
hub of electronic hardware and software, and it’s about three or four blocks
long with big, wide sidewalks and streets that are just littered with people.

—Greg Fischbach

Fischbach went to Japan in March 1987 and returned with three games. In
June, even before the games were ready for market, Fischbach, Scoroposki, and
Holmes decided to make a big splash as they announced their new company at
the Summer CES. They rented a huge booth at the show that they decorated
with an enormous sign bearing their company’s new name— acclaim. They
wanted to convince passing retailers that Acclaim would be a major force in the
video game industry. The image Fischbach tried to create proved prophetic.

Scoroposki’s belief that licensing with Nintendo would be a lucrative move
also proved true. Acclaim Entertainment released its first game in August
1987—a space combat game called Star Voyager that Fischbach jokingly referred
to as “the game that never ends.” Nintendo required licensees to make a mini¬
mum order of 1,000 cartridges; Acclaim ended up selling more than 100,000
copies of Star Voyager. Acclaim exceeded 200,000 in sales of its next game, 3D
World Runner, and more than one million copies of Tiger Heli —a game that Taito
released in Japan but decided against releasing in the United States.

The Seeds of Competition J!

Over the years, Acclaim became one of Nintendo’s most influential part¬
ners, and Fischbach never told Arakawa or Lincoln about the memo he had
written after their visit to Activision. In 1989, however, the memo surfaced
during a court battle between Atari Games (the coin-operated games division
that Warner Communications did not sell to the Tramiels) and Nintendo.

In one of those litigation deals with Atari games, our attorneys discovered
this document. It was a memorandum from Greg to the president of Activision,
basically saying, "I’ve met with Arakawa and Lincoln and I don’t think that it
makes any sense to get into this business.”

We had a lot of fun reminding Greg about that.

—Howard Lincoln

Partnership Lost

And eventually, the tail ended up wagging the dog, as Nintendo grew and
that business flourished. And our toy business, you know, went away.

—Jim Whims

Despite their hesitation to represent Nintendo, Worlds of Wonder salespeople
soon discovered that the NES was their hottest product. The demand for Teddy
Ruxpin in 1986 was at an all-time high; but by 1987, neither Teddy Ruxpin nor
Laser Tag did very well. Nintendo, on the other hand, continued gaining mo¬
mentum. Americans purchased 3 million NES consoles in 1986. Sales more
than doubled the following year. This translated into huge commissions for
toy representatives from Worlds of Wonder, but it also caused Nintendo to
reconsider the relationship.

Several reps wound up making over a million dollars a year in commissions. They
[Nintendo] finally capped people like Mike Needleman and,... oh, who was the
guy in Boston? Richard Tuckley. They capped them to a million dollars apiece.

It was an easy deal. You just said, "Here’s your lucky day. I’ve got an
extra 50,000 pieces of NES.” Easy sell.

—Steve Race

Disaster struck Worlds of Wonder as the 1987 Christmas season approached.
Mistakenly confident in the continued popularity of Teddy Ruxpin, Worlds
of Wonder management grossly overestimated its inventory needs. The com¬
pany ended up with so many extra copies of the expensive robotic bear that it
faced bankruptcy.

In October, Minoru Arakawa contacted Worlds of Wonder to break off the
partnership. Nintendo now had so much clout that it no longer needed a
distribution partner. By coincidence, Arakawa contacted Don Kingsborough
about discontinuing the Worlds of Wonder relationship around the time that
Kingsborough was preparing to lay off his sales force. Arakawa decided to hire
them instead. Ironically, Worlds of Wonder connected Nintendo with the ex¬
act sales force it had once tried to enlist through Atari.

Courtesy of S. Kent

After selling Atari to
Warner Communications,
Nolan Bushnell bought
back the rights to Chuck E.
Cheese Pizza Time
Theaters. Atari made
Bushnell famous, but it
was "the rat” that made
him rich.

Bushnell hired his
neighbor, Joseph P.
Keenan, to work for Atari
Keenan went on to
become the president of
Kee Games, and later,
Data East USA.

David Rosen, the man who brought
photomats, bowling alleys, and arcade
machines to Japan, then led Sega to the
United States.

Roger Hector and Nolan Bushnell at the launch of Sente.

Courtesy of RePlay Magazine

Workers assemble Centipede machines.

Atari’s Don Osborne demonstrates the Star Wars coin-op "cockpit"
to George Lucas.

ije lllgt

Pete Kauffman, chairman of Exidy, was the
bad boy of arcades. His pedestrian
demolition game, Death Race, inspired a
feature on the television news magazine
60 Minutes, and he later created a game
called Chillerthat was so amazingly
morbid that most American arcades
refused to carry it.

Ed Rotberg, creator of Battlezone, left Atari
shortly after working on the military
version of the game.

Parent-activist Ronnie Lamm appeared on
the television talk show Donahue to warn
about the evils of video games.

Courtesy of S. Kent Courtesy of RcPiay Magazim

In 1981, Tournament
Games held the world
video-game champion¬
ships in Chicago. The
attendance was low, and
the checks given to the
winners bounced.

In 1981, video arcades were
as common as convenience
stores, and arcade games
could be found just about
anywhere.

In 1981, the arcade business started its long collapse and sights like this, the recently closed
arcade at Honolulu International Airport, became all too common.

Courtesy of RePlay Magazine

Toru Iwatani (pictured
here between Yasuhiko
Asada, Namco president,
and Kazuo Ito, Namco
general manager) only
made one famous game
before being bumped up
to management. However,
that sole game was Pac-
Man, the most popular
arcade game in the world.

Though it did not do particularly well in
the international market, Ms. Pac-Man was
the most successful game ever released in
American arcades.

The arcade business’s
brightest star, Namco’s
Pac-Man appeared on
Saturday morning
cartoons, breakfast cereal
boxes, and the cover
of Time.

Courtesy of |ohn Strauch__ Courtesy of RePlay Magazine

Seattle attorney Howard
Lincoln convinced
Arakawa not to surrender
when sued by Universal
Studios over Donkey
Kong. Arakawa was so
impressed that he made
Lincoln vice president of
Nintendo of America.

Minoru Arakawa, president of Nintendo of
America, had to battle to break into the
U.S. market, then struggled again to revive
the home game market.

This doodle, created by attorney John Strauch, played a
large role in a court decision that cost Nintendo $250 million
in the Alpex case. The decision was later overturned.

(See pages 394 ~ 395 -)

Courtesy of Vivendi

In 1994, Nintendo allowed Tim Stamper and a team at Rare, Ltd. to use their new rendering
technology to revive Donkey Kong. The result was Donkey Kong Country.

Created by Andrew Gavin and |ason Rubin
of Naughty Dog, produced by Universal
Interactive, and published by Sony
Computer Entertainment, Crash Bandicoot
games became Sony's unofficial answer to
Mario and Sonic. (Pictured here is concept
art from the latest Crash Bandicoot game,
which is being developed and published
by Universal.)

OVSU.E

Bi!$lit* OOV»»H(SfcHT*j»MJH8

Moviephile and Metal Gear creator,
Hideo Kojima.

Sort of a cross between Clint Eastwood and
Toshiro Mafune, Solid Snake is the merce¬
nary hero of Konami’s Metal Gear Solid.

Courtesy of Sega of America

By the time former Mattel president Tom
Kalinske was appointed president and CEO
of Sega of America, Nintendo already
controlled more than 90 percent of the
video game industry. Kalinske chose to
take Nintendo head-on.

Brilliant, temperamental, and an extreme
perfectionist, Sega’s Yuji Naka created
Sonic The Hedgehog, NiGHTS, Burning
Rangers, and Samba de Amigo.

The creation of Sonic The Hedgehog
signaled a new direction and attitude for
Sega. It also meant the end of Nintendo’s
unchallenged dominance of the home
game industry.

Sega's top arcade hit-maker, Yu Suzuki, i
known for his sophisticated taste in wine,
cars, and technology.

Capcom’s Shinji Mikami, creator of the
exceptionally gory Resident Evil games.

Having created Donkey Kong, Mario, Zelda, Yoshi, and Star
Fox, Shigeru Miyamoto (pictured here with awards from the
Academy of Interactive Arts and Sciences) is generally
regarded as the most successful game designer in history.

Donkey Kong was the game that enabled Nintendo to break into the U.S. arcade business.

Courtesy of S. Kent

The late Cumpei Yokoi, dean of Nintendo’s engineers,
devised the toys that helped Nintendo expand from
manufacturing playing cards, created the hardware for
Nintendo’s first arcade games, and led the team that made
Game Boy.

Game Boy. . . . Atari
engineers laughed when
they saw its crude,
monochrome screen.
Twelve years, 115 million
units, and more than 450
million cartridges later,
Game Boy reigns
unrivalled as the most
popular game system of
all time.

Russian mathematician Alexey Pajitnov
(seen here visiting his old apartment in
Moscow) created Tetris, the best-selling
: video game of all time.

The Nintendo Entertainment System (NES)

Anri the Milner NF<i the cvctemc th^t cnlirlift

and the Super NES, the systems that solidified
Nintendo’s place in video game history.

Courtesy of S. Kent Courtesy of S. Kent

Nintendo’s Donkey Kong enters the ring in a PR event for Super Smash Bros.

Because of the lasting popularity of the Pokemon craze in Japan, Nintendo opened a
"Pokemon Center” store a few blocks from the main subway station in Tokyo.

Seamus Blackley, whose

past resume includes such

impressive feats as

working on the super

collider and such low

points as Tresspasser-

a terrible Jurassic Park-

based first-person shooter

on PC—is the main

designer of Xbox.

Having helped his company launch a very suco
PC peripherals, Microsoft "chief Xbox officer” R
now assigned to break into the video game har

In 2001, Microsoft plans to enter the
video game industry with its new Xbox
game console.

Courtesy of Sony Courtesy of Nintendo of America

Nintendo teamed up with
IBM to design a custom-
built 64-bit chip for
GameCube. Because
Nintendo was so quiet
about the system, many
skeptics doubted its
ability to compete with
Sony’s PlayStation 2 and
Microsoft’s Xbox. Big
mistake. GameCube may
look like a toy, but going
into the 2001 Christmas
season, it could compete
with anything on
the market.

With the launch of PlayStation 2, Sony officially launched the most recent generation of video
game hardware.

Twenty years and 100 million Game Boys
later, Nintendo of America president
Minoru Arakawa and Mario still have
reason to smile.

First appearing in the 1981 game Donkey
Kong as a carpenter named "Jumpman,”
Nintendo’s Mario is the elder statesman of
the gaming industry.

When I was a youngster, I went to Coney Island. Like everybody else in New York City, I
played the games in the penny arcades. That was really my total knowledge of the business.

—David Rosen, cofounder, Sega Enterprises

David Rosen and Michael Kogan ... just a couple of guys living it up in Tokyo.

—Bernard Stolar, chief operating officer, Sega of America

334 The Birth of Sega

David Rosen was tall and thickly built, with dark hair and a strange calm
intensity that suggested the ability to carefully consider issues under any cir¬
cumstances. He could be friendly and quietly intimidating at the same time.
He had served in the U.S. Air Force during the Korean War. In 1951, as Marty
Bromley started his slot machine business, Rosen was stationed in the Far
East. He traveled to locations such as Shanghai and Okinawa but spent most
of his time in Japan.

While serving in Japan, Rosen came to believe that the Japanese people
were too industrious to remain in their present circumstances. Seeing an op¬
portunity, he started up a business even before he was discharged. After
finishing his commitment with the Air Force, he returned to the United States,
hoping to further his college education and establish his business.

My first business was actually involved in art, strangely enough, which is
about as far from the current business as you could be. In those years )apan
was still in an economic postwar strata and, consequently, there was still a
lot of unemployment at the time. A lot of the artists were doing portrait paint¬
ing based on photos. I established a company in the United States that sent
photos back to Japan to be made into portraits.

—David Rosen, founder, Rosen Enterprises, Ltd.

When his portrait business failed, Rosen decided to return to Japan and
start a new business that he would run while living in Japan. He studied the
people and their needs and found an intriguing possibility.

At that point in time, the people in Japan had a great need for ID photos. You
virtually needed an ID photo for school applications, for rice ration cards, for
railway cards, and for employment, obviously.

We're talking about 1953, 1954, and the photo studios generally charged
what was then 250 yen, and it took two or three days to have the photos
done. My thought was that we had, in the United States, photo mat studios
that charged 25 cents, and you could get four photos. They were called
Photomats—little booths that were completely automated.

—David Rosen

The Birth of Seja 335

American Photomat booths were not an ideal solution, however. Upon
returning home, Rosen discovered that Photomat pictures faded after one or
two years. If he wanted to bring Photomats to Japan, where the pictures would
be used on official IDs, he needed to find a way to produce pictures that could
last for four or five years.

After some research, Rosen discovered that the problem was easily solved.
Photomat pictures were made without negatives—an automated camera
snapped the shot, then flashed the image on positive paper. If this process
were carried out adhering to certain temperature specifications, the pictures
would not fade for several years. The booths, however, lacked temperature
controls. The people who ran the companies that made the booths believed
that their customers viewed the pictures as having only novelty value.

Adding temperature controls would have been too expensive, so Rosen
came up with a more practical solution. He left the automated camera device
in the booths and placed workers behind the booths to develop the pictures
by hand while monitoring the temperature. With the economy as weak as it
was, Rosen had no problem hiring workers.

I took some older machines that were in the United States, redesigned them, and
brought them into japan. This was the beginning of 1954. We put out the first
couple of booths, and it turned out to be wildly successful. We charged . . .

I believe it was 150 to 200 yen, which was less than the 250 yen [charged by
photographers], and obviously we were able to develop it in about two or
three minutes. The Japanese for this business was Nifun Shashin, which means
"two-minute photo,” and Photorama was the name of the brand.

This became so successful that it enabled me, over a short period of time,
to open up well over a hundred such locations throughout japan. There were
different times when people would go through school applications and what¬
not, and it was not unusual at those times of the year for the lines to get into
the booth to be an hour, hour and a half.

—David Rosen

If anything, Rosen’s Photoramas proved too successful. Although his
prices were only slightly cheaper than those offered by photographers, the

336 The Birth of Sega

convenience of picking up pictures within a few minutes attracted custom¬
ers in droves. As his business grew, photographers started to complain and
eventually protested to the U.S. consulate. When the consulate asked Rosen
for help, he offered to license Photorama franchises. According to Rosen,
this may have been the first franchising business in Japan.

Franchising led to some immediate profits but ultimately killed the busi¬
ness. Although Rosen was able to double his locations by licensing nearly one
hundred operations, franchising invited competition. There was no patent on
Photorama technology, so other companies were able to move in and imitate
the booths. In the early 1960s, Rosen finally closed his Photorama business. By
this time, however, he had managed to open several new ventures and move
in a different direction.

To import any product into Japan in the early 1950s and mid-1950s, and even
pretty much going into the late 1950s, you had to apply for a license through
the Ministry of International Trade and Industry (MITl). It didn’t matter if
you were a Japanese company or any other nationality, you could not im¬
port anything without a license.

The licenses generally went into three categories. Category one was ab¬
solute necessities. Category two items were non-necessities but something
desirable. And category three was luxury. Well, luxury was nearly impos¬
sible; I mean, there were no dollars there. And absolute necessities were such
things as oil, certain foodstuffs, etc. So those problems existed, as I say,
simply because of a lack of dollars, not because they were trying to block
imports coming into Japan.

—David Rosen

Japan received a tremendous financial boost from the presence of the Ameri¬
can military during the Korean War. The United States used Tokyo as a base
throughout the war, and American procurement of goods and workers
brought a rich infusion of dollars into the Japanese economy. As a result of
that new prosperity, Rosen decided to import a limited number of “luxury”
items in 1956. After considering his options, he decided to bring in some coin-
operated electro-mechanical games.

The Birth of Sc^a 337

It took me over one year with a lot of effort and certainly a lot of introductions
to convince the MITI that these games were something that would be good for
leisure. They finally granted a license to me for $100,000, which meant that I
could purchase $100,000 worth of merchandise [in the United States!.

—David Rosen

According to Rosen, the U.S. amusements market was fairly stagnant
when he arrived. The arcades that carried the games attracted a fairly rough
clientele, and all of the games came from a few Chicago-based companies.
With the exception of pinball, the amusement industry had gone flat, cre¬
ating a buyers’ market in which many distributors were glad to sell used
machines to Rosen at bargain rates. He paid approximately $200 per game,
then had to pay nearly twice that price to the Japanese authorities in order
to import them.

Most of the games Rosen imported, such as Bear Gun from Seeburg, involved
shooting. These were big, heavy machines that required a lot of space. With
Bear Gun, for example, the player stood nearly fifteen feet from the target. These
games were also very solidly constructed and seldom broke down.

Due to the success of his Photorama operation, Rosen had more than one
hundred locations in which he could place his machines. He charged 20 yen
per game. At the time, the trade rate was 360 yen to the dollar, so Rosen was
letting people play for less than the ten cents per game that was standard in
the United States. Like his photomats, Rosen’s coin-operated games were a
huge success. With shipping and duties, Rosen paid less than $1,000 to import
each game. Even at 20 yen per game, it took less than two months for the
games to earn back that investment. Within a year, the Ministry of Interna¬
tional Trade and Industry approved Rosen’s request to return to the United
States and purchase $200,000 worth of games.

At this point in time I became known as a very live customer because most
distributors in the United States had warehouses filled with used equipment
that they really had no marketplace for.

in those years, trade-ins were a very big part of any distributor’s busi¬
ness. Operators buy games and two years later they trade them in. At that

338 The Birth of Se^a

time, the distributor's price to the operator for new games was maybe $695,

$795, and he would take a trade-in and give $50 or $100 for an older game.

The trade-ins just piled up in warehouses.

—David Rosen

Through the Photorama business, Rosen had developed strong relation¬
ships with the owners of the Toho and Shochiku movie theater chains and
was able to place arcades in their lobbies or in adjoining spaces. While Namco
founder Masaya Nakamura was still operating horse rides on the rooftops of
Tokyo department stores, Rosen had at least one arcade in every city in Japan.
His closest rivals were Service Games, which by this time had cornered the
jukebox market with “Sega” jukeboxes, and Taito, the amusement company
founded by Michael Kogan. Though they were all fiercely competitive, Rosen,
Kogan, and the principles of Sega formed strong personal ties.

After the success of his arcades, Rosen searched for new ways to expand his
business. He bought the rights to an indoor golf game, in which a computer
read the speed and direction of a ball that players hit into a net, and set up a
golf course franchise. The Japanese, however, considered golf an outdoor ac¬
tivity, and Rosen’s business did not flourish. Next, he tried building a business
around slot cars. This idea touched off a brief fad. Then he was approached by
AMF to help establish a bowling alley.

At that time there were bowling installations in military bases and there was
one bowling installation in Tokyo, but it was sort of quasi-American mili¬
tary. It really wasn’t in the civilian marketplace. I decided that I would open
up the first bowling center.

It had to be put into a very high traffic, high entertainment area. I picked
an area of Tokyo that was full of restaurants and theaters called Shinjuku.

Well, getting space in Shinjuku was very, very difficult; next to impossible. I
decided to open up fourteen lanes, but the only way I could find that much
space was to build on top of one of the existing [movie] theaters.

This was a real chal lenge because the president of that particular theater chain
was a friend of mine. We had to do this without affecting the theater. . . .

The Birth of Se^a 339

no vibrations, no noise in the theater. It was really an engineering feat. Until
we rolled the first ball down, we really couldn’t be sure it would work.

—David Rosen

Rosen’s bowling alley was an unqualified success.

This particular bowling center went on to establish records in the bowling
industry. The way they measure the success of an alley is by lines bowled in
a day. At that point in time, a typical bowling center in the United States
would do 40 to 45 lines per day. The centers that held records were situated
in Hawaii. They were doing about 60 per day. We did no per day.

We only closed four hours a day, between 2:00 and 6:00 in the morn¬
ing. We were originally opened 24 hours, but the police said, "Please close
for a few hours.”

—David Rosen

Ironically, it was the only bowling alley Rosen ever opened. Once again, his
success paved the way for competitors. Before long, Brunswick opened sev¬
eral bowling alleys around Japan, with Sega or Taito arcades in their lobbies.
Thanks to its theater arcades, Rosen Enterprises, Ltd., remained the biggest
amusement game company in the business, but its closest rivals gained ground.

I New Arrangement

Smaller competitors started popping up around Tokyo toward the end of 1964,
and Rosen began discussing a three-way merger with Michael Kogan of Taito
and the three men who controlled Service Games—Marty Bromley, Dick
Stewart, and Ray LaMaire. Kogan eventually decided against joining with the
other companies; but Sega and Rosen Enterprises did join forces to form Sega
Enterprises, Ltd.

Though Rosen Enterprises had a stronger hold on the amusement games
market at the time of the merger, Service Games was a much larger com¬
pany. Its assets included a thriving jukebox trade that at one point reached

340 The Birth of Sesfa

approximately 6,000 locations, a considerable manufacturing facility, sev¬
eral bowling alley arcades, and more than thirty branch offices. Under the
new agreement, Rosen became president and CEO of Sega. Within a year of
his becoming president of the company, Rosen used Sega’s manufacturing
plant to build its own games.

Nearly ten years had passed since Rosen imported his first Bear Gun and Coon
Hunt games, and he felt that game quality had not changed much over that
time. Due to increased competition, he switched from purchasing used games
to buying new ones, driving the money he spent per game from $200 to as
much as $695. The switch yielded little value to the consumer. The coin-
operated amusement industry was so stagnant that the new games were
almost identical to the used ones Rosen had imported earlier.

In 1966, Sega began manufacturing its first game, Periscope, which put a new
spin on the shooting games Rosen had imported since 1956. The game was an
attack submarine simulation. Players scanned a stretch of ocean through a
periscope, then fired torpedoes at ships as they crossed the horizon. The ocean
was a wide bed of plastic that looked like a windy, wave-tossed sea, and the
torpedoes were really only strings of lights, but Periscope had great sound ef¬
fects and the overall effect was very impressive for its time. The game was
expensive to make and cost 30 yen to play—twice the price of earlier games.

Periscope was so successful in Japan that distributors from the United States
and Europe flew in to see it. The game had been designed for use in Sega arcades
and was not built well for export; but when international orders came in, Sega
engineers redesigned it so that it could be shipped elsewhere. Rosen gave the
game a $1,295 price tag, making it far more expensive than games manufac¬
tured in the United States. When U.S. operators complained that Sega wanted
too much money and that a $1,200 game would never pay for itself, Rosen re¬
sponded that they should set Periscope at 25 cents per play instead of the usual 10
cents. Periscope became the first game to be set at that price.

Sega made its mark in this country when it brought over a gigantic target
rifle called Periscope. What was interesting about Periscope was not only
that it was the biggest machine ever built—I think the thing ran io feet deep
by 6 feet wide by 6 feet high—it introduced quarter-play. It was so success¬
ful in the arcades that it brought people off the street. People came into

The Birth of Sega 341

these arcades just to play that game. I would say that in my time, Periscope
is one of the great successful novelty machines.

—Eddie Adlum

With the success of Periscope, Sega suddenly became an exporter rather than
an importer of games. Sega engineers began designing as many as ten new
games each year—all of which were available for export. Within three years
of the merger, Sega had become so successful that Rosen, Bromley, and the
other principals began discussing a public offering on the Japanese market.
That idea turned out to be too ambitious. Had they succeeded, Sega would
have been the first foreign-owned company to enter the exchange since the
end of World War II.

Rather than selling shares of their company, Rosen, Bromley, Stewart, and
LaMaire ended up selling their company altogether. Approached by Kidder
Peabody with the suggestion that several large American conglomerates would
be interested in purchasing the company, they spoke with a few companies
and finally sold to Gulf & Western in 1967.

All four of those boys (Bromley, Stewart, LaMaire, and Rosen) were involved
with Sega until they sold it in 1968. From what i gather, Ray, Dick, and Dave
had more money than they had ever seen, and they were going to retire. My
father would have been in his fifties at that point. They got an offer from Gulf
£ Western and decided to retire, and that lasted all of six months; then three
of the boys (Bromley, Stewart, and LaMaire) started Segasa of Spain.

—Lauran Bromley

Though the sale of Sega included a stipulation that required Rosen to re¬
main as CEO and chairman through 1972, it allowed him to move his
headquarters to the city of his choosing. After trying Hawaii for a few months,
he established headquarters in Hong Kong and stayed there until 1976. It was
during this time that he established a strong relationship with Charlie
Bluhdorn and Jim Judelson, the chairman and president, respectively, of Gulf
and Western. Bluhdorn offered Rosen the opportunity to go into partnership
with G & W in establishing a Far East conglomerate similar to G & W. The

34 ? The Birth of Se^a

company was formed with Sega as a subsidiary. However at that time the
market conditions in the Far East did not allow for an acquisition program of
the type required to emulate G & W’s success in the United States. In 1974
Bluhdorn, recognizing Rosen’s restlessness and entrepreneurial spirit, offered
to spin out Sega into a U.S. listed company, which Rosen as chairman, CEO,
and second largest shareholder could use as a vehicle to grow Sega.

During this time, Sega acquired an established American arcade company
called Gremlin as its manufacturing arm. Teamed up with Gremlin, Sega ended
the 1970s as a major supplier of video games in the United States and Europe.

While profits kept rising in the 1980—1982 periods, I became very concerned
regarding the economics of the industry. I felt that sound fiscal principles were
being ignored and that the wild expansion would lead to a very serious bust.

In a major industry distributor meeting hosted by Sega, I gave a speech in
which I forecasted that the industry was just around the corner from a major
disaster, if there was not a change in the way business was being conducted.

—David Rosen

Rosen advocated that manufacturers and distributors start manufactur¬
ing and selling kits to the operator, allowing them to convert older games
without having to purchase completed cabinets. According to Rosen, the idea
stunned the audience and some people booed him. “My speech was consid¬
ered blasphemy,” he later wrote of the event.

In the late 1970s Bluhdorn asked Rosen to join the Paramount Group, and
his headquarters were moved to the Paramount studio lot. Barry Diller, the
chairman of Paramount, and Michael Eisner, the president of Paramount,
joined the Sega board, and Rosen joined the Paramount board.

In late 1981 Rosen proposed that Gulf & Western buy out the minority
shareholders, including himself. The decision was to buy out the minority
shareholders. Rosen agreed to stay on as corporate advisor, and was there to
see the collapse of the coin-op and consumer markets a few months after the
buy-out in 1982. In 1983, however, about one year after the crash of the arcade
industry, the oil giant started looking for ways to get out of the video game
industry. Gulf & Western sold Sega’s U.S. assets to Bally/Midway, then con-

The Birth of Se^a 343

tacted Rosen and offered him the opportunity to buy back the Japanese op¬
eration for $38 million. Rosen put together a team of backers and assumed
control of the company in March 1984. After the buy-back, Hayao Nakayama,
one of Rosen’s backers, became CEO.

Having witnessed the crash of the arcade industry, Nakayama decided to
diversify Sega’s activities to include home products. Nintendo had already
launched the Famicom, so Nakayama turned his attention toward America.

1 g . Hire

I just love playing Mario on my Atari.

—Yasmine Bleethe, actress on Baywatch

Every dog has its day, and this one is having a big day. 1

—Trip Hawkins, founder, Electronic Arts

It can carry a glass of water to you, or a glass of milk, or whatever, so it’s really hot.

—Ernie Anastos, former anchorman, WABC-TV Eyewitness News

346 The New Empire

The Last Vestiges of Anonymity

Nintendo began marketing the Nintendo Entertainment System (NES) in 1985
with a single sales territory—New York City—and 100,000 game consoles. By
the following Christmas, the NES could be found in stores coast to coast and
in 1.9 million homes. With a new sense of confidence, Nintendo president
Minoru Arakawa sponsored a survey called the North Pole Poll as he pre¬
pared for the 1986 holiday season. In the survey, children were shown the
toys that retailers considered to be their top prospects and asked to choose a
favorite. Some of the candidates included Rambo action figures, Teddy Ruxpin,
Barbie, and baseball gear. The number one pick was the NES.

To publicize the results, Nintendo’s PR firm produced a video news release
about the survey and sent it to television stations across the country. Scores of
news shows ran the story, including WABC TV in New York City. The prob¬
lem was that while an ever-growing body of children knew about Nintendo,
the message had not yet reached most adults. When WABC Eyewitness News an¬
chors Ernie Anastos and Roz Abrams discussed the story on the air, they clearly
had no idea what the NES was or even how to pronounce the name Nintendo.

The segment began with Nintendo’s prepackaged video release about the
North Pole Poll. Once the clip ended, Anastos tried to sound knowledgeable
as he said: “Nine-tendo, that is the high-tech video entertainment system.”

“I think that is part of Nine-tendo, there,” agreed Roz Abrams, pointing at a Ro¬
bot Operating Buddy (ROB), which came bundled in the deluxe NES package.

“Let’s see if we can push this button here,” said Anastos. He flipped the
power switch on the back ol the robot and it began rotating its arms to the
right in a slow and grinding motion.

Assuming an air of expertise, Roz leaned forward and pushed the robot’s
arms down. “It’s part video game, part computer, part everything, and it goes
up and down and all around, and if you have all of the pieces....”

“It can carry a glass of water to you, or a glass of milk, or whatever, so it’s
really hot,” added Anastos.

The Pitfalls of Success

NES sales increased exponentially as Nintendo began its national sales cam¬
paign. According to Nintendo’s internal records, the company sold 1.8 million

The New Empire 347

game consoles in the 1986 fiscal year, 5.4 million in 1987, and 9.3 million in
1988. In 1989, Nintendo changed its fiscal year from September—August to
March—February, leaving the company with a seven-month fiscal year in 1989.
During that seven-month period, Nintendo sold 5.3 million game consoles,
and another 7.6 million in 1990.

Nintendo’s earnings soared as well. In 1987, Nintendo sold more than $750
million worth of games and hardware in the United States. That figure more
than doubled in 1988 to $1.7 billion. By 1990, Nintendo had sold more than
350,000 cartridges worldwide. Nintendo sales alone accounted for one-tenth
of the Japanese-American trade deficit.

Aware of the complexities that their company’s success might bring,
Arakawa and Howard Lincoln hired two outside firms—McCann-Erickson
and Foote, Cone & Belding—to handle advertising. Arakawa hired a public
relations firm, too—Hill and Knowlton. The largest PR firm in the world at
the time, Hill and Knowlton represented the nation of Kuwait just before and
during the Gulf War.

As the NES gained prominence, Nintendo became a lightning rod for pro¬
tests from several groups. One challenge Hill and Knowlton’s account
executives faced was trying to help Nintendo create a positive image at a time
when Americans were becoming increasingly upset about the Japanese—
American trade imbalance.

That was a time when Japanese influence in American business was really
picking up, and there was a certain animosity toward Japanese companies.

You’d call reporters in certain quarters and they’d basically say, "Three strikes
and you’re out." Strike one was that the video game industry was supposed
to be dead; two was that they’d never heard of a company called Nintendo
before; and three came when they said, "Oh, so they’re Japanese!"

—Richard Brudvik-Lindner, former group supervisor and head
of Nintendo of America Account Team, Hill and Knowlton

Protests came from all directions. Educators and parents complained that
Nintendo was distracting children from their studies, a 1989 study stated that
Nintendo was partially to blame for a 10 percent decrease in the cardiovascular

348 The New Empire

fitness of American schoolchildren, 2 and Jewish groups protested that the out¬
line of the third dungeon in a game called The Legend of Zelda was an inverted
swastika. When a Seattle-based group called Families for Peace protested out¬
side Nintendo headquarters during the 1987 holidays, Hill and Knowlton
executives had to scramble to preserve their client’s reputation.

Families for Peace decided they were going to protest against the war toys that
Nintendo was creating and shipping. Nintendo had their little Zapper light gun
and, of course, a lot of the games involved shooting or things of that nature.

That was a big test for Nintendo because they were a Japanese company
and Arakawa hadn’t faced protest before. ... Mr. Arakawa didn’t have a
cultural reference for how to deal with this. Howard Lincoln had a legalistic
way of dealing with it, but it wasn’t going to do much for them in terms of
their public persona, especially at that critical juncture. He took a very law-
yerly, legalistic approach. We convinced them that what they needed to do
was really soften Nintendo’s image at the time, so we went out and bought a
whole bunch of Christmas trees and lights and decorations. We bought some
white plastic sheeting that we put over the Nintendo sign at the entrance,
and we put these Christmas trees up and covered up the name.

We had to cover the name because we assumed there would be news cam¬
eras. Here was this crowd of families marching up and down in front of
Nintendo. . . . Families for Peace. There were moms pushing strollers with
babies, holding signs that said, "No guns,” and "Nintendo breeds war.”

—Richard Brudvik-Linder

In an effort to create a softer image, Arakawa turned to Howard Phillips,
one of Nintendo’s first employees. Phillips, the company’s product analysis
manager, was Nintendo’s most skilled video game player. He was energetic,
enthusiastic, and a natural evangelist for video games. Though he was origi¬
nally sent to the New York launch to work in the warehouse, he proved more
valuable as a salesman and product demonstrator.

Phillips made the perfect spokesman for Nintendo not only because of his
skill as a gamer and his enthusiasm, but also because of his appearance. With
short red hair and a youthful demeanor, Phillips had the bright smile and the
wholesome countenance that Nintendo needed to counteract bad publicity.

The New Empire 349

Dressed in bow tie and jacket, Phillips went on publicity tours, judged con¬
tests, became the president of the Nintendo Fan Club, wrote columns for the
Nintendo Fun Club News —the forerunner to Nintendo Power Magazine —and even¬
tually starred in a Nintendo Power comic strip called “Howard and Nester.”

Phillips played along as Nintendo and its PR firm portrayed him in a slightly
nerdy fashion. His relaxed mannerisms made him instantly likable, and he
knew how to build on his own affability by making himself open and approach¬
able. In 1986, Nintendo began promoting him as “the man who plays games
for a living.” The campaign lasted until he left the company in 1991. During
that time, he became somewhat of a luminary. “I wasn’t as big as a movie star,
but I was as recognized as the actors in network television shows. I was prob¬
ably as recognized as the guy from McGyver" Near the end of Phillips’s time at
Nintendo, one survey found that 59 percent of boys between the ages of nine
and eleven could identify him.

Here to stay

We were not convinced that video games had a long life. We knew that if the
market was flooded with poor quality video games, it’d blow up overnight.

—Howard Lincoln, chairman, Nintendo of America

Although they conceded that Nintendo had done better than expected dur¬
ing its national launch, many journalists and toy industry analysts believed
that the resurgence of video games would be little more than a brief fad. This
put Nintendo in a dangerous position. Parents would not spend $80 purchas¬
ing an NES for their children if they believed the video game craze was ending,
and buyers for the big retail chains might refuse to carry Nintendo products if
the industry was shaky. In a pamphlet called The Facts on Flome Video Games,
Howard Phillips listed four insufficiencies of older game systems that might
have led to their demise:

1. Limited in graphics and depth of play

2. Played at their best only in arcades

3. Restricted to few colors

4. Constrained by poor audio qualities, with a limited variety of
sound effects

350 The New Empire

Nintendo spokespeople often attempted to distance their company from
Atari when dealing with the media, a difficult task considering that its sales
force was comprised of Atari salespeople. They began spreading the message
that Nintendo had analyzed Atari’s mistakes. In a 1986 interview on the Fi¬
nancial News Network, Nintendo of America director of sales Bruce Donaldson
stressed inventory management and system security as the reasons Nintendo
would last longer than Atari had.

Very important to the Nintendo System, at this point in time, [is that] it can¬
not be what we refer to as "reverse engineered.” Nobody can buy a unit,
from an engineering standpoint, take it into [his] factory, and figure out
how to make software. There are security codes built into our entire system.

—Bruce Donaldson, former director of sales, Nintendo of America

Donaldson was mistaken. A British software development house called Rare
Ltd. reverse engineered a Famicom in 1984. And in 1988, engineers at Salt Lake
City—based Sculptured Software reverse engineered the NES to create their
own game authoring equipment, then created a thriving trade selling NES
development kits to other software developers. Other companies such as
Tengen, the home game division of Atari Games, invented technologies to
disable the security chip that Nintendo embedded in the NES to lock out un¬
licensed games.

We were very concerned about the quality of the games. If we didn’t come
up with good quality from our associates, we thought that we might go like
Atari. So we really had to be strict with our quality screening system.

—Minoru Arakawa

Nintendo’s most important message was game quality. According to Lin¬
coln and Arakawa, the game companies of the Atari age had gotten sloppy
and released too many identical games. To prevent this, Lincoln created very
strict terms that gave Nintendo unflinching authority over the licensing agree¬
ment that publishers had to sign to make games for the NES. American
companies such as Activision and Electronic Arts, which did not have to deal

The New Empire 3§1

with these restrictions when they made games for personal computers, took
a wait-and-see approach with the NES.

When Nintendo of America first began marketing the console, the only
licensees making games for the system were Japanese companies. These com¬
panies reaped tremendous benefits during the first year that the NES was out.
The first three games that Capcom released for the system— 1942, Ghosts 'N
Goblins, and Commando —all sold over one million copies. By 1987, several U.S.
firms recognized the value of doing business with Nintendo and signed li¬
censing agreements.

There were a lot of myths that were built up over the years about how Nintendo
was arrogant and Nintendo had a really restrictive licensing program and all
of that. But from our point of view, these guys were all making a ton of money.

Atari Games got all upset because they felt that they weren’t getting
enough games, so they illegally reversed engineered the NES and copied our
security chip. We got in a lot of litigation with them, so all of this stuff was
kind of cumulative.

When we set up this third-party licensing program in 1986, we came up
with a program by which we identified ways that we could control the qual¬
ity of software that was going to reach the market. We said two things. We
said, "If you want to be a third-party licensee, you have to agree that you
will only publish five games a year on our system, and you have to agree
that the games will be exclusive to the Nintendo Entertainment System for a
period of two years. ” From our point of view, those clauses worked as a qual¬
ity control mechanism.

—Howard Lincoln

Over the next decade, Lincoln learned that controlling third-party games
was not as important as having a healthy library of original games. When a
company named 3DO launched a highly sophisticated game console in 1994,
Lincoln commented that he was not worried about 3DO as a competitor be¬
cause it did not publish its own games. When a reporter later asked why he’d
been so confident, Lincoln responded, “The first-party games are the prod¬
ucts that differentiate your hardware.”

352 The New Empire

The Home Game Company

With more than 60,000 units sold in the United States, Donkey Kong was
Nintendo’s biggest arcade hit. The arcade industry began its long collapse the
year after Donkey Kong was released, and Nintendo’s arcade fortunes eroded
quickly. Nintendo released Donkey Kong Junior in 1982 and sold only 30,000 ma¬
chines, 20,000 Popeye. machines (also 1982), and a mere 5,000 copies of Donkey
Kong 3 (1983).*

In 1982, Universal Sales made arcade history with a game called Mr Do!
Instead of selling dedicated Mr. Do! machines, Universal sold the game as a
kit. The kit came with a customized control panel, a computer board with
Mr Do! read-only memory (ROM) chips, stickers that could be placed on the
side of stand-up arcade machines for art, and aplastic marquee. It was the first
game ever sold as a conversion only. According to former Universal Sales
western regional sales manager Joe Morici, the company sold approximately
30,000 copies of the game in the United States alone.

In 1983, Nintendo released the VS System, a line of arcade games with
double-screens on which two players could face off against each other or play
alone. In 1987, Nintendo replaced the VS System with Play Choice 10, a line of
arcade machines that worked like a jukebox with ten interchangeable boards.
All of the games for Play Choice 10 were modified versions of NES cartridges.

Despite the strategic move away from creating original arcade games, Lin¬
coln and Arakawa did not take the arcade business lightly. Play Choice 10 had
great marketing potential. They could prerelease highly anticipated games
on Play Choice 10 to build public awareness with negligible development costs.
Wealthy from home game sales, Nintendo remained the largest advertiser in
RePlay, a magazine that tracked the arcade business, for years after the com¬
pany stopped developing arcade content.

With its software development focused on home games, Nintendo began
churning out the most detailed and diverse game lineup ever seen in the con¬
sumer market. In 1987, Nintendo released three extremely significant games.

* In fairness. Donkey Kong 7 was not as impressive a game as the original Donkey Kong or Donkey
Kongjunior. The earlier games featured unique challenges; Donkey Kong 3 was little more than
a clever adaptation of Space Invaders. Lack of innovation may have hurt the game’s sales.

The New Empire 353

The Legend of Zelda

Nintendo’s biggest game in 1987, The Legend of Zelda, was created by Shigeru
Miyamoto, the same man who created Donkey Kong and Super Mario Brothers.
By this time, Hiroshi Yamauchi, the president of Nintendo Co. Ltd. in Japan,
recognized Miyamoto as a rare talent upon whom his company’s future
would depend.

The Legend of Zelda was a role-playing game in which players helped a young
elf boy named Link explore a huge territory as he fought monsters, collected
treasures, and explored dungeons. The ultimate goals of the game were to
defeat an evil monster named Canon and rescue Zelda, the princess of Hyrule.
Before you could do that, however, you had to locate pieces of a magical tab¬
let called the Triforce that were scattered across a vast playfield. In many ways,
The Legend of Zelda was Miyamoto’s most brilliant game. It combined a well-
thought-out fairy tale with perfectly crafted game mechanics. It was also
Miyamoto’s first free-roaming game. Unlike Super Mario Bros., a side-scrolling
game in which players could move only forward or backward, The Legend of
Zelda was played from the top-down perspective, allowing players to move
the hero in any compass direction.

When the first prototypes of The Legend ofZelda arrived in the United States,
Minoru Arakawa was not sure how people would respond to a complex game
with text windows in it. He worried that perhaps the game was too compli¬
cated for American audiences. To test this out, he had several employees try
the game. In order to give the game a fair chance, Arakawa arranged for Japa¬
nese-speaking workers to sit with American employees and translate any Kanji
that appeared in the text boxes.

It was all in Japanese, which made it really hard to play, but it was just so
compelling that we kept playing it and playing it. The way the game me¬
chanics worked, the fact that it did this great thing with that sword... It had
great mechanics. Typical of Miyamoto, it had puzzles. You would come across
things that would be on the island or behind a door or whatever, and you
could see them, but you couldn't have them.

—Howard Phillips

354 tire New Empire

As he tested The LegendofZelda on his employees, Arakawa noticed a disturb¬
ing trend. Most American workers who played the game did not warm up to
it instantly. They all ended up giving the game high marks, but Arakawa no¬
ticed that some people needed as much as ten hours before they understood
the game and enjoyed it.

The Legend of Zelda was a different kind of game and, also, it took a long time until
people really liked the game. I hoped people would be patient enough and under¬
stand that it was a different game and enjoy it, and I was worried at the time.

—Minoru Arakawa

Housed in a shiny gold cartridge, the American version of The Legend of Zelda
required more megabits of storage space than any other game released for the
NES up to that point, and it came with an internal ten-year battery, enabling
it to store three players’ progress so that they would not have to start again
after every game. The Legend of Zelda was the first game to include an internal
battery. It also came with more documentation than earlier games, including
a thick instruction booklet that identified most of the monsters and weapons
in the game and a large fold-out map of the fantasy land of Hyrule. As a final
precaution, Arakawa added a toll-free telephone number that players could
call if they needed help with the game.

The game was so different that we were afraid that people couldn’t figure
out how to play and [would] give up, so we put the 800 telephone number in
the game [booklet] so that they could call us for free and we could answer
any questions about the games.

We released the Legend of Zelda on June 27, 1987. All of a sudden, the
telephone started ringing. We hired four people to answer questions over
the telephone, and those four people were busy all the time, so we increased
from four to five, 10, 20, 40, 50, and we ended up with 200.

—Minoru Arakawa

Customers called nonstop and asked questions about more than The Legend
of Zelda —they wanted to know about every game. To cover the calls, Arakawa
expanded his telephone bank to ten full-time operators, but it wasn’t enough.

The New Empire 355

He continued expanding the telephone operation, running ads in the help-
wanted sections of the Seattle Times and the Seattle Post Intelligencer for people
who “want to play games for a living.” By 1990, more than 200 people were
working on the help lines, and the toll-free number became too expensive to
maintain. Expecting to reduce the number of calls, Arakawa approved the
suggestion to keep the help center as a free service but eliminate the toll-free
number. Throughout the 1990s, the help center continued to maintain a staff
of 200 operators, fielding an average of 100,000 telephone calls, 3,500 e-mail
messages, and 1,900 letters per week. During the holidays, the staffing grew to
500 operators fielding as many as 250,000 calls*

Mike lyson’s Puncga-Out

The second major game of 1987 was Mike Tyson’s Punch-Out, a home adaptation
of an arcade game that Nintendo had released in 1983. Both the arcade game
and the NES cartridge were designed by Genyo Takeda and Nintendo Co. Ltd.’s
Research and Development Team 3, a team of engineers that generally fo¬
cused on hardware.

The original arcade game, which was simply called Punch-Out, was a boxing
game in which players took on five fictitious fighters as they fought for a shot at
a championship belt. An early first-person game, players saw the game from
within the head of an “up-and-coming boxer.” The fighter the player controlled
was depicted as a wire mesh character. Although Punch-Out was ostensibly about
boxing, it was really a puzzle game. In order to win, players had to learn the
patterns used by the computer-controlled boxers. A fighter named “Bald Bull,”
for instance, would charge at the player. If he landed a punch at the end of his
charge, he would score an instant knockdown. The player could either dodge
Bald Bull’s charge and respond with a properly timed counterattack, or hit him
at a precise moment in his charge to knock him to the canvas.

The home version of Punch-Out featured more than twice as many opponents
as the arcade game. While the home version did include three of the original
fighters—Glass Joe, Bald Bull, and Mr. Sandman (who was the world cham¬
pion in the arcade game)—it also had five all-new opponents, including Mike
Tyson, who had recently been crowned heavyweight champion of the world.

In 1998, the help center held a small party to celebrate call number 64 million.

356 The New Empire

Arakawa thought up the idea of licensing Mike Tyson himself. He attended
one ofTyson’s early fights during a trade show and was impressed by the young
boxer’s power and skills. Arakawa decided that adding the super-powerful
heavyweight’s name to the upcoming boxing game would make it more at¬
tractive. Nintendo’s legal team approached Tyson with an offer that was
rumored to be $50,000* for a three-year period, and the fighter agreed. (It
should be noted that Nintendo took a chance licensing Tyson, since the agree¬
ment was signed prior to his winning the WBC title from Trevor Berbick on
November 22, 1986.) When Arakawa told Takeda the idea, Takeda agreed and
began adding Tyson’s image to one of the fighters in the game.

I watched Tyson fight during CES. This was before he became champion. He
was so powerful and strong and we all fel I in love with him, so we decided to
license him. japan liked the idea, too. Fortunately, the Punch-Out game was
under development for the home [console], so I contacted Mr. Takeda and
asked him to convert it to Mike Tyson’s Punch-Out.

He changed the master board to include Tyson, and Tyson [the boxer]
was quite successful. He won every fight before he became champion, so
we were very pleased.

—Minoru Arakawa

Unlike the arcade game, the home game was played from the third-person
perspective. Players controlled a tiny boxer in a black tank top named Little
Mac, who was so short that his head barely reached his opponent’s belt lines.
As he prepared to release the game, Arakawa confided to Howard Phillips
that the Little Mac character was designed to look like him.

When he first got Punch-Out, Arakawa said, "Little Mac, that’s you.”

I said, "What are you talking about?" and he said, "It looks just like you.”

I told him, "He looks nothing like me,” but Arakawa kept saying that re¬
peatedly. I don’t know if he was just pulling my leg.

—Howard Phillips

Nintendo refuses to specify the amount.

The New Empire 357

If Takeda’s team members wanted Little Mac to look like Howard Phillips,
they failed. Little Mac had black hair; Phillips’s hair was red. Their faces were
also unalike.*

Nintendo, a company that worked hard to maintain a clean image, came
to regret its association with Tyson. After winning and unifying the heavy¬
weight crown in 1987, Tyson became involved in a well-publicized divorce
from actress Robyn Givens. During the proceedings, Tyson was accused of
beating Givens. When Nintendo’s three-year agreement with Tyson ended,
the company quietly removed his name and image from the game and re-
released it as Punch-Out! with a new champion named “Mr. Dream.”

Both Mike Tysons Punch-Out and The legend ofZelda became million-sellers.

Metroid

Metroid, the third major game to be released by Nintendo in 1987, was a futur¬
istic adventure in which players controlled a space explorer named Samus.
Created by Nintendo’s Research and Development Team 1—the team led by
Gumpei Yokoi, the man who created the hardware for Donkey Kong—Metroid
was a difficult game to beat. It involved a lot of precision jumping, one of the
tougher skills in video games. It featured several large side-scrolling and ver¬
tically scrolling maps and stands out for having some of the most innovative
and challenging levels of any NES game. It was also one of the first games to
feature a female hero. Samus wore a large space helmet throughout the game.
She could have been a man, a child, or a robot. Once she destroyed the final
enemy character, a creature called “Mother Brain,” she removed her helmet.
Only then did players find out that Samus was a woman.

Metroid became a symbol of Nintendo’s ability to make adult-oriented games.
In later years, Nintendo tried to attract older consumers to Game Boy and
Super NES by releasing Metroid versions for those systems.

The Library of licensees

Nintendo’s third-party licensees also provided impressive games in 1987.
Konami, a company that would distinguish itself as one of Nintendo’s four

* Glass Joe, the first opponent in the game, looked a bit more like Phillips and has the same
hair color and length. It is possible that Arakawa was mistaken.

358 The New Empire

most influential licensees, made good use of its five-game allotment in 1987.
A successful arcade company with such past hits as Frogger and Time Pilot,
Konami’s first offerings included Gradius, a side-scrolling space shooter; Track
& Field send Rush 'N Attack, two decent translations of arcade games; Castlevania,
a side-scrolling adventure in which players controlled a whip-toting vampire
hunter; and Double Dribble, a basketball simulation.

Konami sold more than 1 million copies of Gradius, its first NES title, in Ja¬
pan before shipping it to the United States. The game contained a secret code
that would enable players to equip their spaceship with an array of weapons.
To get the weapons, players had to hit the directional pad on their controllers
up twice, down twice, left, right, left, right, “B,” “A,” and then “Start” but¬
tons. Konami used the same secret code in many of its later games.

Data East, another licensee with a strong arcade pedigree, used its
game allotment to convert popular arcade games into home cartridges.
Data East’s first offerings included Tag Team Wrestling, Karate Champ (the
first side-view martial-arts tournament game), Burgertime (which had been
released for ColecoVision, Intellivision, and several Atari systems in the
early 1980s), and Kamov.

Taito, which along with Konami was one of the original four licensees, re¬
leased home versions of three arcade games in 1987— Elevator Action, Legend of
Kage, and Arkanotd. In later years, Arkanoid became somewhat of a collectors’
item because it had an adapter featuring a knob that enabled NES controllers
to move paddles across the bottom of the screen. Arkanoid was basically an
updated version of the Atari game Breakout.

Some companies rushed to publish NES translations of arcade games that
they licensed from other companies. SNK Corporation licensed the NES rights
to the arcade hits Ikan Warriors dead Ikari Warriors IF. Victory Road from a company
called Irem. Sun Soft Corporation licensed a 1983 driving simulation called
Spy Hunter ham Bally/Midway.

Of all of Nintendo’s early licensees, however, the one with the most staying
power in the industry was Capcom. With an unmistakably strong arcade pres¬
ence and a particularly aggressive marketer at the helm of its U.S. affiliate,
Capcom released a mixture of arcade translations and original games that
attracted a strong following.

The New Empire 359

Capcom is another coin-op company, a very good coin-op company. They
were especially good at creating the games and doing the smart marketing.
Sometime, from inventory-risk point of view, they made mistakes by being
too aggressive, and they ended up in trouble back in those days.

—Minoru Arakawa

Fighting for Survival

Nintendo and Sega were neighbors during the 1987 Winter Consumer Elec¬
tronics Show. Sega’s big product at the show was a pair of 3D glasses for the
Master System. The glasses were designed by Mark Cerny, the young game
designer who created Marble Madness for Atari Coin-op. Now working for Sega,
Cerny moved to Japan shortly after leaving Atari.

Sega’s 3D glasses reflected their creator’s gift for sensible design. They were
molded out of durable plastic, lightweight, and large enough to fit over pre¬
scription eyewear. The glasses were not meant to replace the television but rather
to enhance it. Players watched the game through the glasses, and transparent
liquid crystal displays within the eyepieces focused the picture on the screen
and added 3D effects* Cerny’s glasses were one of the big hits of the trade show.

We were showing off what we felt was the next step in this technology, these
3D glasses that used a shuttering effect. Next to us. . . right next to us be¬
cause we were side by side, Nintendo was showing their knitting machine.

They actually had a big to-do for knitting potholders and stuff like that.

I remember seeing Howard Lincoln and Arakawa in the hallway between
our booths, and I started laughing and said that I felt that I was taking two
steps forward in technology and I didn’t know where they were going with
the pot holders.

—Bruce Lowry, former president, Sega Consumer Products

* Ten years after Sega released its 3D Glasses, a number of smaller companies released
products that utilized the identical technology to enhance PC games.

Sega had a number of small victories during this period. Macy’s and FAO
Schwartz carried the Master System right alongside the NES, and Target stores
promoted the console quite heavily. Film critics Siskel and Ebert compared
the NES and Master System on a special holiday program, concluding that
they preferred Sega’s hardware. Ebert, who wore corrective eyeglasses, even
commented that he could wear his glasses under the 3D Glasses.

These were fleeting victories at best, however. Nintendo controlled some¬
where between 86 to 93 percent of the market by the end of 1987. By the time
Sega had sold 100,000 Master Systems, Nintendo had already sold more than 2
million NES units and the gap was widening. Nintendo had better market
awareness and more money for advertising. Sensing that an established mar¬
keting partner with inroads into the American toy industry might have more
luck competing with Nintendo, Sega Enterprises CEO Hayao Nakayama pulled
the plug on the in-house consumer division in the beginning of 1988 and signed
a two-year licensing agreement with Tonka Toys. Neither Bruce Lowry nor
Bob Harris, who was vice president of sales and marketing, wanted to move to
Tonka’s Minnesota headquarters; and both ended up leaving Sega.

While we had gotten into all the retailers they [Nintendo] did, we simply did
not have the resources to compete against Nintendo’s huge marketing bud¬
get, and the decision was made to look for a partner. We hooked up with
Tonka, and they took over the distribution and put a tremendous amount of
money into marketing dollars. They put over $30 million into marketing.

—Bruce Lowry

Another Big Year

Toy sales generally drop sharply after the holidays, but Nintendo sales re¬
mained strong in January and February of 1988. With more than seven
million users, the demand for new games remained steady all year long. So
did the requests for game hints and information about upcoming titles.
Nintendo tried to satisfy consumer curiosity with a free quarterly newslet¬
ter called Nintendo Fun Club News, but the newsletter wasn’t enough. It began

The New Empire |6l

as a 12-page, two-color publication in the spring of 1987, but by winter it
had expanded to 32 full-color pages. After releasing the spring 1988, issue of
Nintendo Fun Club News, Arakawa decided it was time for Nintendo to publish
a full magazine. The magazine was named Nintendo Power.

There were quite a few publishers making video game magazines in )apan,
and no one was doing one in the United States, so we decided to do it our¬
selves. I felt Gail Tilden was the perfect person to do the editing on the
magazine. She had just had a baby and wasn’t in the office, so I called her up
and asked her to start our publishing department. She accepted, and she
came with the baby in her arms two weeks after she got out of the hospital.

—Minoru Arakawa

Nintendo Power, which was released bi-monthly, was larger and far more so¬
phisticated than Nintendo Fun Club News. Each issue was approximately 100 pages
long and featured game maps, tips from game counselors, and descriptions of
upcoming games. Nintendo Power ran no advertisements, though it glibly plugged
products made by Nintendo. By 1989, more than one million people subscribed
to Nintendo Power.

One of Nintendo Powers most popular features was “NES Achievers,” a two-
page spread that listed the names of people who either completed or got
exceptionally high scores on popular NES and Game Boy games. The compe¬
tition to get on this list was fierce and not always restricted to kids.

I had my name in Nintendo Power Magazine several times for top score on
Came Boy Tetris. It got to the point that they wouldn’t print my name again,
so I had to use a fake name.... my first name backwards and my last name
backwards. Evets Kainzow.

I saw the fake name in there one day, and I thought it was somebody else
and said, "Oh, my God, his score is better than mine!” I was trying to figure
it out, then I noticed that Evets Kainzow lived in Saratoga, and I remembered
sending it in.

—Steven Wozniak, cofounder, Apple Computers

362 The New Empire

Inventing the miniate Video Game

As Nintendo’s popularity grew, so did complaints about video games interfer¬
ing with school studies. Rather than taking a defensive approach, the public
relations team from Hill and Knowlton recommended that Nintendo take a
proactive stance and proposed an event that would cast the company in a
pro-education light.

There was a fair amount of backlash starting to develop about this time, and
people felt that video games were an insidious stealer of children’s energies
and creativity. There were a lot of things we did to try to put a more human
face on Nintendo, including sponsoring a contest that promoted the process
of inventing and creativity among kids.

—Richard Brudvik-Lindner

The contest was called the “Invent the Ultimate Video Game” competi¬
tion. Kids of all ages were invited to submit original ideas for video games to
be judged by Nintendo. They did not have to make an actual game; they sim¬
ply needed to send documentation explaining their ideas. Of the more than
10,000 entries received, 10 finalists were selected and flown to Washington,
D.C., in February 1989, to exhibit their ideas at an event that would be held in
the rotunda of the Senate office building. Many of the games that were se¬
lected had a decidedly educational theme. A female finalist, for instance, came
up with a game that simulated a presidential election. The winner of the com¬
petition was fifteen-year-old Jeffrey Scott Campbell of Aurora, Colorado, who
received the grand prize: a $3,000 scholarship.

I presented the trophies at the competition and talked with a lot of reporters.

This one TV reporter came up to me, and we spoke for quite a while. We had
a friendly conversation, then he said, "Are you ready to do the interview?”

I said yes, and he put his microphone in my face and said, "Why is it that
video games are so bad for kids?"

I thought for a few seconds, then I said, "They’re not.”

He said, "Let’s try this again,” and asked the same question. Then I thought
for a few seconds and said, "They’re not. ” He wanted to get me arguing, and

The New Empire 363

I thought this was the best way to make sure that he did not get any useable
tape from me.

—Howard Phillips

Not a Political Statement

In 1988, Konami released an NES side-scrolling shooter game called Contra. The
game started out like a fairly typical war game with soldiers running through a
jungle, shooting at enemies. Before long, however, the action moved out of the
jungle and into a futuristic-looking fortress filled with alien creatures and la¬
sers. (Despite the picture of an alien standing between two soldiers on the box,
some people saw the title and thought the game referred to the guerrillas Ronald
Reagan had sent aid to in Nicaragua.) Toys “R” Us refused to carry the game,
stating that it was too violent. When Minoru Arakawa called Toys “R” Us head¬
quarters and told the buyers that the violence in the game was within acceptable
limits, the retailers picked up the game. It sold exceptionally well.

Nintendo’s product analysts scrutinized and screened games before approv¬
ing them for publication on the NES, but some things slipped through. When
Jaleco, a company best-known for the million copy—selling baseball simula¬
tion Bases Loaded, submitted Maniac Mansion as a possible NES title, Nintendo
made the company change some of the background art. Originally created by
LucasArts for the Commodore Amiga, Maniac Mansion featured naked Greek
statues. Once the statues and a few mildly suggestive lines of dialog were
changed, the game was approved. Unfortunately, Nintendo’s screeners had
not discovered an Easter egg that was well hidden deep within the game.

You had to sneak into a character named Weird Ed’s room and steal his ham¬
ster. You would then run down to the kitchen undetected and put the hamster
in the microwave oven, at which point the hamster would explode into a
little charred mess complete with sound effects. Then you could hand the
charred hamster back to Weird Ed.

That actually was one of the only ways you could die in Maniac Mansion.

If you pulled off that trick, you would end up as a little tombstone, and then
you could move around the game as an invisible ghost-like character.

364 The New Empire

It was just one of those nice little tricks that was buried in the game, and
it was buried so well that they never found it until the first 250,000 copies
had sold. When we did the second run, they made us change it.

—Mike Meyers, former product manager, jaleco

A Holiday for iniels

As the holiday season approached, Nintendo could not ship in enough inven¬
tory to satisfy demands. Orders had been placed for 8.4 million NES consoles.
Nintendo was only able to deliver 7 million. Because of the cost of making
cartridges, Nintendo executives generally preferred multiple small manufac¬
turing runs and making customers wait for games rather than risking
overstocking inventories. This policy made shortages of top products a
Nintendo holiday tradition.

Blockbuster releases also generally resulted in holiday shortages. In 1988,
Nintendo released two blockbuster games in time for the holidays—the se¬
quels to Super Mario Bros, and The Legend of Zelda. Excitement over the games
grew so feverish that some Nintendo outlets took pre-orders. Both games had
fundamental changes in their game play that made them unlike their prede¬
cessors. Although both games were good, neither lived up to expectations.

Like The Legend of Zelda, Zelda LL: The Adventure ofLinkwa.s an adventure game
in which players led a young elf through a sprawling kingdom, exploring
dungeons and fighting monsters. The game had many of the same mon¬
sters and supposedly took place in the same fantasy world as The Legend of
Zelda, but the earlier game was exploration-based while The Adventure of Link
focused more on combat.

The second sequel of the 1988 holiday season, Super Mario Bros. 2, was even
more dissimilar to its predecessor. The only thing it shared with the original
Super Mario Bros, were the lead characters, a few clever puzzles, and the same
cute, innocuous sense of humor. The play mechanics of Super Mario Bros. 2 were
entirely new. Super Mario Bros, was a fast-moving game of exploration and pre¬
cision jumping, in which players always raced against the clock. Much of the
action occurred in acrophobic environments, where players sped across tall
mushrooms or dangling steel girders. There was always a sense of vertigo, as

The New Empire 365

one misstep could cost Mario a life. Super Mario Bros. 2, on the other hand, took
place at a slower and more plodding pace. Players located puzzles in the origi¬
nal Super Mario Bros, by jumping and bumping walls and blocks as they ran.
Many puzzles in the sequel were hidden under clumps of grass. To find them,
players had to pull every plant they passed.

Part of the reason the Super Mario Bros. 2 bore so little resemblance to the
original Super Mario Bros, was because it was not a true sequel. The game that
was released in the United States as Super Mario Bros. 2 was originally released in
Japan as Doki Doki Panic.

Mario 2 was a gap filler. In lapan it was called Doki Doki Panic and it had
some little Arabian guy. They just took the Arabian guy out and replaced
him with Mario, and I think there were some changes to the girl to make her
more like a Mario-ish heroine; but they only made very limited changes.

—Howard Phillips

Shigeru Miyamoto, the man who created Super Mario Bros., had little to do
with the making of Doki Doki Panic. He did create a sequel that was released in
Japan. Though Miyamoto’s sequel was similar to the original Super Mario Bros.,
it was determined that the game had elements that might irritate Ameri¬
can consumers.

There were two things in the Japanese Super Mario 2 that made it not so palat¬
able. At the time, I didn’t really know if Miyamoto had driven these changes or
not, and it made me question whether he just lucked out to begin with.

In the Japanese Super Mario 2, the very first thing that happens is that this
mushroom pops out of a block and you think, "Oh, great, go grab it.” It’s a
poison mushroom. In the first Mario game, all the things that popped out
were good. They added this new jeopardy that when you were looking for
something surprising and good, it might be surprisingly bad.

The other thing he did was add in this driving rain, it came at a 45-degree
angle so that Mario would be cruising along, and this wind would pick up
and it varied with time. Sometimes it would blow slow and you’d move pretty
quickly, and then sometimes it’d blow hard. You had to time your jumps to

366 The New Empire

the wind, but again, the winds were unpredictable and you had to guess.

Those two things were classically un-Miyamoto, in that [they were] random
and out of the player’s control.

Maybe Miyamoto was depressed at the time he made Mario 2, or maybe
he delegated somebody else to do some level design, and that person added
a couple of developments.

—Howard Phillips

Though it was quite different from the original Super Mario Bros., Super Mario
Bros. 2 was a major hit. Nintendo sold 6.76 million copies of the game worldwide.

The Liiai Sane

A "computer program” is a set of statements or instructions to be used directly or indi¬
rectly in a computer in order to bring about a certain result.

—United States Congress'

All computer software exists as electrical pulses, yet Congress explicitly extended copy¬
right protection to computer software as a literary work. 2

—Judge Fern M. Smith, District Court, North District of California

If you stack the notes from my appearances in court and measure them end-to-end, that
stack would probably be about two feet long, if you take all of the paperwork from all of
Magnavox’s cases, it would be at least 200 feet, enough to fill two storage rooms in a
private storage facility in Chicago.

—Ralph Baer, former manager, Equipment Design Division, Sanders Associates

368 The Le^al Game

lasing Decisions

Video game companies began taking each other to court before the term video
game was even coined. Magnavox, the first console manufacturer, sued Atari,
the first commercially successful arcade company, as early as 1973, coming
the year after the introduction of Pong. At the time, people did not know
whether to call Pong a “computer game” or a “television game.”

There have been hundreds of legal actions throughout the history of video
games. Many of these actions, such as Magnavox’s protection of its technol-
ogy patents, have resulted in insignificant trials or out-of-court settlements.
Other cases have had important ramifications for future copyright protec¬
tion and antitrust actions.

Data East v. Epyx

In 1984, Data East released a game titled Karate Champ. Though it was not the
first two-player fighting game,* it was the first two-player martial arts tour¬
nament game and the progenitor of a genre that in the early 1990s would
become extremely popular. In Karate Champ, players controlled a martial artist
as he battled computer-controlled fighters in tournament-style combat. {Ka¬
rate Champ had two-player simultaneous action as well.) It featured several
realistic blocks, kicks, and punches and had large, relatively human-looking
characters. The game was a modest hit in the arcades.

In October 1985, Data East released a home version of Karate Champ for the
Commodore 64 computer. One month later, the British company System III
released a similar game titled International Karate. When California-based Epyx,
Inc., licensed the game and released it as World Karate Championship {or the Com¬
modore 64 in April 1986, Data East took Epyx to court, claiming that the
“overall appearance, compilation, and sequence of the audio visual display of
the video game World Karate Championship infringed upon Karate Champ” Data
East also claimed that World Karate Championship infringed upon its trademark
and trade dress. The case went before Judge William A. Ingram of the United
States District Court for the Northern District of California.

Upon looking at both games, Ingram found several areas of similarity to
support Data East’s claim:

The first two-player fighting game was Warrior, released by Cinematronics in 1979.

The Le^al Came 3^9

A. Each game has fourteen moves.

B. Each game has a two-player option.

C. Each game has a one-player option.

D. Each game has forward and backward somersault moves and about-
face moves.

E. Each game has a squatting reverse punch wherein the heel is not on
the ground.

F. Each game has an upper-lunge punch.

G. Each game has a back-foot sweep.

H. Each game has a jumping sidekick.

I. Each game has a low kick.

J. Each game has a walk-backwards position.

K. Each game has changing background scenes.

L. Each game has 30-second countdown rounds,

M. Each game uses one referee.

N. In each game the referee says, “begin,” “stop,” “white,” “red,” which
is depicted by a cartoon-style speech balloon.

O. Each game has a provision for 100 bonus points per remaining second. 3

World Karate Championship borrowed other elements from Karate Champ. Both
games featured fighters in either red or white karate pis, and both featured bo¬
nus rounds in which players earned extra points by breaking bricks or dodging
dangers. The court recognized that as both games depicted karate tournaments,
some duplication was inevitable. Karate in general, and karate tournaments in
particular, included standard features such as karate pis, certain moves, and ref¬
erees. Matches at karate tournaments involve two fighters earning points by
performing combat maneuvers. The fights are scored by referees who award
certain points for various moves. In his decision, Judge Ingram also noted that
both games were made for the Commodore computer and that various con¬
straints were inherent in the use of that computer. Even granting these
constraints, the judge found too many similarities to ignore.

The district court found that except for the graphic quality of Epyx’s
expressions, part of the scoreboard, the referee’s physical appearance,
and minor particulars in the “bonus phases,” Data East’s and Epyx’s games
are qualitatively identical. 4

370 The Legal Game

Based on these findings, Judge Ingram ordered Epyx to recall World Karate
Championship and International Karate. His decision was overturned, however, by
Judge Stephen S. Trott oi the United States Court of Appeals, Ninth Circuit.

To establish copyright infringement, Data East must prove ownership
of a valid copyright and “copying” by Epyx of the copyrighted work. It is
undisputed that Data East is the registered copyright owner of the au¬
dio-visual work for each version of “Karate Champ.” Thus we need only
determine whether Epyx copied “Karate Champ.” This sounds simple
and straightforward. It is not. 5

According to Trott, there was no direct evidence that System III, the
original creator of International Karate ; had access to the Commodore com¬
puter version of Karate Champ. He listed Judge Ingram’s 15 similarities and
identified them as inherent to the sport of karate. According to Trott,
“karate is not susceptible of [sic] a wholly fanciful presentation.”* In his
decision, the judge stated that the only parts of the game that could be
protected by a copyright were the areas in which Data East made cre¬
ative contributions—namely the scoreboard and the background scenes.
These, however, were the areas in which Karate Champ and World Karate
Championship were most different.

Based upon these two features, a discerning 17.5-year-old boy could
not regard the works as substantially similar. Accordingly, Data East’s
copyright was not infringed on this basis either. 6

Trott found in favor of Epyx and reversed Ingram’s decision. Epyx was al¬
lowed to market World Karate Championship. This decision would have a decisive
impact on several future decisions, including another case with Data East. In
1993, Capcom released the game Street Fighter II, which became an international
arcade sensation. Shortly after the game was released for home systems, Data
East released the fighting game Fighter’s History, which had similar combatants

* In later years, Mortal Kombat, Street Fighter II, and other “completely fanciful” martial arts
games that built off the Karate Champ formula would dominate both the home market and
the arcade industry.

The Legal Game JJl

and moves. Capcom took Data East to court, claiming infringement, but the
courts ruled in Data East’s favor.

Atari Games Corporation v. Nintendo of America

In 1985, Steven Ross, president of Warner Communications, divided Atari into
two companies and sold off shares of each. He sold 75 percent of Atari Corpo¬
ration, formerly known as the consumer division, to JackTramiel. He kept 40
percent of Atari Games Corporation, the arcade division, and sold the rest to
Masaya Nakamura, founder of Namco. Nakamura had hoped to develop syn¬
ergy between the two companies. Instead, he found the arrangement
unsatisfactory and decided to sell his stake in Atari. Backed by a group of em¬
ployees and Time Warner, Hideyuki Nakajima, the man Nakamura sent to
manage Namco’s American operations, bought Atari Games in 1987.

Nakajima is generally remembered as a smart and extremely likable man
with a long history in the video game industry.* When Nolan Bushnell first
opened Atari Japan, in 1973, he hired Nakajima to manage it. One year later,
Bushnell sold the operation to Namco and Nakamura hired Nakajima to con¬
tinue running the company.

He was very "American” for a lapanese man. Culturally, they are different
people, but he was almost like an American with a Japanese accent. Just a
really neat man. I remember I was at an Atari convention down in Hilton
Head, and I asked him some sort of a philosophical question about the in¬
dustry and he looked at me and said something like, "That is a strange
question for the preacher to be asking.”

I really got a kick out of that. Here was this big deal from Namco and Atari
calling me "the preacher.”

—Eddie Adlum, publisher, RePlay

Shortly after taking over Atari, Nakajima decided to leverage some of Atari’s
arcade games as consumer products. He could not publish the games under
the Atari banner because the consumer rights to the Atari name belonged to

Nakajima died of lung cancer on July 11, 1994.

3J2 The Le?al Game

Atari Corporation. Instead, Nakajima created a wholly owned subsidiary of
Atari Games called Tengen *

At the time, the only viable outlet for video games was the hugely lucra¬
tive Nintendo Entertainment System (NES) market. Sega was not licensing
games for the Master System, and the Atari 7800 had barely made a dent in
the market. To break into the market, Nakajima knew he would need to be¬
come a licensee of Nintendo, so he met with Nintendo president Minoru
Arakawa and senior vice president Howard Lincoln in 1987 to discuss the terms
of their licensing agreement.

Nakajima wanted special privileges that had not been granted to other lic¬
ensees.** As the only company with access to the Atari library, he felt Tengen
had more to contribute, but Arakawa insisted that all licensees receive the
same terms. Nakajima ultimately agreed to Nintendo’s terms and signed on
as a licensee in December 1987. What Arakawa and Lincoln did not realize was
that they were entering into a trap.

It is not known if Nakajima ever planned to honor the licensing agree¬
ment, but Atari engineers began trying to discover ways around the security
devices in the Nintendo Entertainment System a full year before he signed
the agreement. (The NES had a custom-designed security chip containing a
protocol called ‘TONES programming” that detected unlicensed cartridges
and prevented them from working on the console.)

Atari first attempted to analyze and replicate the NES security system in 1986.

Atari could not break the 10NES program by monitoring the communication
between the master and slave chips themselves. Atari analysts chemically
peeled layers from the NES chips to allow microscopic examination of the
object code.*** Nonetheless, Atari still could not decipher the code sufficiently
to replicate the NES security system. 7

—judge Fern M. Smith

* Keeping with Atari tradition, Nakajima named the company after a term from the game
Go. Tengen refers to the center of a Go board.

** Nintendo licensees could publish only five games per year. Once a game was published
on the NES, it could not be released for other platforms for two years. Nakajima requested
that both stipulations be waived.

*** This is a figurative statement.

The Legal Game 373

Nintendo Co, Ltd., did not have this security system when the Famicom
was released in Japan. The system was designed for the NES, and it was built
around a special chip that was placed in all consoles and cartridges. The chips
worked like a lock and key, communicating signals in an initialization pro¬
cess. The NES simply ignored cartridges that lacked the security chip, and
Atari’s engineers were unable to duplicate it.

In 1988, as Nakajima agreed to release licensed versions of Pac-Man, RBI Base¬
ball, and Gauntlet, his lawyers found another method of analyzing the security
chip. They illegally obtained a reproduction of the 10NES program through
the Copyright Office by signing a false affidavit stating that they needed it for
use in a copyright infringement suit Nintendo had filed against them. The
suit was entirely fictional.

After deciphering the 10NES program, Atari developed its own program—the
Rabbit program—to unlock the NES. The Rabbit program generates signals
indistinguishable from the 10NES program. . .. The Rabbit gave Atari access
to NES owners without Nintendo’s strict license conditions. 8

—Judge Fern M. Smith

Submitting the false affidavit was a mistake that would haunt Atari in fu¬
ture court actions. According to several accounts, a team of Atari engineers
running a “Clean Room” operation was close to breaking the 10NES code. By
illegally obtaining a reproduction of the code from the Copyright Office, Atari
tainted the operation.

Some paralegal went to the copyright office, got the information and showed
it to somebody at Atari. The fact that he had access to it basically means that
somebody had the information and showed somebody at Atari, [which] ba¬
sically means that we had knowledge of it. So, some paralegal fucked up!

—Ed Logg, game designer, Atari Games Corporation

On December 12,1988, with three NES-licensed games on the market and a
complete understanding of NES marketing and security, Atari filed suit against
Nintendo, alleging that Nintendo was “improperly using its patent and greater

374 The Legal Game

market share to monopolize the home video game market.” Atari asked for
$100 million in damages. All of the pieces were in place. Through the original
licensing agreement, Atari had obtained access to retailers. Through the Copy¬
right Office, it had obtained a complete understanding of NES technology.
Atari could now manufacture its own cartridges, and the court action would
work as a preemptive strike against any injunctions Nintendo might file.

One unanswered question about this case is why Hideyuki Nakajima chose
such an aggressive tact for dealing with Nintendo. Some people quietly specu¬
late that it dated back to licensing disagreements between Hiroshi Yamauchi,
president of Nintendo, and Namco president Masaya Nakamura. Nakamura
received some preferential treatment when he originally signed Namco as a
Nintendo licensee, but when the contract expired, Yamauchi refused to re¬
new those preferential terms. The change in terms led to an angry rift between
Nintendo and Namco.

Mr. Yamauchi tried to take away all of the special provisions of the contract
that Namco enjoyed as a first licensee, and because of that, the relationship
suffered. I became very upset about the whole situation at that time, but
looking back, that was just his business management philosophy. I shouldn’t
have become upset about it, although I must admit that I was pretty upset at
that time. But I have no ill sentiments now.

When you consider the technical expertise and the depth of the technical
know-how of Namco, which Namco currently possesses as reflected by the
success of Namco games, Nintendo may have lost a lot more than Namco by
taking that approach.

—Masaya Nakamura, founder, Namco

One event that may have added to Hideyuki Nakajima’s resentment of
Nintendo, and Minoru Arakawa in particular, was a small dinner gathering at
Arakawa’s house in August 1988, at which Nakajima was a guest. According to
several accounts, Arakawa, Howard Lincoln, and Nakajima had just finished
dinner and gone out on a deck to talk. While they were outside, Arakawa, known
for taking short naps whenever the urge struck, fell asleep for a few minutes.
According to Lincoln, Nakajima seemed offended when he left the party later
that evening. (Nakajima may have taken offense to Arakawa’s falling asleep,

The Legal Game 375

but it should be noted that Atari had already used the false affidavit to obtain
the reproduction of the 10NES by that time.)

I’ve heard that story many times, and I don’t know that that influenced or
impacted the licensing decision. I do know that there was a fairly consistent
falling out between Nintendo and Atari Games. What the ultimate rationale
behind that was, I don’t know that we’ll ever fully know, but as far as Mr.
Arakawa’s dozing off with Hide, I somehow doubt that was the cause. I think
Hide was bigger than that.

—Ted Hoff, former senior vice president of Sales and Marketing,

Atari Games Corporation

Nakajima took an unusually aggressive stance toward Nintendo, and
Arakawa responded by taking an uncharacteristically patient approach toward
Atari Games. Ever since the Universal Pictures suit over Donkey Kong, Nintendo
had a reputation for using the legal system to its advantage. In this case, how¬
ever, Nintendo waited eleven months before responding to Atari’s charges by
lodging a suit of its own. In November 1989 Nintendo launched a countersuit,
accusing Atari of patent infringement, breach of contract, unfair competi¬
tion, and tortious interference with contract. Before filing the suit, Nintendo
took other measures, sending letters to retailers warning them not to carry
Tengen products. Stores caught selling the games, the letters warned, would
be subject to legal action.

This strategy caught Atari off guard and proved effective. Nintendo was
the most lucrative product in the toy industry at the time, and many retailers
would simply collapse if Nintendo cut off their supplies. Nintendo cartridges
were one of the few toy products that sold steadily all year long. Though a
few retailers such as Toys “R” Us considered ignoring Nintendo’s demands,
every major chain eventually removed Tengen cartridges from its shelves and
refused future shipments. Caught with expensive inventory and no sales out¬
lets, Atari asked the courts to stop Nintendo from threatening customers.
Judge Fern Smith responded by enjoining both Atari and Nintendo from in¬
terfering with each other’s customers. Both companies appealed the decision,
and the injunction was lifted on both sides, opening the way for Nintendo to
continue threatening retailers who stocked Tengen products.

37 & The Lejal Game

The court battle went much the same way, with Atari’s lawyers making
small gains, then finding themselves in a bad position. They attempted to make
the point that the data stream created by the security chips during the au¬
thentication process was not protected by copyright law. On this issue they
were correct. The copyright laws that protect computer software clearly stated
that while programs could be covered by a copyright, the data they produced
could not. Under that interpretation, Atari had the right to copy the data
stream created by 10NES.

Atari also argued that Nintendo’s lock-out security gave the company an
unfair advantage in the marketplace and that duplicating the code was the
only way to break into the market. Atari then took the case one step further,
asking for information that would ensure compatibility with future Nintendo
consoles. The judge declined that motion.

By requiring independent game developers to carefully study a particular
security system and discern which program instructions are truly necessary
for present compatibility, console manufacturers will have a limited period
of time in which to control the market for compatible games. In this time
period, some third party game developers are likely to enter license agree¬
ments with Nintendo, particularly if they have limited resources. After a
relatively short period of time, however, other developers will enter the game
market with independently produced, but still compatible games. In addi¬
tion, if third party developers who entered license agreements later find the
license agreements to be onerous, there still exists the option of reverse en¬
gineering the security system after the expiration of their license agreement.

Thus, a fair use defense which allows copying for present compatibility bal¬
ances the incentives for both the game developers and console manufacturers.

The extension sought by Atari would destroy this balance by eliminating
the console manufacturers’ lead time. 5

—Judge Fern M. Smith

The case came down to a few simple points. Since Atari did not dispute
Nintendo’s ownership of 10NES, the trial revolved around two specific ques¬
tions: Was Rabbit a direct copy of 10NES? And would companies need to
copy the program to compete in the market? The question of copying was

The Le^ai Game J[J

solved when Nintendo showed that Atari had duplicated nonfunctional parts
of the 10NES code.

In particular, the Court finds that the existence of program elements in the
Rabbit program which serve no function other than authenticating the con¬
sole firmly establish illicit copying. 10

—Judge Fern AA. Smith

Nintendo’s lawyers were also able to prove that there was more than one
way around the NES security system and that Atari did not need the illegally
obtained reproductions from the Copyright Office to access the NES.' 1 'The judge
found in favor of Nintendo, but the battle with Atari was only beginning.

Tetris

The most notable casualty of the war between Nintendo and Atari Games was
the Tengen version of the game Tetris, a game that was created by Soviet math¬
ematician Alexey Pajitnov while working at the Computer Center of the
Moscow Academy of Science. Pajitnov came up with a computer game in
which players organized two-dimensional geometric shapes. The blocks would
fall from the top of the screen, and players had to rotate and place them be¬
fore they landed. If the player organized the blocks into complete and
unbroken lines as they landed, the blocks would disappear. If the line was
broken, it would remain on the screen and blocks would pile on top of it. The
game ended when the blocks reached the top of the screen.

Pajitnov developed the game on an Electronica 60, an antiquated computer
that was the Russian clone of the PDP (Programmable Data Processor) com¬
puters made for the Department of Defense by Digital Equipment.* ** Because
his computer could display only alphanumeric characters, Pajitnov teamed
up with Vadim Gerasimov, a gifted young hacker with access to a PC, to cre¬
ate a better-looking interface for the game.

* This point would become pivotal in later cases.

** Steven Russel developed Spacewaron a PDP-1. Pajitnov’s Electronica 60 was considerably
more powerful, the equivalent of a PDP-11.

37® The Legal Game

In 1986, a friend of Pajitnov’s sent a copy of Tetristo the Institute of Computer
Science, in Budapest, Hungary. It was there that Robert Stein, president of the
London-based software company Andromeda, happened to see the game.

Sometime in 1986, Robert Stein was in Hungary and saw Tetris _just one of

the pirate copies. I didn’t call them pirated back then, I gave it out myself
everywhere. So, he feels that this is a really good game and approached the
Computer Center and wanted to make a license and publish it. He had no
idea what it means to deal with the Russians, with the Russian bureaucracy.

—Alexey Pajitnov, creator, Tetris

Stein contacted the Moscow Academy of Science and began negotiating
with Pajitnov for the rights to Tetris. Thinking Pajitnov had the authority to
make a deal, Stein next began calling executives at large software publishers
with an offer to license the game. He sold the European computer rights to
Tetris to Mirrorsoft and the American rights to Spectrum Holobyte, both
backed by British publishing magnate Robert Maxwell. Stein had not counted
on the difficulties of dealing with the Soviets, however, and granted these rights
before securing them for himself. Mirrorsoft and Spectrum Holobyte released
versions of Tetris in January 1988. The Soviets did not sign Stein’s contract un¬
til the following month. Stein’s contract specifically gave him control of the
personal computer versions of Tetris created for Western markets.

He finally came to us and said, "Well, I want this right, I want those rights, I
want those rights.” So, basically, because we promised him the PC rights,
they were given to him, and we legalized our relationship at this point. But
the game was on the shelf already and I do believe that he sold his video
rights as well without having an agreement. He approached us immediately,
asking for all the rights, but we didn’t know who the hell he was.

—Alexey Pajitnov

Then the confusion began. Spectrum Holobyte sold the Japanese computer
and coin-op rights of Tetris to an entrepreneur named Henk Rogers, who had
strong ties to Nintendo. At the same time, Mirrorsoft sold the exact same

The Le^al Game 379

rights to Atari Games. Mirrorsoft wielded more power in the Maxwell orga¬
nization, so the rights went to Atari. Atari, in turn, sold the Japanese
coin-operated game rights to Sega Enterprises and the Japanese console and
PC rights to Rogers. What nobody realized was that Stein had never received
the rights to make any of these deals.

After looking over the various arrangements, Rogers realized that no one
owned the handheld rights to Tetris, so he flew to Moscow and met with the
Soviets. He had hoped to secure the rights as an agent for Nintendo. Nintendo
was preparing to unveil the Game Boy, and Arakawa thought Tetris would be
the perfect lead title for the new handheld game system. While Rogers was
there, the Soviets surprised him by offering the worldwide video game rights
as well. He had been under the impression that Atari and Mirrorsoft con¬
trolled those rights, and fearing a legal battle with those companies, Rogers
brought Nintendo into the negotiations. On March 22, 1988, Howard Lincoln
and Minoru Arakawa signed a contract with representatives of
Electronorgtechnica (ELORG), the Soviet agency handling the transaction,
sealing the worldwide home video game rights to Tetris.

Atari Games had already begun work on the Tengen version of i'etns for
the NES by that time.

I was there when they locked up Tetris. The Tetris story was kind of an inter¬
esting one, and to this day the people at Tengen believe that the Russians
double dipped. The product was in negotiation for licensing, and at virtu¬
ally the same time, the product was licensed to two companies. We had
manufactured Tetris and put it on the market, and, in fact, it became the
number one seller on the Nintendo platform.

-Ted Hoff

On March 31, nine days after signing the contract in Moscow, Lincoln and
Arakawa sent a fax to Hideyuki Nakajima, informing him that Nintendo had
secured video game rights to Tetris. Two weeks later, Atari Games quietly filed
for a copyright for the game.

Atari released its Tengen version of Tetris in May, 1989; Nintendo released its
version one month later. The Tengen version, which was created by veteran

3 §@ Hie Le^al Came

arcade designer Ed Logg * had both single-player and two-player modes and looked
almost exactly like the arcade game. Nintendo’s version was a single-player game.
Most reviewers agreed that Tengen had done a better job with the game.

Judge Smith, who handled the case concerning Atari’s duplication of the
10NES, presided over the Tetris case as well. The trial hinged on determining
who had legal ownership of the game. Nintendo’s pedigree was obviously stron¬
ger. Nintendo had signed statements from Soviet officials confirming the sale
and a note signed by Stein, defining computers as PC computers with, among
other things, a keyboard and a monitor. Recognizing that Nintendo would
almost certainly prevail when the case went to trial, Judge Smith granted
Nintendo’s motion to force Atari to recall its cartridge. The case ended with¬
out a trial, however. On November 13,1989, Smith canceled the trial and ruled
that Nintendo owned the rights to the game.

I think to this day, anyone you talk to will certainly say that the best Tetris
was the two-player Tetris that came out on Nintendo and was published by
Tengen. Without a doubt, it was the best Tetris. At one point, you could look
in the back of any of the gaming magazines and find people who would be
willing to pay you $300 for a Tengen Tetris cartridge.

There were 268,000 of them locked up, bolted, padlocked in Milpitas on
Sycamore [Street]. If people knew that they were $300 each and knew that
there were that many of them, they probably would have picked the lock. But
that was a well kept secret in a dark room. And those cartridges were never
shipped. When I left the company two years ago, the cartridges were still un¬
der lock and key. My understanding is that they were subsequently destroyed.

-Ted Hoff

Nintendo sold more than 3 million copies of its NES Tetris cartridge and
more than 40 million copies of Tetris cartridges for Game Boy. (The game

* Logg, best known for creating the arcade games Centipede, Asteroids, and Gauntlet, deserves
some credit for Atari’s coin-operated version of Tetris. He converted the code he made for
the Tengen NES cartridge to work in the coin-operated game, then Atari engineers Greg
Rivera and Norm Avellar finished the game. The Tengen Tetris cartridge was finished nearly
four months before it was released. Atari sat on it while the arcade game was hot.

The Lejal Game |8l

came packed in with the system.) Pajitnov, the creator of the game, did not
make any royalties from any of these sales, but his association with the game
enabled him to emigrate to the United States. In 1996, all of the rights that
ELORG had sold expired and reverted to Pajitnov. Hoping to help Pajitnov
finally profit from the game, Henk Rogers helped him establish the Tetris
Company, Lie., which would then control all rights to the game. From that
time on, companies that made games based on Tetris had to purchase the
rights from Pajitnov.

Sega Enterprises, Ltd. v. Accolade, Inc.

Ordinarily in a trademark case, a trademark holder contends that another
party is misusing the holder’s mark or is attempting to pass off goods or
services as those of the trademark holder. The other party usually protests
that the mark is not being misused, that there is no actual confusion, or that
for some other reason no violation has occurred. This case is different. Here
both parties agree that there is misuse of a trademark, both agree that there
is an unlawful mislabeling, and both agree that confusion may result. The
issue here is—which party is primarily responsible?"

—Judge Stephen Reinhardt

In 1984, Bob Whitehead and Alan Miller, two of the original VCS program¬
mers who left Atari and started Activision, founded a software company called
Accolade. Accolade started out as a computer game company, but when Sega
released the Genesis in 1989, Whitehead and Miller decided to convert some
of their PC titles to work on the new console.

They had licensed approximately thirty other companies, and the licens¬
ing deal, it turns out, is a very expensive deal. One pays them between $io
and $15 per cartridge on top of the real hardware manufacturing costs, so
it about doubles the cost of goods to the independent publisher. It winds
up with the consumer generally paying a lot more for the cartridge, but
that’s the licensing deal, and they have a right to establish whatever they
consider to be a fair deal.

382 The Lejal Game

We chose to not accept the licensing deal and instead to independently
study the system, figure out how to do games for it, and then publish several
games for the system.

—Alan Miller, cofounder, Accolade

Mike Lorenzen led a team of Accolade engineers that purchased a Genesis
console and three game cartridges, then wired the console so that they could
make printouts of the executable code of the games. They compared each
game’s code to locate identical chains, believing that all of the games would
use the same programming instructions to disable any security locks Sega
placed in the Genesis. They used this information to create a “development
manual” for making Genesis games.

According to Accolade, at this stage it did not copy Sega’s programs but
relied only on the information concerning interface specifications for the
Genesis that was contained in its development manual. Accolade maintains
that with the exception of the interface specifications, none of the code in its
games is derived in any way from its examination of Sega’s code. 12

—Judge Stephen Reinhardt

Accolade released Ishuio, its first Genesis game, in 1990. Previously released
as a Macintosh and PC computer game, Mrabwas a strategy board game in the
same vein as Go.

Like Nintendo, Sega created security systems in its consoles to guard
against software pirates and unlicensed publishers. In 1990, the company
unveiled Genesis III, a slightly modified version of the Genesis console that
included an externally developed security system called the Trademark Se¬
curity System (TMSS).

The most recent version of the Genesis, the "Genesis III,” incorporates the li¬
censed TMSS. When a game cartridge is inserted, the microprocessor contained
in the Genesis III searches the program for four bytes of data consisting of the
letters "S-E-G-A” (the "TMSS initialization code”). If Genesis III finds the TMSS

Tlie Le?al Came 383

initialization code in the right location, the game is rendered compatible and
will operate on the console. In such case, the TMSS initialization code then
prompts a visual display for approximately three seconds which reads "pro¬
duced by or under license from sega enterprises ltd” (the "Sega Message”). 13

—Judge Stephen Reinhardt

With Genesis III, Sega created a double security gate. To make unlicensed
cartridges, software publishers had to discover how to unlock the security
system, then face charges of misrepresentation since the TMSS authentica¬
tion process triggered the licensing message. Though all officially licensed
games were Genesis III compatible, Ishido would not operate on the new con¬
sole. Accolade did not learn about this development, however, until the Winter
Consumer Electronics Show in January 1991, when Sega did a demonstration
in which the new version of the Genesis screened the Ishido cartridge. By this
time, the company was preparing five games for release.

Caught in a vulnerable situation, Accolade engineers scrambled to discover
what piece of code the licensed cartridges used to satisfy TMSS. They found
their answer in a tiny segment in the “power-up” sequence of the game code
that had no identifiable function. Lorenzen noticed it during his first round of
reverse engineering and even sent a memo to Miller, stating that “it is possible
that some future Sega peripheral device might require it for proper initializa¬
tion.” 14 That code sequence was added to the games Star Control, Hardball, Turrican,
and Mike Ditka Power Football before Accolade put them on the market. Accolade
released a fifth game, Onslaught, as well, but the game code did not have the TMSS
file in the correct location and would not run on Genesis III consoles.

On October 31, 1991, Sega Enterprises filed suit against Accolade, accusing
the company of trademark infringement and unfair competition. One month
later, Sega added copyright infringement to its charges. Accolade lodged a coun¬
terclaim, accusing Sega of false designation of origin and unfair competition.
Among other things, the counterclaim stated that Sega injured Accolade’s repu¬
tation by falsely attributing itself as the source of the unlicensed games.

The case was supposed to be heard by Judge Robert F. Peckham, a judge
who had tried similar cases and whose views were thought to be sympathetic
toward entrepreneurs.

38 If The Le^al Game

The case was originally assigned to a federal judge here in San Francisco
named Peckham, with whom we had some familiarity. We had been the plain¬
tiff in a copyright infringement case and knew his thoughts on the copyright
process and intellectual property laws in general associated with computer
technology. We felt very comfortable with having him as the judge.

Unfortunately, he had a heart attack early on in the case and the case had
to be reassigned. We were reassigned to a brand new federal judge named
Barbara Caulfield, and she was a disaster.

—Alan Miller

When the two sides met in court, Sega asked Judge Caulfield to bar Accolade
from manufacturing Genesis-compatible games and for Accolade to abandon
future attempts to reverse engineer Genesis technology. For its part, Accolade
asked the court to stop Sega from manufacturing or selling Genesis III consoles.

Sega began the case by establishing that Accolade’s games contained illegal
reproductions and adaptations of Sega Enterprises, Ltd.’s copyrighted mate¬
rial. Accolade defended its position by appealing to the Fair Use Doctrine.

The criteria to be considered in determining whether a particular use is fair
use include:

1. The purpose and character of the use, including whether such use is
of a commercial nature or is for nonprofit educational purposes;

2. The nature of the copyrighted work;

3. The amount and substantiality of the portion used in relation to the
copyrighted work as a whole; and

4. The effect of the use upon the potential market for or value of the
copyrighted work.' 5

—Judge Barbara A. Caulfield

In Judge Caulfield’s decision, she stated that the Fair Lise Doctrine offered
Accolade no protection. Since Accolade was a game manufacturer, the Gen¬
esis-compatible games were clearly made for financial gain. They would
compete with Sega-licensed games in the marketplace, and she felt that they
might indeed diminish the value of Sega’s copyrighted work.

The Le?al Game 385

Accolade’s game cartridges compete directly with those of SEL [Judge
Caulfield’s notation for Sega Enterprises Ltd.], which has likely lost sales as a
result of Accolade’s copying. In addition, since SEL’s disassembled code is
an "unpublished work,” it is subject to a narrower scope of fair use . 16

—Judge Barbara Caulfield

As to the charges of trademark infringement, Judge Caulfield sided with Sega.
In her decision, she pointed out that Accolade copied the S-E-G-A code that
triggered the Sega logo and licensing message. Accolade’s lawyers explained that
there was no way of knowing that the TMSS code would bring up the trade¬
mark and licensing messages when the code was added to the games. Accolade
engineers had simply recognized that this small file could be found in games
that worked on the new console and was not present on games that were
screened out. In her decision, Judge Caulfield dismissed this argument.

Accolade boldly inserted SEL’s code into its games before SEL released the
Genesis III into the marketplace, and thus without fully realizing the conse¬
quences. Accolade took that risk, and cannot now shift the responsibility to
SEL and SOA (Sega of America ). 17

—Judge Barbara Caulfield

Accolade’s lawyers argued that Genesis III would not read a game unless it
contained the TMSS code, and by definition the code would trigger the trade¬
mark messages. This argument, however, was severely weakened when a Sega
engineer named Takeshi Nagashima was called to testify. Nagashima claimed
that competitors could create games that would work on Genesis III without
the TMSS code. He then produced two cartridges that did not have the code.
When he demonstrated them before the court, they ran without displaying
S-E-G-A or the licensing message. Sega offered the cartridges for inspection
by Accolade’s defense team but refused to allow Accolade engineers to in¬
spect the cartridge or to reveal how the code had been modified.

On April 3,1992, Judge Caulfield ruled in favor of Sega and enjoined Acco¬
lade from “disassembling, translating, converting, or adapting” the codes in
Sega’s games. She also ordered Accolade to stop manufacturing, distributing,

386 The Le^at Game

and developing Genesis-compatible products. The decision meant that Acco¬
lade, a relatively small company, was stuck with thousands of worthless
cartridges. Six days later, at Sega’s request, Judge Caulfield added an order
that Accolade recall all Genesis-compatible games within ten business days.
Though the recall was quickly repealed, the rest of Caulfield’s injunction re¬
mained in effect for several months.

She imposed ar. injunction against Accolade from doing any work at all with
Sega cartridges. We could not sell the cartridges we had developed. We had
to immediately stop development on all of our Sega-related products. This
was just terrible, just to fight the injunction, we had to pay at least a half
million dollars in legal fees, and the commercial damage associated with
this injunction ultimately proved to be somewhere around $15 to $25 million
to our company.

She bought Sega’s argument that it was impermissible to study computer
systems and figure out how they worked, and in addition, to bring out com¬
petitive software. This was a fundamental step backward from the way that
product development had always been done in the Valley and in general
throughout the world.

—Alan Miller

Accolade appealed the decision, and the case went before Judge Stephen
Reinhardt of the Ninth Circuit Court of Appeals on July 20,1992. Judge Reinhardt
interpreted the Fair Use Doctrine differently than Judge Caulfield. He under¬
stood the doctrine to suggest that when there is no other means of understanding
how a system works, and when a legitimate reason exists for needing to gain
that understanding, reverse engineering was indeed a fair use of copyrighted
technology. He applied a similar approach toward the false trademark message.

The question is whether the computer manufacturer may enjoin competing
cartridge manufacturers from gaining access to its computers through the
use of the code on the grounds that such use will result in the display of a
false trademark. Again, our holding is based on the public policies underly¬
ing the statute. We hold that when there is no other method of access to the

computer that is known or readily available to rival cartridge manufactur¬
ers, the use of the initialization code does not violate the Act even though
that use triggers a misleading trademark display. 18

—Judge Stephen Reinhardt

Judge Reinhardt noted that the TMSS file, which contained somewhere
between 20 and 25 bytes of data, was minuscule when compared to the 500,000
to 1,500,000 bytes of data contained in the entire game. The data in the games,
according to Reinhardt were overwhelmingly original and deserved to com¬
pete in a free market. This, he felt, was to the benefit of the public.

There is no basis for assuming that Accolade’s Ishido has significantly af¬
fected the market for Sega's Altered Beast, since a consumer might easily
purchase both; nor does it seem unlikely that a consumer particularly inter¬
ested in sports might purchase both Accolade’s Mike Ditka Power Football
and Sega’s Joe Montana Football, particularly if the games are, as Accolade
contends, not substantially similar.' 9

—ludge Stephen Reinhardt

Sega’s attorneys defended the original decision by pointing out that their
client had invested time and capital designing and manufacturing the Gen¬
esis. Even after Genesis shipped, Sega continued spending millions of dollars
marketing it. They characterized Accolade as a “free rider,” benefiting from
time and investment. Reinhardt dismissed this argument, however, as the
‘“sweat of the brow’ rationale for copyright protection.”

He was also unimpressed with Nagashima’s demonstration of a game car¬
tridge that initialized in Genesis III without activating the trademark signals.
Reinhardt stated that “At most, the Nagashima affidavit establishes that an
individual familiar with the operation of TMSS can discover a way to engineer
around it.” Just as Judge Caulfield had said that Accolade took a risk in adding
the TMSS code and could not be excused by claiming it did not know that
using the code would result in a trademark abuse, Judge Reinhardt now held
Sega responsible for attaching its trademark to an unlicensed game.

388 The Legal Game

Sega knowingly risked two significant consequences: the false labeling of
some competitors’ products and the discouraging of other competitors from
manufacturing Genesis-compatible games. Under the Latham Act, the former
conduct, at least, is clearly unlawful. 20

—judge Stephen Reinhardt

Though he did not completely absolve Accolade of all wrongdoing, Judge
Reinhardt struck down the injunctions handed down by Judge Caulfield. The
immediate ramifications of Judge Reinhardt’s rulings were short lived. Within
a year of the trial, Accolade released a basketball game titled [Charles] Barkley
Shut Up andJamlzs an official Sega licensee. The long-term ramifications of the
case were significant, however. Sega Enterprises v. A ccolade has been cited in nearly
every video game trial involving reverse engineering and unlicensed prod¬
ucts since 1993.

States if MY and MD v. Nintendo of America

In 1988, Nintendo announced that there was a worldwide shortage of the ROM
chips used in Famicom and NFS game cartridges. All publishers, Nintendo
included, would be given chip allotments that averaged approximately 25 per¬
cent of their original orders. This development had a two-edged effect. Many
company executives complained that they were not able to sell as many games
as they hoped. On the other hand, the shortage ensured that nearly every
cartridge that was manufactured that year got sold. Consumers seemed to
purchase anything they could find as long as it carried the label “Nintendo.”

Overall, our licensees enjoyed the shortage because everything they pro¬
duced got sold, but everybody wanted to have a little more than allocated.

—Minoru Arakawa, president, Nintendo of America

Some licensees simply accepted the shortage, while others accused Nintendo
of purposely inventing the shortage in an effort to further control the mar¬
ket. Hide Nakajima and Atari Games accused Nintendo of America of unfair
competitive practices. Other nonrelated complaints were leveled against

The Legal Game 389

Nintendo as well. In a 1989 case, the Tramiels accused Nintendo of shutting
Atari Corporation out of the marketplace and filed a $500 million suit. In an¬
other suit, filed in 1991, Nintendo found itself in court against the attorneys
general of all fifty states and the District of Columbia.

The attorneys general accused Nintendo of a variety of offenses that seemed
to borrow from all of the suits that had been filed against Nintendo. They
accused the company of price fixing, shutting out competitors, overregulat¬
ing licensees, and bullying retailers. New York Attorney General Robert
Abrams, who led the investigation and ensuing case, said that Nintendo threat¬
ened to slow down or cut off supplies to retailers who lowered the price of the
games by as little as six cents. When the case finally went before Judge Sweet,
the same New York judge who presided over Universal Studios/MCA v. Nintendo, it
focused mostly on allegations of price fixing and ended in a settlement.

The results of the case are almost humorous. On October 17, 1991, Judge
Sweet approved a rather absurd settlement in which Nintendo agreed to mail
coupons giving consumers who had purchased NES systems between June 1,
1988, and December 31,1990, a $5 discount on the purchase of their next game
cartridge. To make sure that the people who might have purchased the con¬
soles got the message, Nintendo agreed to run advertisements in TV Guide,
USA Today, four video game magazines, and 800 newspapers. According to the
terms of the agreement, Nintendo would have to make up the difference if
the coupon sales added up to less than $5 million in discounts. Nintendo also
agreed to pay the states and the District of Columbia $1.75 million for their
administrative costs and $3 million for other uses.

Nintendo will pay $3 million to the Attorney Generals for use at the States’
option for one of the fol lowing purposes: antitrust enforcement, deposit into a
state antitrust revolving fund, defraying the costs of experts used in multistate
antitrust investigations, benefiting those unidentified consumers for whose
benefit the settlement was entered, or payment into a state’s treasury.

—Judge Robert Sweet

In an article titled “Please, Br’er Fox! Don’t Throw Me in the Briar Patch!”
Forbes described the settlement as less than punishing for Nintendo.

390 The Lesfal Game

The deal Nintendo cut to settle antitrust complaints by the Federal Trade
Commission and some states turns out to be another shrewd move by the
Japanese videogame manufacturer. Nintendo agreed to mail 5 million $5
coupons good on Nintendo cartridges, plus pat-myself-on-the-back let¬
ters from some local attorney generals. That’s some punishment. Nintendo
has just put a new 16-bit machine on the market, but the coupons are
only good for the old eight-bit cartridges. So the deal helps clear old in¬
ventory as well as bring in lookers for the more powerful new sets.

Please, Br’er Attorney General.. . ! 22

The FTC investigation may not have resulted in a large punitive settlement,
but it served notice to Nintendo of America and its parent company in Japan
that more investigations could follow if complaints continued. Though there is
no proof that company executives made this decision because of the lawsuit, in
October 1990 Nintendo announced that its licensees were free to manufacture
their own cartridges and to publish games on competitors’ consoles.

In about, I think it was 1989 or 1990, we made a business decision that we did
not need the exclusivity clause. Now, it’s true we were in litigation with Atari
Corp. We were in litigation with Tengen and the FTC was moseying around; but
we made a decision that we would no longer require the exclusivity clause. We
would no longer enforce it and we would not put it into any new agreements.

Those clauses, from our point of view and from our lawyers’ point of view,
were perfectly legal under the antitrust laws. It was determined to be that
way by a jury and by multiple courts, including a court of appeals, in the
various litigations that we had.

—Howard Lincoln

Lewis Galoot) Toys v. Nintendo of America

In 1990, Lewis Galoob Toys obtained the U.S. manufacturing rights for a de¬
vice called GameMage that enabled players to access hidden codes that
designers placed in games as Easter eggs. Releasing the product in the United
States as Game Genie, Galoob packaged the “game enhancer” with a “pro¬
gramming manual” containing codes for hundreds of games. Through Game

The Le^al Came 391

Genie, players could enter up to three codes at one time, codes that made games
easier or gave players extra lives. The game Contra, for instance, allowed players
to give their soldiers powerful weapons or set the game up so that the enemy
soldiers did not shoot their weapons. The codes for The Legend ofZeldac ould give
players endless supplies of bombs, let them purchase items in the game for free,
and make Link, the hero of the game, invincible. Spokespeople for Galoob said
that Game Genie added new life to old games, but Nintendo saw it as a threat
and notified the toy manufacturer that the device infringed on copyrighted
material. Galoob took Nintendo to court to ask for a declaration that Game
Genie did not infringe upon protected material; it also tried to pacify Nintendo
by offering to license the product through the company. The offer was declined.

In June 1990, Nintendo applied for an injunction to bar the toy manufac¬
turer from distributing Game Genie. In a preliminary hearing, Judge Robert
W. Schnacke granted Nintendo’s request on the likelihood that Nintendo could
win the case. In April 1991, the case went to court before Fern Smith, the
same judge who had presided over Atari Games Corporation v. Nintendo of America.

Judge Smith’s interpretation of the Fair Use Doctrine would prove central
to both Nintendo’s and Galoob’s case. Nintendo claimed that Game Genie
was a derivative work. It did not play original games; rather, it altered the
copyrighted work of other companies. Nintendo’s lawyers compared it to the
unauthorized “speed-up kits” that were used to enhance arcade games. They
referenced the case of Midway Manufacturing v. A retie International, in which a judge
barred a company called Arctic from selling chips that accelerated the arcade
version Galaxian * Judge Smith, however, disagreed with Nintendo’s argument,
citing that Game Genie did not physically incorporate portions of any copy¬
righted works and that it in no way diminished the game market.

One interesting question that emerged in this case was whether Galoob
was in fact infringing on Nintendo’s copyrights or whether the real perpetra¬
tors would be consumers using the device. The argument suggested that Game
Genie was simply an adapter onto which consumers attached a game car-

* In the Arctic case, arcade owners replaced the original chips with new ones that incorpo¬
rated Namco’s original programming along with new code. A more accurate comparison
would have been Atari Games v. General Computer, since the chips General Computer created to
accelerate Missile Command mere, used to enhance Atari’s chips and modified, rather than
borrowed, the original code.

392 The Legal Game

tridge. The decisive factor in the case, however, was that Nintendo’s lawyers
could not demonstrate to Judge Smith’s satisfaction how Game Genie im¬
pacted their client’s business.

Nintendo has failed to show any harm to the present market for its copy¬
righted games and has failed to establish the reasonable likelihood of a
potential market for slightly altered versions of games at suit. 23

—Judge Fern Smith

While Judge Smith was unable to certify that Game Genie users would not
infringe on Nintendo’s copyrights, she did conclude that Galoob had not vio¬
lated the Copyright Act and ruled in favor of the toy manufacturer, ordering
Nintendo to pay the company $15 million for lost sales. When the case came up
for appeal before Judge Jerome Farris in 1992, he affirmed Judge Smith’s opin¬
ions. Nintendo did not concede defeat, however, until the U.S. Supreme Court
declined to hear arguments on the case on March 22,1993, sealing the decision.

ISpom Computer Corporation v. Nintendo of America

With the exception of the original Magnavox Odyssey, which had several games
hardwired into its circuitry, all of the home television game consoles that re¬
tailed in the early 1970s were single-game (or dedicated) systems. In 1974, Alpex
Computer Corporation created and patented a technology that enabled con¬
soles to play multiple games stored on ROM chips stored in game cartridges.
The first company to license Alpex’s technology was Fairchild Camera and
Instrument, which used it in the Channel F game console released in 1976*
Two years later, Alpex applied for patent protection on that technology and
received patent number 4,026,555, also known as the “555 patent.”

After receiving its patent, Alpex embarked on a campaign to enforce it, sell¬
ing nonexclusive licenses to companies that infringed. Magnavox, Atari, Mattel,
Bally, and Coleco were j ust a few of the companies that Alpex contacted. Though
the other settlement sums are not public, it is known that Atari paid $380,000 to
settle the affair.

The Fairchild Channel F was the first game console to use interchangeable game cartridges.

The Le<fal Game 393

Alpex declared Chapter 11 bankruptcy and ceased operation in 1983. As
the company dissolved, creditors found that its only valuable asset was the
“555 patent.”

In 1983, after the settlement with Atari and another with Magnavox, counsel
for Alpex sent infringement letters to approximately seventy companies. These
letters announced that Alpex had recently granted licenses under the patent
to Atari and Magnavox and stated that Alpex had "recently obtained infor¬
mation indicating that your company manufactures and/or sells video game
cartridges and/or consoles which may infringe the subject patent.” 24

—Judge Kimba Wood

Of the seventy companies that received the letter, six companies expressed
interest in settling without litigation. By 1985, Alpex had won licensing agree¬
ments in suits against ten companies.* Most companies preferred to pay Alpex
rather than risk a court battle. This was especially true of Japanese compa¬
nies, which were supposedly scared that U.S. jury awards might reflect
anti-Japanese sentiments. 25 Sega Enterprises, for instance, elected to purchase
a license from Alpex in 1993. Nintendo, however, refused to settle, so Alpex
sued for willful infringement of the “555 patent.”**

The case, which was tried before Judge Kimba Wood*** of the South New
York District in Manhattan, hinged on a question of technology. Nintendo
claimed that while the NES did use interchangeable cartridges, the bit-map¬
ping technology developed by Alpex was not powerful enough to handle the
sophisticated images in NES games.

The television raster comprises numerous discrete dots or bars, approximately
32,000, which the cathode ray beam illuminates on a standard cycle, which
in turn creates the image on the television screen. The patented invention

* Alpex had an ongoing suit with Parker Brothers, the result of which was stayed pending
the results of the case against Nintendo.

** At one point Nintendo offered a $3.9 million settlement.

*** Bill Clinton nominated Kimba Wood for the post of Attorney General after the nomina¬
tion of Zoe Baird was withdrawn. The process ended with Janet Reno getting the position.

394 The Le^al C a me

requires sufficient RAM to accommodate each of the approximately 32,000
memory positions needed to represent the raster image. The RAM holds at
least one "bit” of data for each position in the memory "map” of the raster.
Accordingly, this video display system is called "bit-mapping.” 26

—Judge Glen Archer

According to Nintendo’s defense, Alpex’s RAM-based technology was sim¬
ply too slow. Nintendo’s lawyers claimed that the NES featured a patented
“picture processing unit” (PPU) that received pre-formed “slices” of data.

The PPU receives preformed, horizontal slices of data and places each slice in
one of eight shift registers, each of which can store a maximum of 8 pixels.

These slices of data are then processed directly to the screen. The PPU repeats
this process to assemble the initial image on the screen. Thereafter, it repeats
the process as necessary to form changes in images throughout the progres¬
sion of the game. Nintendo refers to the PPU as an "on-the-fly” system. 27

—Judge Glen Archer

The case turned into a debate about whether “on-the-fly” graphics did in¬
deed differ from the technology in the Alpex patent. Nintendo maintained
that while Alpex’s bit-mapping was fast enough for games with “linear player
images,” it lacked the speed for games with “animated cartoon characters,”
such as Mario. The highlight of the case was when John Strauch, lead attorney
on the Alpex team, cross-examined Nintendo expert witness Stephen Ward.
Strauch questioned Ward about the differences between linear player images
and animated cartoons. Strauch tried to corner Ward into explaining the pre¬
cise differences between the two kinds of graphics. Ward, either unwilling or
unable to specify, refused to be pinned down, although he maintained that
he could detect concrete differences, having viewed hundreds of games.

To clarify, Strauch drew a stick figure that he identified as a drawing of a
hockey player. Ward agreed that the character would definitely be classified
as a linear image. Next, Strauch colored the figure red and asked if it was
still a linear image. When Ward said that it was, Strauch drew a bulge on the

The Legal Game 395

player that he identified as a hip and asked if it was still linear. Ward an¬
swered that they had “entered into a region” in which he had no answer.
Strauch next added two little arms and asked if they were still in the gray
area in which Ward could not distinguish between linear images and car¬
toons. Ward said, “I believe that one could arbitrarily decide to draw the
line either way in that case.”

“Now using your terminology and understanding, we are using your ter¬
minology the way you want to define this, if I add a nose, are we still in a
situation where we can put this one on either side of the line?”

Ward responded, “I think that at some point when you add features that make
it look like a human form, for example, then it is no longer a linear player im¬
age, and if you keep adding noses and arms, then you do cross that line.”

Strauch: Let me add a tiny tail here. Let’s say this is an animal combina¬
tion human-animal cartoon. Just adding a tiny tail. Have we yet reached
the point where you are willing to say that it is not a linear image player?

Ward: We are getting close to that point, yes.

Strauch: Okay. Why don’t we put a beard on it. Where are we now?

Ward: Okay. I am willing to say that it is not a linear image player.

Strauch: Okay, so now I know how you are drawing the line. If we
have a nose, two little arms, a tail, more hip, and the configuration I
have drawn, except for the beard, you don’t know whether it is a linear
image player or not; but if we add the beard, it is not. 28

According to Alpex attorneys John Strauch and Thomas Young, members
of the jury tried to duck behind the rail of the jury box so that the rest of
court would not see them laughing during this exchange. The jury agreed
with Alpex, finding that Nintendo willfully infringed Alpex’s patent and that
118 of the games that had been introduced for the NES before the patent ex¬
pired on July 31 infringed on the “555 patent.” Alpex was awarded $208 million
for damages. Stating that she saw “scant” evidence of willful infringement,
Judge Wood did not add further punitive damages to the award, but she al¬
lowed interest and legal fees to be tacked on, bringing it to $252 million—one
of the largest patent awards in history.

398 The Year of Hardware

A Part of Society

By 1989, Nintendo had become a regular fixture in the news. The media re¬
ported on the company’s phenomenal record sales and press events and
sometimes covered curious anecdotes associated with the company. The
“Hands-Free” Controller, developed by Nintendo engineers to enable quad¬
riplegics to play games, earned the company print and broadcast attention.
To use this special controller, players rested their chins on a lever that worked
like a steering device. A tube running from the controller to their mouths
replaced the “A” and “B” buttons. “A” button functions were accessed by blow¬
ing into the straw, and “B” button functions were accessed by sipping.

The press also covered humorous human-interest stories such as an inci¬
dent involving a burglar who noticed a Nintendo Entertainment System (NES)
and couldn’t resist trying it. Somebody noticed the criminal and reported him
to the police. On arrival, the police found the burglar in front of the televi¬
sion, playing a game.* In another story, a bomb squad blew up an NES on the
runway of Los Angeles International Airport. Airport security officers X-rayed
the NES inside a suitcase and, unable to identify it, called the bomb squad.
Fearing the unfamiliar object to be a bomb, the police detonated it.

I was quoted in USA Today on the front page that day, or. . . the next day
and ... something to the effect of "Well, we know we have a great product,
but people don’t usually get quite such a bang out of it.”

—Richard Brudvik-Lindner

Unauthorized and Never Sue!

Nintendo guarded against unlicensed companies making unauthorized NES,
Game Boy, and Super NES cartridges, but an Arizona-based company, Wis¬
dom Tree, slipped through its net unchallenged.

Wisdom Tree was the offshoot of Color Dreams, a company founded by
U.S. engineers who reverse engineered the NES and found a way around the
lock-out chip. Using this technology, Color Dreams published games such as

*This story has been confirmed by people who worked for Nintendo at the time, though
the details may be exaggerated.

The Year of Hardware 399

King Neptune's Adventure, Pesterminator, and Metal Fighter. One of the company’s titles,
Menace Beach, featured material considered highly risque by NES standards.
The goal of the game was to help a hero rescue his kidnapped girlfriend. Pic¬
tures of the chained-up woman were flashed throughout the game, and she
had on less clothing in every shot. In the beginning, she wore a blouse and
skirt; by the end of the game she was in a bikini* **

In 1989, Color Dreams spun off Wisdom Tree, a company that made NES
games with Christian themes. For the most part, Wisdom Tree games were fairly
indistinguishable from other video games and had the same basic side-scrolling,
object-finding, enemy-shooting play. Some of the games had biblical trivia quiz¬
zes between rounds, and the themes of the games were adapted to convey biblical
ideas. Wisdom Tree’s first game, Bible Adventures, was released in December 1990.
After a slow start, the company sold approximately 350,000 copies.

Basically, what we were doing was taking the garbage out and putting Bible
content in. That’s the whole reason for the company to begin with. We mar¬
keted almost ioo percent into the Christian bookstore market, not through
secular channels. It took a while to get in. We got picked up by Focus on the
Family, which gave us pretty much of an industry okay.

—Brenda Huff, co-owner, Wisdom Tree

Wisdom Tree eventually published seven NES games, along with four games
for Game Boy,*'" three for Sega Genesis, and one for the Super NES. The
company’s library included several original games published by outside con¬
tractors and a couple of cosmetically altered Color Dreams games. Sunday Funday,
for instance, was a thinly disguised version of Menace Beach. While the owners
of Wisdom Tree were openly Christian, their game designers did not neces¬
sarily share their beliefs. People who later worked with the man who
programmed Bible Adventures say that after working day and night on the
project, he went to Las Vegas and blew his earnings in less than a week.

* Menace Beach was far tamer than Peek a Boo Poker, Bubble Bath Babes, and Hot Slots, three
unlicensed games published by the Taiwanese software company Paneision, which featured
anime -style drawings of naked women.

** Two of Wisdom Tree’s Game Boy cartridges were not really games. The company published
cartridges containing the text of the King James and New International versions of the Bible.

400 The Year of Hardware

Wisdom Tree presented Nintendo with a prickly situation. The general pub¬
lic did not seem to pay close attention to the court battle with Atari Games, and
industry analysts were impressed with Nintendo’s legal acumen; but going after
a tiny company that published innocuous religious games was another story. In
1994, Wisdom Tree tested Nintendo’s ability to turn the other cheek by licensing
the mazes and code to a game called Castle Wolfenstein 3D and converting them
into an unlicensed Super NES game called Super 3D Noah’s Ark. This was this one
of the few unlicensed games to appear on the Super NES. In Castle Wolfenstein 3D,
players ran through dungeons killing Nazi soldiers and guard dogs as they hunted
for Hitler. In Super 3D Noah's Ark, which featured the exact same mazes, players
shot food at little goats that had escaped from their pens*

Ignoring Wisdom Tree was the only logical course of action. Super 3D Noah’s
Ark was released toward the end of the 16-bit generation, as growing numbers
of people began using computers to play games. Though Wisdom Tree was
one of the last companies to manufacture and sell NES and Super NES games,
the company’s focus eventually turned to publishing games for PCs.

The Return of Sega

One of my first jobs here was to take the Master System back from Tonka and
bring it over to Sega. Then we closed down a lot of the development. We did
not have the money to do anything big; our main focus of 1989 and 1990 was
obviously Genesis.

—Paul Rioux, former executive vice president of finance,

Sega of America

Sega’s alliance with Tonka did not prove completely satisfactory for either
company. Despite its strong toy distribution network and a very generous ad¬
vertising campaign, the Minnesota toy truck company sold considerably less
than one million Master System game consoles in two years. When the con-

* This game was built into a special adapter that attached to any licensed Super NES
cartridge. The chip in the licensed cartridge would disable the security chip, allowing the
Super Nintendo to read the game.

The Year of Hardware 4 O 8

tract expired, Sega quietly took back the system and inherited large invento¬
ries of unsold game consoles and cartridges. Clearing out Master System
inventory, however, was not a major priority at the time. Sega had spent the
last two years developing a powerful new game console that had twice the
processing power of the NES/Famicom, and the product was finally ready for
release in Japan.

Sega’s new system, called the Mega-Drive, featured an impressive array of
hardware. It was built around the 16-bit Motorola 68000 processing chip, the
same chip that Apple used to power the Macintosh computer. This chip could
process twice as much data per cycle as the 8-bit MOS Technologies 6502 chip
Nintendo used in the Famicom. The Mega-Drive had a 512-color palette and
could display as many as 64 colors on screen at any one time, compared to the
NES’s 52-color palette. The Mega-Drive even had a separate 8-bit processor
for sound. All of that power translated into games with larger and more de¬
tailed characters, more complex graphics, faster action, and a game console
that could compete with coin-operated game machines in the arcades.

With its headquarters in Tokyo, Sega Enterprises had the infrastructure needed
to market the Mega-Drive in Japan. Bringing the system to the United States
was another story. Hayao Nakayama, CEO of Sega Enterprises, and David Rosen,
the chairman, had already experienced the problems of launching a game con¬
sole through a small start-up operation. Nintendo, a company that had only
recently entered the home video game market in the United States, had com¬
pletely smothered the Master System out of the market by 1988. Attaching itself
to Tonka, a strong company that knew little about the game business, also failed.
In an interesting twist, Rosen decided to enlist the same company that Nintendo
had tried to enlist before launching the NES—Atari Corporation.

Dave Rosen came to Atari and asked if we’d be interested in taking over the
manufacturing, marketing, and distribution of Genesis. We came very close
to making a hefty licensing deal so that Atari could jump into the 16-bit fray
before Nintendo. The negotiations went pretty far down the stream, and as I
recall, they fell apart when lack [Tramiel] and Dave Rosen couldn’t agree to
the terms. Then Sega decided to do it themselves.

—Michael Katz, president, Video Game Division, Atari Corporation

402 The Year of Hardware

Everybody’s Expert

Video game companies have a certain incestuous relationship, and it is not
uncommon for top employees to take jobs with their competitors. Bruce
Lowry, for instance, resigned his job as Nintendo vice president of sales to be¬
come the president of Sega of America. When he left Sega, he moved to Europe
to help Ron Judy run Nintendo of Europe. But of the many job shifters in the
industry, few have had as illustrious a career as Michael Katz.

In the late 1970s, Katz, as marketing director at Mattel, oversaw the cre¬
ation of the first handheld video games. From there, he moved to Connecticut
to become vice president of marketing at Coleco. After five years at Coleco,
he received an intriguing telephone call.

I was contacted by headhunters representing some venture capitalists and
told about a company named Epyx, which they described as a $1.5 million
computer game company losing $400,000 a year in Sunnyvale. I was anx¬
ious to get back to California, where my two kids lived. I hadn’t lived in San
Francisco for about seven or eight years, and my goal was to get back there.

I didn’t know anything about Epyx and I had never heard of a venture
capitalist. I liked the fact that I was being offered a CEO slot and some stock in
a start-up, but I wasn’t quite sure whether I wanted to do something risky like
that. I had to make the decision on a January night in Connecticut. I was trying
to get a fire started in my fireplace and it wouldn’t start. As I was leafing
through a computer gaming magazine, I came upon an Epyx ad. Just as I turned
the page and discovered it, this flame burst in the fireplace. It was a complete
coincidence. The fire that I’d been trying to start burst into a flame, so I con¬
sidered that a divine message that Epyx was where I should go.

—Michael Katz, former president, Epyx

Katz became the president of Epyx in February 1983 and changed the
company’s entire focus. The company had severe financial problems and only
had enough cash to maintain operations for approximately six months. Under
Katz’s direction, the company created three new product lines and hired Chiat
Day, the same advertising agency that handled Apple Computer. Another of
Epyx’s new directions was the acquisition of outside software developer StarPath,

The Year of Hardware 4®3

which was led by Bob Brown, one of the engineers involved in the creation of
the Atari 2600. StarPath had abandoned a project based on the Olympic games.
With the real Olympics only a year away, Katz had the company finish the project,
which was released for the Commodore 64. Summer Games was released in 1984
and was followed up in 1985 with a sequel, Winter Games. Over the following years,
these thematic “Games” titles became Epyx’s signature series and included a
tremendously popular product called California Games.

Katz’s biggest interest, however, was in marketing hardware, not software.
When two inventors named RJ Mical and Dave Needle approached Epyx in
1986 with a design for a color handheld video game system, Katz urged the
board to adopt the project (which later became the Atari Lynx). Epyx eventu¬
ally did work with Mical and Needle, but by that time Jack and Sam Tramiel
had already lured Katz to accept a position at Atari Corporation.

I had lunch with jack and Sam Tramiel one day, and they said, "What do you
want to do?”

I said, "I want to form an Entertainment/Electronics division at Atari. I
want to bring back video games, and that can help fund the new division. It
can also fund the ST computer,” which was what jack and Sam were all ex¬
cited about.

So they said, "You can become president of the entertainment electronics
division if you also become president of the video game division and be¬
come head of sales and marketing for the computer division.” I said that
sounded fair. So in one lunch, which is what jack and Sam are like, we made
a deal. I got a new job and became head of the video game division, which,
in jack’s mind, had the main objective of getting a lot of profits so that the
company could develop the ST computer.

—Michael Katz

Katz moved to Atari in 1986 and oversaw the rerelease of the Atari 7800 game
console. Unlike the Master System, the 7800 was not meant to compete with
the Nintendo Entertainment System head-on. Atari introduced it as a low-end
alternative system that sold for $30 less than its competitors. The 7800 barely
dented Nintendo’s billion-dollar market, but it contributed to Atari’s best year
since the fall of 1982. In 1988, Atari reached $452 million in revenues.

404 Hie Year of Hardware

We brought back Atari video games as the low price spread for three or four
years and made a hell of a lot of profit. As I recall, we made about $80 million
of profit over that period. We brought back the 7800. We needed software
for it, but, of course, this was the period when Nintendo created the market
again in the U.S. and Nintendo had a lock on all the hot arcade titles. No¬
body else, whether it be Atari or Sega or anyone, could get the hot arcade
titles because Nintendo had exclusives.

It occurred io me that the standard for the last few years had not been
arcade games. There was a core group of computer gamers who knew all the
hot computer games, so I went to those companies who were just doing com¬
puter format. I went to Doug Carlstom at Broderbund, to Ken Williams at
Sierra, to Gilman Louie at Spectrum Holobyte, and to Alan Miller at Accolade,
and asked if we could license games like Hardball and Lode Runner.

—Michael Katz

By the beginning of 1989, Katz needed a break from work. He had not taken
a two-week vacation since graduating from college in 1967, and the Tramiels
were notorious for placing high expectations on their executives. Tired and
needing time to decide what he wanted to do with the rest of his life, Katz left
Atari Corporation and spent the next three months traveling around the
world. While he was gone, Sega released the American version of the Mega-
Drive. It was called Genesis.

Genesis

Sega of America launched Genesis in two markets, Los Angeles and New York,
on August 14, 1989. The console sold for $189 and came with a single control¬
ler and the game Altered Beast. There were five additional games available at
launch: Thunder Force, Tommy Lasorda Baseball, Super Thunder Blade, Space Harrier II,
and Last Battle. A second wave of games arrived one month later.

As the game that came with the console, Altered Beast played an important
role in convincing consumers about the power of Genesis’s 16-bit processor.
NES games generally had small characters occupying only a limited area on
any game screen. The shape-shifting hero of Altered Beasts as, nearly half as tall
as the screen and had recognizable facial features. The snakes, wolves, enemy

The Year of Hardware 405

sorcerers, and other creatures that attacked him were also large and clearly
drawn. In size, game play, and graphics, the Genesis version of Altered Beast
was amazingly similar to the arcade game on which it was based.

In October, as the Genesis market expanded from New York and Los Ange¬
les to a nationwide campaign, Sega of America announced the hiring of a new
president and CEO, Michael Katz.

Dave Rosen asked me if I wanted to come to Sega and become president, so
I joined Sega in October of 1989 and spent a year. And every day, the chant
that I was supposed to be saying and our troops were supposed to be saying
was "Hyakumandai,” which means a million units in Japanese because
Nakayama felt we should be selling a million units.

We had to differentiate ourselves from Nintendo, and once again we
couldn’t get hot properties from the arcades other than Sega’s own arcade
titles. Just like it was at Atari, it became a matter of figuring out a way to
position ourselves strongly when we couldn’t get the hottest arcade titles. So
we decided to get the hottest personalities instead.

—Michael Katz

As the head of Sega, Katz’s first goal was to establish an identity for Gen¬
esis. The marketing team came up with a two-part approach. On one hand,
team members needed to demonstrate the superiority of Genesis over the
NES. They needed to show that Genesis games had better graphics and sound
and looked more like arcade games. Realizing that most consumers were
more interested in games than technology, Katz’s team members did not
want to focus too heavily on the 16-bit processor. Instead of reciting tech¬
nological achievements, they developed an advertising campaign that
challenged Nintendo head-on. Sega’s new marketing mantra was, “Genesis
does what Nintendon’t.”

Sega came out slamming us in their commercials. They were naming us by
name, and that was really a big deal. It’s like somebody calling your team
"crap.” We took it good-naturedly and competed the best we could.

—Don James, vice president of design, Nintendo of America

4®6 The Year of Hardware

The second part of Katz’s marketing rollout was to circumvent the lack of
arcade properties by creating a library of instantly recognizable titles. Nintendo
could dominate the arcade translation business; Sega, meanwhile, would con¬
tract athletes and celebrities and create games with their names and images.
Under Katz’s direction, Sega created Pat Riley’s Basketball, Arnold Palmer Golf, Buster
Douglas Boxing, and Joe Montana Football.

)oe Montana became the ultimate example. We paid $1.7 million up front. I
fought to convince Nakayama and the Japanese that we needed Montana,
and I gave Joe Montana the check. We also had Michael Jackson, we had Pat
Riley, and we had Tommy Lasorda. Buster Douglas was my selection, too. He
got knocked down in his first challenge after he won the championship, but
that was okay because the royalty was on a sliding scale and that meant we
didn’t have to pay as much. He gave up the title right after he had gotten it.

—Michael Katz

Shortly after starting at Sega, Katz convinced Nakayama to sign a five-year
agreement with 49er quarterback Joe Montana. The deal enabled Sega to use
Montana’s name and image in a football game. Once the licensing deal was
signed, the next problem was finding the game itself. Sega did not have a large
U.S. game production facility at that time, and Sega of Japan had not designed
a football game. By coincidence, a small software company, Mediagenic,* had
a game under development. According to the team that had worked on the
project, the game was approximately 30 percent finished, but Mediagenic ex¬
ecutives said that it could be finished by October, or November at the very
latest, so Katz decided to purchase the game.

We didn’t know about all the internal turmoil that was going on at
Mediagenic. Basically, they deceived us over a period of four or five months
that the game was proceeding on schedule. We—Sega—were naive and irre¬
sponsible. We should have known.

The game wasn’t very far along at all, but we didn’t discover that till
about September or October. By the time we found out, the only way we

The company was formerly known as Activision.

The Year of Hardware 4®7

were gonna get a game out near Christmas would be to find another game
that was either mostly finished or completely finished, and convert it,

—Michael Katz

In desperation, Sega turned to Electronic Arts, one of its first American
licensees. Well known for its sports games, Electronic Arts had been publish¬
ing the John Madden Football series for four years. The first Madden Football, released
for the Apple II computer in 1986, was so successful that Electronic Arts be¬
gan updating its team rosters and playbook and rereleasing it on an annual
basis. Electronic Arts president Trip Hawkins agreed to help, and his designers
put together a game that Sega could name Joe Montana Football and publish under
its first-party label. The game was released in January 1990. Electronic Arts
released a Genesis-compatible version of John Madden Football later that year.

The finished versions of Joe Montana Football and John Madden Football were so com¬
pletely different that few people would have guessed that the same company had
made them .John Madden Football featured a playbook partially designed by Madden
himself. As an NFL broadcaster and former Raiders coach, Madden helped Elec¬
tronic Arts’ designers create a game realistic enough to appeal to football purists.

Joe Montana Football, on the other hand, was an arcade-style game that em¬
phasized fast action over realism. Unlike John Madden Football, which had all 28
NFL teams, Joe Montana Football had a 16-team roster and a simplified playbook
built around a passing-intensive offense that discouraged running plays.

Although the Joe Montana series did not last as long as the Madden games, it
helped establish Sega’s reputation among sports fans and Genesis as the lead¬
ing video game platform for sports simulation. Electronic Arts developed only
the first Joe Montana football game. Blue Sky, an independent development
company, created Sega’s later football games. Founded by George Kiss, who
worked with Michael Katz at Coleco, Blue Sky went on to make several im¬
portant Genesis hits, including World Series Baseball and Vectorman.

I think |oe Montana earned something like a $2.5 million or a $3.5 million
royalty over the course oj the five years of our agreement. The Japanese were
originally concerned that he wouldn’t even earn the money that we paid him
[in advance], so I was gratified to hear that.

-Michael Katz

408 The Year of Hardware

Of all the games that Sega released in 1989, MichaelJackson’s Moonwalkerma.de.
the biggest impression on the media. Not only did the game contain synthe¬
sized versions of such hits as “Smooth Criminal,” “Bad,” “Billie Jean,” “Beat
It,” and “Thriller,” it also had Jackson and chorus lines of villains dancing to
choreographed moves that looked like they belonged on MTV. Loosely based
on Jackson’s Moonwalker video, the game followed Jackson as he explored pool
halls, graveyards, and other secret hideouts in search of kidnapped children.
Just like the video, the game ended with Jackson turning into a robotic alter
ego as he battled a nefarious criminal named Mr. Big.*

Sega’s marketing team was led by A1 Nilsen,** who constantly reminded
the press that Jackson had added his own creative suggestions during the de¬
velopment of the game. Jackson even released a statement saying that Genesis
was the first game console that had enough power to handle his music. In
this, however, the pop star was wrong. The first system powerful enough to
handle his music was the Master System. Sega published an eight-bit version
of MichaelJackson’s Moonwalker as well.

Sega of America may have slowed down its Master System marketing effort
with the launch of Genesis, but it did not abandon the retailers in the video
game channel. Sega released Master System versions of such Genesis hits as
MichaelJackson’s Moonwalker, Ghouls TV Ghosts, Golden Axe, Columns, and even Sonic The
Hedgehog. It also released the Power Base Converter, a pricey adapter that allowed
consumers to play Master System cartridges on their Genesis consoles.

Electronic Arts Does

When we announced the Nintendo deal, the stock went up. When we an¬
nounced the Sega deal, the stock went down because the market was so
ignorant about what was going to happen. Of course, by the end of that
year, everybody realized that the wheels were falling off the 8-bit market,
and we were getting punished for that. They still didn’t appreciate the 16-bit

* Actor Joe Pesci played Mr. Big in the music video. The character in the video game was an
excellent likeness.

** Nilsen was the JC Penney buyer who handled video game orders during the late 1970s
and early 1980s.

The Year of Hardware 4®f

[systems]. A lot of people in the period from 1989 to 1990 just assumed that
Sega was not going to do anything.

—Trip Hawkins

Electronic Arts’ relationship with Sega produced significant rewards for both
companies. Genesis quickly became a lucrative new outlet for Electronic Arts,
and Sega benefited from having a line of sophisticated games that appealed to
an older audience more than most games on the NES.

Nintendo approached Electronic Arts about making games for the NES in
the mid-1980s, long before Sega announced Genesis. But Hawkins did not want
to make games for the eight-bit console. He and many other Electronic Arts
board members felt that the NES was not powerful enough to run their com¬
puter games and they did not want to downgrade their games to run on it.
Like many people at the time, Hawkins was openly disdainful of console games
and critical of Nintendo’s chances of success. The difference was that Hawkins
waited too long to change his mind. By the time he realized that Nintendo
was going to succeed, Electronic Arts’ stock was tumbling and the eight-bit
market showed signs of aging.

We decided that Genesis would do really well and that we had very appro¬
priate content for it. We did not want to be in this business the way it was
currently being run, the way Nintendo did it with that one-sided licensing
agreement, and Sega was trying to clone almost everything about Nintendo.

I thought, look at what Atari is doing. They have reverse engineered the ma¬
chine and are selling their own games. If Atari wins that lawsuit, that will
open up the market and you won’t need to have one of those oppressive
licensing agreements.

—Trip Hawkins

In 1989, Electronic Arts’ technicians successfully reverse engineered both
the NES and Genesis. Though the NES market was considerably larger and his
company eventually released a few games for it, Hawkins felt that Genesis was
a better fit for his company’s goals. Electronic Arts’ programmers were famil¬
iar with its 16-bit 68000 processor, having worked with it while making games

VO The Year of Hardware

for the Atari ST, Commodore Amiga, and Apple Macintosh computers. Con¬
verting games to work on Genesis also required less work since the most
popular computers had 16-bit processors at that time. Only one obstacle re¬
mained: waiting to make sure that Sega did not change the architecture of its
game console before releasing it in the United States. (Hawkins was aware of
the security chip Nintendo added to the Famicom before shipping it to the
United States as the NES.) When Genesis proved nearly identical to Mega-
Drive, he decided to move ahead with his plans.

We decided to go ahead and publish our own stuff on Genesis. Then, before we
did that, we went to Sega and said, "Look, before we embark on this path,
maybe there’s a way for us to work out a more reasonable arrangement.”

So in June of 1990, we signed a very unusual and much more enlightened
license agreement with Sega. Among other things, we had the right to make
as many titles as we wanted. We could approve our own titles; there was not
this sort of oppressive restriction on our rights of expression, and, of course,
the royalty rates were a lot more reasonable. We also had more direct control
over manufacturing.

—Trip Hawkins

Electronic Arts’ first two Genesis games, Populous and Budokan: The Martial Spirit,
were released in June 1990. In August, Electronic Arts released a miniature
golf simulation called Zany Golf-and that fall released the first Genesis version
of John Madden Football.

At that time, we would be pretty happy if we released a computer game that
sold 50,000 units. That was considered to be a significant milestone of suc¬
cess. We thought, Well, what would it take for us to sell 50,000 on the Sega
Genesis? We decided that if they had an installed base of 500,000 units, we
would be able to sell 50,000.

After Madden came out, they probably reached 500,000 machines in North
America, and by that time we had probably sold well over 100,000 units. That
was pretty healthy penetration, and it just got better and better after that.

—Trip Hawkins

The Year of Hardware 411

I started at NEC in 1987, and within about two months I got this call, and they
said, "Hey, NEC’s doing this new project in Japan that’s a video game sys¬
tem. We want you to check it out and think about whether you could introduce
it in the U.S.” It was ironic because I didn’t go there having any thought of
NEC doing anything in the video game space, and yet almost right away
they started doing video games.

—Ken Wirt, former vice president and general manager,

NEC Technologies

Sega was not the only company to release a new video game console in the
United States in 1989. NEC, one of Japan’s leading computer manufacturers,
and Hudson Soft, a leading video game publisher, teamed up to enter the
market with a system called TurboGrafx-16 (TurboGrafx).

Hudson and NEC designed PC Engine, but a lot of it was Hudson’s game ex¬
perience because they were one of the top developers for the Nintendo
Famicom. Hudson was a very colorful company. It was started by two broth¬
ers named the Kudo Brothers. They were eccentric software entrepreneurs,
and they grew up kind of next to the railroad tracks on the island of Hokkaido,
which is the northern island of Japan.

—Ken Wirt

In the very beginning, TurboGrafx had a few small advantages over Genesis.
NEC had a good reputation as a computer company and strong name recogni¬
tion among PC owners. TurboGrafx was also older than Genesis. NEC released
it in Japan as the PC Engine a full year before announcing plans to ship it to the
United States, and the launch was tremendously successful. More Japanese con¬
sumers purchased PC Engines in 1988 than Famicoms, and a small core group of
U.S. video game enthusiasts had bought imported PC Engines for prices averag¬
ing approximately $500. American game magazines such as Electronic Gaming
Monthly and Video Games and Computer Entertainment mentioned the console. In May
1989, NEC announced plans to release the system in the United States.

412 The Year of Hardware

NEC had some distinct disadvantages, too. Sega was an established arcade
company, and American consumers knew the Sega name from the Master
System and arcade games. Some people even remembered the tabletop games
and ColecoVision cartridges from the early 1980s. Sega also had a stronger
following among game enthusiasts. By the time Mega-Drive was released in
Japan, it was much bigger news in the U.S. press than PC Engine.

NEC did not have to search very far to find an executive to handle the in¬
troduction of its new game console. Ken Wirt, who joined NEC’s computer
division a few months before the launch of PC Engine, had spent more than a
year as a vice president in Atari’s consumer computer division. Recognizing
the value of his past experience, executives at NEC headquarters in Japan sent
Wirt their new console and some games and asked him to evaluate the sys¬
tem. His initial reaction was positive.

They sent over some PC Engines and I checked it out. The quality was great.

At the time, we were comparing it to the Nintendo Famicom and the Sega
Master System, and it did an awful lot better than either of those did. It
played faster and the graphics were better and it had some interesting styl¬
ing. And the game cartridges were those little 1 C cards. I mean, it had a lot of
interesting things going for it.

—Ken Wirt

Technologically, TurboGrafx was a curious hybrid of 8- and 16-bit technol-
ogy. NEC’s marketing department fiercely maintained that it had both a 16-bit
custom graphics processing chip and a 16-bit central processor, but critics
charged that both systems were built around 8-bit chips. TurboGrafx clearly
lagged behind Genesis in overall power, though it could display far more col¬
ors on the screen*

As I recall, TurboGrafx was a hybrid design of 8- and 16-bit technology. From a
marketing standpoint, driving the idea that it was a 16-bit system was pretty
important. From a marketing standpoint, that was a complicated story to tell.

* TurboGrafx could display 241 colors at a time. Technically, Genesis could display only 61
colors at one time, though a method for displaying 128 colors was developed in later years.

The Year of Hardware 4*3

Of course, the competition wanted to tell the 8-bit part of the story, and
NEC wanted to drive the 16-bit component of the story. In hindsight, maybe
it wasn’t a good idea to let that battle line be drawn because neither side
was ioo percent right. Perhaps telling a more sophisticated story would have
been of more value.

—Stephen Boogar, former vice president of sales, NEC Home Electronics

Instead of storing games in cartridges, NEC published its games on plastic
cards that looked a lot like the cards used on the Master System. But NEC’s held
a lot more data. The game that came packed with the system was a slow-paced,
side-scrolling adventure called Keith Courage in Alpha Zones that highlighted
TurboGrafx’s ability to display several colors. In the future, however, TurboGrafx
games would have the potential to be much larger than Sega games. NEC an¬
nounced that it would release a CD-ROM add-on device called the
TurboGrafx-CD within a few months after the fall release of the main console.
(CD-ROM disks could store nearly 260 times more data than TurboGrafx cards.)
The console launched in New York and Los Angeles in late August, just two
weeks after the launch of the Sega Genesis, and retailed for $199.

The video game business was hot at the time that we launched, and we had
tons of orders from all the big retailers. Kmart, Wal-Mart, Babbages, every¬
body had these giant orders. We had a big introduction ceremony in New
York in the original customs building. There must have been 200 press people
at this thing, and it was covered on CNN, and there was a big media splash
about the introduction.

-Ken Wirt

Unaffected and Overconfident

I thought Nintendo screwed up three different times. One was being so late
bringing its 16-bit in to counteract Genesis. Number two was not making
Game Boy a color system a lot quicker to counteract not only our Game
Gear but also the Lynx. Number three was not taking care of mom and dad

4>4 The Year of Hardware

by making a downwardly compatible component that accepted 8-bit soft¬
ware on the Super NES. It didn’t have to enhance the software, just to accept
it so mom and dad didn’t complain about tossing $500 out the door on
little Johnny’s NES.

—Bob Harris, former director of creative services and advertising,

Sega of America

The executive team at Nintendo greeted the news about Sega’s Genesis and
NEC’s TurboGrafx with indifference. Looking back years later, several
Nintendo employees have offered various explanations about why they did
not take Genesis seriously. Some people said that the first Genesis games
did not leave an overwhelming impression. Others said that Japanese Mega-
Drive sales figures were so low that Genesis didn’t seem like much of a threat.
Several people admitted that since Nintendo had a U.S. install base of over
20 million, Sega seemed like an upstart, an upstart that Nintendo had easily
beaten a few years earlier.

The other failing was this blind faith that since they were Nintendo and
they were successful, no one could ever defeat them. That they worked so
hard and had done so many things right and were given such positive
acclaim from people and had made so many people in the industry wealthy
that you just couldn’t imagine them looking anywhere else because we’d
made them so happy.

—Howard Phillips, former game master, Nintendo of America

At the same time, Nintendo had just passed new milestones, and the busi¬
ness continued to expand. Nintendo’s sales for the year topped $2.3 billion,
and the company’s licensing program grew as well. Knowing that under the
terms of their agreement, they could not publish more than five games per
year, two licensees—Konami and Acclaim—asked for second licenses. This
allowed Acclaim to publish five additional games as LJN, and Konami to pub¬
lish its additional games as Ultra. Two of the first games that Konami published
under the Ultra label were exceptionally successful —Teenage Mutant Ninja Turtles,

The Year of Hardware 4 s 5

a game based on comic-book heroes that became a cartoon show and a mo¬
tion picture, and Metal Gear, a game about a soldier in a special forces operation.

The big news around Nintendo in 1989 was the pending release of a new
handheld game system, the first handheld video game to use interchangeable
cartridges since Milton Bradley released Microvision in 1979. Named Game
Boy, the new unit was designed by Gumpei Yokoi and Nintendo’s Research
and Development Team 1, the team that created Game & Watch and designed
the hardware for Donkey Kong.

Typical ofYokoi’s engineering, Game Boy was inexpensive, lightweight, and
efficient. It was the same size as a calculator, had stereo sound, a black-and-
white liquid crystal display (LCD) screen, and could run for ten hours on four
AA batteries. Though Game Boy was designed around an eight-bit processor,
it was not compatible with the Nintendo Entertainment System, and its car¬
tridges were only slightly bigger than a book of matches.

Yokoi was not alone in his interest in handheld games. Unaware that Yokoi
was creating Game Boy in Japan, Rare Ltd. cofounder Chris Stamper built a
handheld game system that played NES cartridges. When he completed the
project, Stamper and Joel Hochberg, Rare’s American partner, demonstrated
the unit to Nintendo of America.

We had no idea that Nintendo was working on a portable system when I
arranged a meeting with Mr. Arakawa and Howard Lincoln, to show them a
portable system that we had developed that used NES carts. There were a
number of problems, of course, such as battery life. It was cumbersome in
comparison to what Came Boy in its final form actually looked like because it
accepted a larger cartridge.

At my meeting with Howard and Mr. Arakawa, they took me into their
confidence and told me about this Came Boy project and suggested that we
forego any development of this project that we were working on.

—Joel Hochberg, cofounder, Rare and Coin-lt

In a shrewd maneuver, Nintendo of America president Minoru Arakawa
decided to use Tetris as the cartridge that came packed in with Game Boy. It
was a perfect match. The puzzle game’s simple graphics lent themselves well

416 The Year of Hardware

to Game Boy’s LCD screen, and its style was ideal for travel and quick breaks.
The Tetris cartridge also fit into advertising campaigns that Nintendo ran in
later years, after discovering that Game Boy had a stronger appeal to adults
than the NES did.

Nintendo originally released three cartridges— Baseball, Breakout, and Golf -—
that retailed for $20 at the time that Game Boy was launched. A few weeks
later, Nintendo released the Game Boy cartridge Super Mario Land with a bar¬
rage of advertisements based on the science-fiction movies of the 1950s. Though
it had the look and feel of other Mario games, Super Mario Land took the plumber
in new directions. In this game he flew a spaceship and rode in a submarine.
Shigeru Miyamoto had not overseen the creation of this game; Yokoi pro¬
duced it himself specifically to support his Game Boy system.

Unlike the other hardware systems that came out in 1989, Game Boy was
an immediate success. According to an article in 'Lime magazine, the one mil¬
lion Game Boys sent to the United States in 1989 met only half the demand
for the product. 1 That allotment sold out in a matter of weeks. Game Boy was
a juggernaut. Its sales did not slow down, even when it was confronted with a
technologically superior product.

Atari lynx

Jay Miner, the man most associated with the design of the Atari 2600, founded
Amiga in 1982. In 1983, he hired a young programmer named RJ Mical* who
had a fanatical passion for creating operating systems. Tall, athletically built,
and openly goofy, Mical was the antithesis of the standard programmer. Work¬
ing under Miner, Mical learned a new appreciation for the relationship between
hardware and software.

Everything i learned at college and everything I learned until going to Amiga
suggested that hardware was hardware and software was software, and the
way things are done is that you invent a bunch of hardware and give it to the
software guys. There’s a much better way of thinking that I learned at Amiga.

For the first time, the hardware and the software were created together. There

Mical’s biggest claim to fame at Williams was helping design the arcade game Sinister.

The Year of Hardware 4^7

was a great flow of communication, a mutual design coming into existence
at the same time.

—RJ Mical, operating system designer, Amiga

While working at Amiga, Mical struck up a friendship with a hardware guru
named Dave Needle. Both men shared the same “Yin and Yang” philosophy about
the interrelationship of hardware and software. They both left Amiga in 1985.
Needle took a job with Apple Computer and Mical became an independent con¬
tractor. A few years later, however, while eating at a Mexican restaurant, they
began discussing projects they could build together. The conversation turned to
video game systems. Needle grabbed a napkin, and they sketched the basic plan
for a handheld video game system with stereo sound and color graphics.

Mical and Needle originally planned to design their system around a 16-bit
processing chip but decided it was not a practical idea. The chips they looked
at would have had heat problems, and when they evaluated the components
needed to support the 16-bit processor, they decided the system would be
bulky and heavy. They switched to an 8-bit 6502 chip from the same family of
chips used in the NES and Atari 2600.

Mical and Needle did not have the money needed to build and market a
game system, so they began searching for a company that would buy their
idea. They contacted Epyx and demonstrated their idea toward the end of
Michael Katz’s tenure as president of the company. They did not know that
Katz had urged the company’s board of directors to accept the project. Over
the next few months, they entered a lengthy and friendly negotiating process
that ended with them accepting stock in Epyx and taking positions with the
company. They called the project “Handy Game.”

Though Katz had managed to keep Epyx running, he was never able to
completely solve its financial problems. The company, needing financial back¬
ing in order to bring out a new game system, invited several potential partners
to view Handy Game while it was under development. In 1988, Nintendo sent
Don James to have a look at it.

Someone from Epyx contacted us and said, "Hey, we’ve got this thing and
do you guys want to look at it?” I don’t think they actually offered it to us,
but we found out about it and I flew down and had a look.

418 The Year of Hardware

I went down and they showed me what they were doing. It was really just
a screen at that point. It was difficult to see the screen because it faded in
and out if you moved it around. You had to have it just the right angle to see
the screen really well. My personal thought was that, because of that and
because it just chewed through batteries like crazy, it wouldn’t ever really
catch on that well.

—Don James

Nintendo sent somebody to look at what we were doing, but he didn’t seem
interested. It was like he came to see us even though he had already made up
his mind that he wasn’t interested.

—RJ Mical

Needle and Mical learned a new phrase while working on Handy Game—
“emag tresni.” For them, the phrase became a sort of Murphy’s Law. It meant
that no matter how carefully you worked, and no matter how meticulously
you checked every detail, something was bound to go wrong. In this particu¬
lar case, the mistake occurred as Needle designed Handy Game’s screen with
engineers from Sharp Electronics. Needle and a Japanese engineer discussed
every point in the design, but at some juncture, they slipped up on one digit
slot in the binary coding, and instead of listing a “1,” the engineer placed a “0.”

If you didn’t have a game in the slot when you turned it on, the screen would
display the message, "Insert Came.” Because of the error, the message came
out inverted. It said, "emag tresni.”

—RJ Mical

Epyx’s financial problems increased throughout 1988, and the company
ended up selling Handy Game to Atari Corporation. Many of the employees
at Epyx resented the idea of working with Atari. Mical and Needle disliked the
idea of working with Atari so much that they left Epyx. A few months later,
Epyx collapsed.

Jtie Year of Hardware i^9

Atari changed the name of the system from Handy Game to Lynx to high¬
light the fact that up to eight Lynx consoles could be daisy-chained together
using link cables. The system was launched in October 1989 to rave reviews.
Lynx was designed to accommodate both left- and right-handed play, and it
had one of the finest LCD screens of its time. The screens on Game Boy and
later handheld systems tended to blur when showing fast movements. Lynx’s
screen handled speed without blurring, though it scratched very easily. Color
graphics and a crisper screen were not enough, however. While Toys “R” Us
and most of the dedicated video game stores carried Lynx, Atari could not
give it the marketing and retail support that Nintendo gave Game Boy. Atari’s
poor reputation with retailers, and fear of Nintendo, caused many retailers to
avoid the system. Originally retailing for $199, it cost twice as much as Game
Boy and was never widely advertised. Many stores pulled Lynx from their
shelves within a year. It was available mostly through mail order thereafter.

It was embarrassing to talk to retailers when I first joined the company. They hated us
because we never did what we said we were going to do. Fortunately, they did not like
Nintendo either. In those days, Nintendo was so arrogant.

—Tom Kalinske, former president and CEO, Sega of America

Indeed, when Apple president Michael Spindlerwas asked in March 1991, which computer
company Apple feared most, he quickly answered, "Nintendo.” 1
[Laughs] They should have feared Apple more/

■Bill Gates, chief operating officer, Microsoft

422 Run for the Money

The NES Hits Its Apex

Nintendo’s best year... The best year for the NES, the most lucrative year for
the NES, was 1990, which was also the first full year that Sega Genesis was on
the market.

—Peter Main, executive vice president, Nintendo of America

With the 1989 releases of Genesis and TurboGrafx, Nintendo found itself lagging
in technology behind the competition; but amazingly, technology did not seem
to matter. Nintendo sold more than 17 million copies of Super Mario Bros. 3 world¬
wide, setting a lasting sales record for a game cartridge that was not packed in
with console hardware.* There were other hits, too. Sun Soft scored a major hit
with Batman, a game that built off the popularity and storyline of the Tim Bur¬
ton movie. Konami scored a major hit that year as well with Teenage Mutant Ninja
Turtles, the first game to be published under the new Ultra label.

In 1987, Nintendo of America president Minoru Arakawa met with execu¬
tives of Konami—one of Nintendo’s three most successful third-party
partners—to discuss a problem they saw in their licensing agreement. Ac¬
cording to the agreement, third-party licensees were allowed to publish only
five games per year. Konami had published a long line of bestselling games,
including Castlevania, Blades of Steel, Double Dribble, and Life Force, and the five-
games-per-year clause was holding the company back from realizing additional
profits. Based on the games’ quality and torrid sales, they argued, Konami
should not be limited to five games per year.

Another third-party publisher had the same complaint. Acclaim, Greg
Fischbach’s Long Island-based game company, also asked for permission to
publish more games. Having created such games as Double Dragon II, Iron Sword,
and several games based on WWF wrestling, Acclaim was another one of
Nintendo’s top licensees.

After considering their arguments, Arakawa found a way around the rule.
He gave Konami and Acclaim second licenses so that they could publish an
additional five games under different names. Acclaim adopted the name

* By comparison, Nintendo sold in excess of 30 million copies of the original Super Mario Bros.
and Game Boy Tetris cartridges, both of which were packed with hardware systems.

LJN for its second license and Konami published additional games under
the name Ultra.

I think Konami and Acclaim were doing so well that we thought we had a
good reason to give them another license. The other licensees did not like it.

Konami had a really good manager [Emil Highcamp] in the States. He was
not only doing marketing and sales, he was also a good product manager.

He sometimes went to Japan and asked the RSD people at Konami [head¬
quarters] to come up with this type of game or that type of game. Once he
was watching TV and saw Teenage Mutant Ninja Turtles and got an idea, so
he licensed it and asked Japan to make it into a game.

—Minoru Arakawa, president, Nintendo of America

Under the Ultra label, Konami sold approximately 4 million copies of Teen¬
age Mutant Nmj a Turtles, giving Ultra a heady send-off. One of Ultra’s next titles,
Metal Gear, also helped establish the product line. But Ultra’s days were num¬
bered. The Ultra license was only for the Nintendo Entertainment System
(NES), and that system was coming to an end.

Even with earnings of $3.34 billion and 48 million Nintendo Entertainment
Systems sold worldwide, Nintendo executives knew that they could not con¬
trol the market with obsolete hardware. Work had already begun on the new
16-bit game console that they hoped would help them shut competitors out
of the market.

A Change at Sega

I think Mike Katz was the guy who did a lot of the things that ultimately led
to Sega’s success with Genesis.

—Howard Lincoln

Breaking Nintendo’s hold on the international video game market proved to be
more than a matter of technology for Sega. Nintendo controlled more than 90
percent of the international market. But whether Sega’s 16-bit game console
was sold as the Mega-Drive in Japan or the Genesis in the United States, the unit

424 Run for the Money

was simply not catching on. With memories of the failed Master System still
vivid in his memory, Sega Enterprises CEO Hayao Nakayama decided to shake
up Sega of America, in the hope that new ideas might lead to new success.

In mid-1990, Nakayama bumped into an old acquaintance named Tom
Kalinske who was visiting Tokyo on business. As they spoke, Nakayama told
Kalinske that he now worked at a company called Sega that had a new game
console that he hoped could steal the market away from Nintendo. Kalinske,
who was working for a struggling toy car manufacturer called Matchbox, al¬
most laughed. “You’re competing with Nintendo! They’re huge!” he said.

According to a 1995 article, Nakayama offered Kalinske the position of CEO
of Sega of America on the spot. 3

Tom KaHnske

And so Nakayama-san was not happy that we hadn’t sold a million units. In
January, about fourteen months after I started there, I was replaced by Tom
Kalinske who, of course, I’d known from Mattel, where we had worked together.

—Mike Katz, former CEO, Sega of America

Thomas J. Kalinske was a natural choice for president and CEO of Sega of
America. An affable man with clean-cut all-American good looks, he gradu¬
ated from the University of Wisconsin with a degree in marketing and spent
years in advertising before joining Mattel as a product manager in the early
1970s. While at Mattel, Kalinske’s bold style caught the eye of top executives,
and he moved up quickly.

Mattel, the largest toy company in the world, had plenty of room for a
tomcat like Kalinske to grow. He began with preschool toys, then was asked
to oversee the Barbie line. At the time, Mattel marketed Barbie as a single line
of dolls with accessories. Kalinske’s team changed the strategy, breaking the
line into several segments such as Malibu Barbie. “When I started on the Barbie
business, worldwide, it was $42 million; when I left the company, it was $550
million; today, it’s $1 billion.’” 1 As Kalinske rose through the ranks of Mattel,
his responsibilities expanded and he oversaw several research and develop¬
ment teams. One ol those teams formed the nucleus of Mattel Electronics.

Run for the Money 42|

I was a VP of marketing at the time, and one of my product development
groups developed the first portable games. We introduced them on Father’s
Day. Nobody thought it was going to be successful, and, of course, the prod¬
ucts were phenomenally successful. Within that same group, they developed
the Intellivision technology. But what happened was that because it was clear
the electronics business was going to become such a major part of the com¬
pany, we decided to create a totally separate company. Once we made that
decision and staffed it with some new hires and with some e-toy people, I
never had anything to do with it again.

—Tom Kalinske

A rising star at Mattel, Kalinske tracked the new electronics division’s me¬
teoric ascent and fall.

I eventually ended up on the board of directors of Mattel Inc., and during
that time period the Intellivision company would report its results back in.

So I had some involvement at a board level with them and how they were
doing. All of a sudden one day the guys from Mattel Electronics said, "Oh my
god, the bottom has fallen out. Atari just lost all its money, and we’re losing
all this money, and it looks like we’re gonna lose $350 million."

—Tom Kalinske

Twelve years after he started at Mattel, Kalinske began a three-year stint as
president of the company. During this time, he went toe-to-toe with televi¬
sion network executives over advertising sales. “We were spending millions of
dollars, and the networks treated us like dirt,” says Kalinske. “They had
McDonalds and other big companies, and they acted as if they were doing us
a favor by giving us advertising time.”

Mattel came up with an alternative medium for reaching children—a car¬
toon series and a line of toys called HeMan and the Masters of the Universe. The idea
was to create a hit cartoon series for non-network television where advertis¬
ing was more affordable. The idea worked. “Masters of the Universe ended up
getting a 7.5 rating at a time when the networks’ shows weren’t getting a 7.5
rating. From that point on, the networks were much easier to work with.”

426 Run ior the Money

After sixteen years with Mattel, Kalinske went to Matchbox for a short pe¬
riod, then replaced Michael Katz, who had spent the last year trying to find a
foothold in the market. In truth, Katz has seldom been given enough credit
for his role in Sega’s success. Much attention has been given to the rise in
profits under Kalinske, jumping from approximately $100 million in sales in
1990 to over $1 billion by 1993. Much of this success, however, grew out of
programs started by Katz.

We started the aggressive advertising campaign "Genesis does what Ninten-
don’t.” We concentrated on games that Americans would play. . . . sports
games, specifically, and some other products. And we attempted to develop
a mascot character like Mario.

—Michael Katz

Several people who worked under Kalinske when he first joined Sega say
that he did not know much about video games but that he was a fast learner.
In the early days, marketing executives and engineers had to brief him before
meetings with reporters, and some Sega of America employees wondered if
he was right for the job. Playing off his Mattel background, some reporters
dubbed Kalinske Sega’s “Ken doll” spokesperson, suggesting that he was a
good-looking figurehead with little else going for him. The label was grossly
inaccurate. According to those who worked with him, Kalinske studied hard
and quickly developed an understanding of the industry. He demonstrated
the ability to make tough decisions and the willingness to defend his decisions
when challenged by the Japanese board of directors of Sega Enterprises. He
also surrounded himself with industry-savvy advisers such as Steve Race, an
Atari veteran and one of the founders of Worlds of Wonder; Bob Harris, who
had helped launch both Master System and Genesis; Paul Rioux, who had
worked on Intellivision; and Al Nilsen, who had been JC Penney’s merchan¬
dise buyer during the Atari’s heyday.

Tom focused on retail and how to represent the company and third-party
relationships. I mean, that was Tom. He made sure that the best people out¬
side of us wanted to work on Genesis.

Run for the Money 4 2 ?

Shinobu Toyoda was the vice president of licensing, and he was the man
behind building the Sonic franchises and licensing in and out. He wanted to
go to Hollywood. To this day he works in Los Angeles at our Sega PC offices.

He’s the one who wanted to do the Paula Abdul game. He’s the one who
would go down to Hollywood and go onto all the sets to get licenses like
Batman. He was the one who made sure Sonic was on every bath towel and
all of that stuff, and he worked very closely with the Sonic cartoon.

The guy who was most underrated and the guy who doesn’t get a lot of
positive press was Paul Riuox. I can tell you from firsthand experience ... I
got to sit and watch all these guys, and Paul Rioux was the guy who pushed
hard to improve the quality when the quality wasn’t there. He was the guy
who saw the value of making money in peripherals. He was the "make it
happen” guy, the sort of nuts and bolts guy who would be involved in all
aspects. He didn’t have the most romantic job, but I assure you, he was a
really key part of the success.

You know, it was a real triad, though. If all three of them [hadn’t been]
there, I really feel like we wouldn’t have been successful. The chemistry be¬
tween the three was essential.

—Michael Latham, former director of Omega Group, Sega of America

A student of classic marketing, Kalinske believed in the Gillette school of
“giving away the razors to sell the blades.” Above all else, he felt that Sega had
to get as many Genesis consoles into consumers’ hands as possible and as
quickly as possible. Working with his executive team, Kalinske developed a
four-point strategy that he believed could weaken Nintendo’s hold on the
market. His plan included dropping the price of Genesis from $189 to $149,
with the eventual goal of getting it down to $100; replacing Altered Beast, the
first bundled game, with a game called Sonic The Hedgehog that was under devel¬
opment at the time; assembling a U.S.-based team to create games more suited
to American tastes; and adopting strident advertising campaigns that chal¬
lenged Nintendo head on.* Kalinske prepared a presentation with these

* While Tom Kalinske often takes credit for creating advertising campaigns that challenged
Nintendo “head on,” it should be noted that the “Sega does what Nintend-don’t” campaign
began under Michael Katz. It should also be noted that Nintendo later responded to this
campaign with “Nintendo is what Genes-isn’t.”

428 Run for tlie Money

sugg es ti°iis and flew to Japan to present them to Nakayama and the board of
Sega Enterprises. The board nearly rejected his ideas.

It was like I’d hit them with a bucket of cold water. They asked, "Are you out
of your mind? You want to lower the price until we don't have any profit at
all? You want to take out our regular software and put in our best software?

You want to take on this company that has 92 percent of the market in an
advertising campaign?”

That’s essentially what they told me. I thought, "Well, this is the shortest ca¬
reer anybody ever had. I guess I’d better start looking for something else to do.”

As the other guys got up to leave, Nakayama turned and said, "On the
other hand, he was hired to make decisions for the U.S. market, and if that is
what he thinks needs to be done, he should go ahead and do it.”

—Tom Kalinske

Kalinske returned to Sega of America with Hayao Nakayama’s approval on
all four suggestions. The next step was putting his plan to work.

Sega’s Secret Weapon

A large portion of Kalinske’s recovery plans would fall on the shoulders of
Sonic The Hedgehog* a speedy blue rodent in red tennis shoes.

Sonic was the creation of Yuji Naka, a young game designer whose creden¬
tials included Phantasy Star, a role-playing title generally remembered as the best
game ever released for Sega Master System, and Ghouls TV Ghosts for Genesis, a
flawless translation of a popular Capcom coin-op game. Of the games released
around the launch of Genesis, Ghouls TV Ghosts stands out among the finest.

An exacting and relentless micromanager, Naka was well known for expecting
nothing short of perfection from those who worked on his team. Like the pro¬
grammers who created the games for the Atari 2600, Naka generally preferred to
do everything from game layout to the music and even writing the code himself.

* The “T” in Sonic The Hedgehog is capitalized. Sega marketing wizard A1 Nilsen had the “The”
registered as Sonic’s middle name.

Run for the Money 429

Not just programming, everything ... the graphics, the pictures. I’m really
careful about everything. It’s not exactly the building of the program itself
that concerns me, it’s the overall flow of the program. In my mind, working
as a producer or director means handling all aspects of a game, including
the music, graphics, pictures, and everything.

—Yuji Naka, creator of Sonic The Hedgehog

Naka’s demanding managerial style sometimes gave way to outbursts.
Unlike other creative teams, Naka’s team suffered from heavy turnover as
burned-out programmers, designers, and artists looked for less demanding
work elsewhere. Mild-mannered in public, Naka was said to be given to emo¬
tional flare-ups when under stress. He had already established himself as
one of Sega’s most respected console game creators in 1989, when the com¬
pany-wide call went out to create a new mascot that could compete with
Nintendo’s Mario.

Mr. Nakayama expressed the idea to the company that it would be a good
thing for Sega to develop a mascot character—one that could be sort of, that
could do for Sega what Mickey Mouse does for Disney. As a result of that,
numerous artists and designers from the company submitted design ideas
and suggestions and sketches for what this character would be. A lot of ideas
were considered, like kangaroos and rabbits, and we were kind of thinking
along the lines of a jumping, hopping kind of character.

Mr. Oshima [Masato Oshima] was the artist whose character design sketch
was accepted. He’s the one who essentially drew the hedgehog. It’s a very
stylized hedgehog.

—Roger Hector, former head, Sega Technical Institute

Naka wanted to make a game that was similar to the Super Mario Bros, games,
only simpler. Mario games used two buttons, so Sonic should use one. Mario
collected coins, so Sonic collected rings. The way Naka’s people differentiated
Sonic from Mario was by making the hedgehog faster and giving him “atti¬
tude.” Mario games were slow and friendly, Sonic games would be fast and

430 Run for the Money

the eponymous groundhog would glare at the camera and tap his foot impa¬
tiently if the player did not move quickly enough *

The Japanese, unbeknownst to us, created a character with Sonic The Hedge¬
hog. We, in America, thought Sonic was ridiculous because the hedgehog was
a little known animal and it was in blue. We thought it was silly, but to the
credit of the game, which was so good, the character became established.

I think it was because the game was a good game on its own anyhow. The
character could have been anything, but it was a hedgehog that would have
died a dismal death had it not been for a very good game.

—Michael Katz

Moreover, Sonic traveled through a surreal world designed to show speed.
His two-dimensional side-scrolling environment included loops, steep cliffs,
and pinball-esqe bumpers from which he could launch at high speeds. Com¬
pared to Sonic The Hedgehog, even the fastest racing games of the time seemed
slow. Players had to make decisions in advance and react quickly to survive
each level of the game. When Sega at last unveiled Sonic The Hedgehog, the re¬
sponse was one of astonishment. Magazines praised it as one of the greatest
games ever made and proof that Genesis could do more than the Golden Axe
and Moomvalker side-scrollers for which it had become known.

People at Nintendo, however, remained unimpressed.

It was pretty much a typical Nintendo reaction at first. [People said] "Look,
they’re trying to copy us with Super Mario Bros, and it’s the same kind of a
game. They can’t really do anything as good as we do it.” Over time, there
was this kind of dawning realization that this was .. . not such a bad prod¬
uct. It was the same thing with Genesis, in general.

—Richard Brudvik-Lindner, former group supervisor and head of
Nintendo of America Account Team, Hill and Knowlton

* Sonic’s foot tapping was not original. It first appeared in Major Havoc, an Atari vector-
graphics coin-op game created by Owen Rubin.

Run for the Money 43

Sonic The Hedgehog was released in the United States in 1991. As part of
Kalinske’s proposed plan, it replaced Altered Beast as the game that came
bundled with the system. People who had purchased the old package with
Altered Beast within a few-months grace period were allowed to mail in for a
free copy of Sonic, in effect giving them an extra game at no charge. The Sonic
cartridge was also sold separately for those who already owned Genesis.

Sonic was an immediate hit, and many consumers who had been loyally
waiting for Super NES to arrive now decided to purchase Genesis. After strug¬
gling for more than a year, Sega was suddenly seeing success. The fiercest
competition in the history of video games was about to begin.

The Super Family Computer

Japan remained loyal to Nintendo, ignoring both Sega’s Mega-Drive and
NEC’s PC Engine (the Japanese name forTurboGrafx). When Nintendo Co.
Ltd. announced that its 16-bit Super Family Computer (Super Famicom)
would go on sale in Japan in November 1990, nearly 1.5 million people pre¬
ordered the console.

The November 21,1990, Japanese launch of Nintendo’s 16-bit Super Famicom
was an international media event. Tens of thousands of people lined up in front
of department and electronics stores the night before, hoping to pick up the
coveted new console. According to some reports, many parents called in sick to
work so that they could join the lines of waiting shoppers. All of Tokyo was
slowed down by the crowds, and a frenzy began when news spread that Nintendo
had shipped only 300,000 consoles. The pushing and shoving were so chaotic
that the Japanese government later asked Nintendo and other video game com¬
panies to restrict future hardware releases to weekends.

In terms of technology, the Super Famicom, which would be released in
the United States as the Super NES, was an improvement over both Genesis
and TurboGrafx. Like Genesis, Super NES had a true 16-bit processor rather
than the 8-bit/16-bit hybrid in TurboGrafx. Nintendo’s Research and Devel¬
opment Team 2, led by Masayuki Uemura, designed the console around visual
and audio performance rather than processing speed. It displayed more col¬
ors. Genesis had a 512-color palette; Super NES could display 32,000 colors.
Along with its central processor, the Motorola 65816 chip, it included a Sony
stereo chip and two customized graphics chips that were nicknamed PPU-1

4J2 Run for the Money

(Picture Processing Unit) and PPU-2. Powered by PPU-1 and PPU-2, Super NES’s
architecture included seven special modes for handling graphics, the best-
known being “Mode 7 Graphics,” which enabled designers to set parameters
for effects such as scaling and rotating backgrounds. What the Super NES
lacked, and what would ultimately become its technological Achilles’ heel,
was the sheer processing power of Genesis.

Nintendo’s strongest selling point, however, was the game that came packed
in with the Super NES console— Super Mam World. Shigeru Miyamoto, who by
now was seen as video gaming’s greatest star, created an enormous and sprawl-
ing game that expanded the Mario universe. By this time, Miyamoto had
started working with teams of designers. He may have created the original
Donkey Kong with only two people to write code, one person for hardware, and
another for music, but the 16-bit Super Mario World, also known as Super Mario
Bros. 4, was a much bigger effort created by what Miyamoto would later re¬
member as a fifteen-person team.

Super Mario WorldbxiiXt on earlier Super Mario Bros, games. It marked the re¬
turn of the bright colors that had been a trademark of the original Super Mario
Bros, (although they were replaced with washed-out colors in the series’ sec¬
ond and third installments). This was also the game in which Nintendo
introduced Yoshi, a friendly dinosaur who carried Mario on his back. “Too
much of a good thing,” complained one video game magazine. Others ex¬
tolled it as the greatest game ever made.

Nintendo set aside $25 million for marketing and prepared to release Super
NES in the United States at a retail price of $199 on September 1, 1991.* With
Sega having recently dropped the price of Genesis, the $200 cost of Super NES
seemed high. As one magazine put it, “Hold on to your wallets, Nintendo
fans. Super Mario Bros. 4 is on the way. But it could be a mixed blessing for all
those addicted to the Mario Bros, series of home video games—and a cash-
register bonanza for the Japanese company that sells them.” 5

As the time grew closer, however, it became clear that the market was shift¬
ing. The launch of Some had revitalized Genesis sales. The ABC sitcom Boseanne,
starring comedienne Roseanne Barr, ran an episode in which Barr and her
working-class husband splurged to purchase a Super NES for their son while

* That date was eventually changed to September 9, which would later become the launch
date of Sony’s PlayStation and Sega’s Dreamcast as well.

Run for the Money 433

telling him that they would not be able to afford to buy him such an expen¬
sive gift. When he heard this, the boy was nonplussed and exclaimed that he
would simply visit a friend who owned a Genesis. There was a real market
analogy to the one in the sitcom. Tired of waiting for Super NES to arrive and
unhappy about the $200 price tag, many consumers decided to take a chance
on Genesis. Unlike the Japanese launch in which Super Famicom had outsold
both competitors combined in presales alone, Super NES would debut against
an established product.

By the time Nintendo produced Super NES this fall, Sega already had
150 different 16-bit cartridge games on the market vs. 12 for Nintendo,
and its player was retailing for $150, or 25 percent less than Nintendo’s.
While no one knows who will ultimately win this spirited battle for
Christmas sales, the feisty underhog has sold a million Genesis systems
this year, vs. 700,000 for Super NES. 6

In the meantime, NEC, already shut out by Sega, now faced desperate times
as it tried to market TurboGrafx against a second competitor. Having already
failed at increasing its sales by introducing new technologies—the TurboGrafx-
CD and a handheld console called TurboExpress that played games designed
for the TurboGrafx game console, as opposed to the scaled-down games played
on Game Boy and Lynx, NEC lowered the price of its base system to $99.

The basic issue was that Genesis had much better-known games. They got Elec¬
tronic Arts’ support and they had Madden Football and all that stuff. And they
had a lot more marketing dollars. And, you know, marketing dollars count.

—Ken Wirt, former vice president and general manager,

NEC Technologies

In a move designed to increase market share, NEC Technologies has low¬
ered the suggested retail price of its TurboGrafx-16 system to $99.99. In
addition, the company will offer the new TurboGrafx-16 system SKU,
called the “Bonk SuperSet,” at a suggested retail price of $149.99 and will
lower the suggested retail price of its TurboGrafx-CD player from $399
to $299. NEC’s 16-bit TurboExpress portable remains priced at $299. 7

434 Run for the Money

The Baffle Begins

A conventional wisdom in the video game industry is that consumers pur¬
chase new hardware when the economy is strong and stick to software when
the economy is tight. In 1991, the United States economy was in recession. It
didn’t matter. Nintendo easily sold its entire first shipment of 1 million Super
NES consoles when they went on sale on September 9. Estimates of the exact
number of Super NES units sold in the United States over the next three
months range from Sega estimates of just over 1 million to an internal
Nintendo figure of 2.2 million. 8 According to the NPD Group, a company that
tracks sales figures, Sega outsold Nintendo in 1991. According to NPD figures,
Sega finished the year with 55 percent of the market, while Nintendo’s share
was 45 percent. (This figure did not include TurboGrafx, NES, or Master Sys¬
tem sales.) And the competition was just heating up.

The All-American Game

Mr. Yamauchi was subjected to a great deal of scrutiny. ... a great deal of
discrimination. He was really dragged through the mud. And it took him six
months to put that deal together.

—Howard Lincoln

Toward the end of 1991, U.S. Senator Slade Gorton (Republican, Washington)
requested a meeting with Minoru Arakawa and Howard Lincoln. The three
met at Nintendo of America headquarters in Redmond, Washington. During
the meeting, Gorton asked Lincoln and Arakawa if they were baseball fans.
Neither one was. Next he asked them if they knew that the Seattle Mariners,
the local pro baseball team, was up for sale.

I think we’d [only] been to one Mariner game, but that was it. Trip Hawkins
(founder of Electronic Arts) had come up and taken us, and we actually had
gone to the owner's suite where we met Jeff Smulyan (owner of the Mariners).

We didn’t have any interest in baseball. We probably had some kind of a
vague idea that the Mariners had been put in play, that Jeff Smulyan had put

Run for the Money 435

the team up for sale, and that if they could find a local buyer, they could
keep it. But there were no local buyers coming.

—Howard Lincoln

Gorton finally came to the point, asking them if Nintendo could help keep
the Mariners in Seattle by buying the team. If Nintendo did not purchase the
franchise, the Mariners would very likely move to Florida, where a group of
investors was prepared to buy it. Lincoln’s response was less than favorable.

And I think I said it immediately, "Bull.” I mean, would Major League base¬
ball go along with a Japanese investor, a Japanese element?

His comment was, "That’s going to be a problem, but that can be over¬
come by having minority local ownership.”

—Howard Lincoln

Lincoln and Arakawa were noncommittal. Lincoln worried about the back¬
lash among major-league owners. He also worried about how Nintendo Co.
Ltd. chairman Hiroshi Yamauchi would react to the bad publicity and pro¬
tests that might erupt from the news that a Japanese company was purchasing
an American baseball team. Arakawa, on the other hand, had lived in Seattle
for the last fourteen years and wanted to give back to the city.

About two weeks later he [Arakawa] came in my office and said, "Oh, re¬
member that meeting we had with Senator Oorton about baseball?” I said,

"Yes.” And he said, "Well, Mr. Yamauchi has decided to buy the team.”

—Howard Lincoln

Lincoln and Arakawa decided to work through Senator Gorton, who was
visiting Russia when Yamauchi decided to purchase the baseball team. By
the time he returned, Lincoln and Arakawa were on the Big Island of Ha¬
waii, staying at a large vacation property that Nintendo had purchased. On
Christmas day, they called Gorton at home and told him the news. In an
effort to stave off trouble, Yamauchi did not purchase the Mariners alone.

436 Run for the Money

He formed a consortium called the “Baseball Club of Seattle” with John
Ellis, chairman of Puget Sound Power & Light; John McCaw of McCaw Cel¬
lular Communications; Frank Shrontz, CEO of Boeing; and Chris Larson of
Microsoft. The consortium met Smulyan’s asking price of $100 million for
the Mariners, with Yamauchi personally contributing 60 percent and taking
the controlling voice. 9 As Lincoln predicted, baseball fans and club owners
did not welcome Yamauchi’s decision.

In Super Mario Land, one of Nintendo’s most popular games, Mario the
plumber must travel through four kingdoms, dodging arrow-dropping
bees (Bunbuns), defeating bomb-carrying turtles (Nokobons) and jump¬
ing over man-eating plants (Pakkuns) so he can rescue Princess Daisy
from the evil Tatanga.

In Nintendo’s newest game, Hiroshi the billionaire must negotiate
his way through a hostile country, avoiding the venomous Jingos and
skiing past the antagonistic Moguls so that he can rescue Ken Griffey,

Jr., from the clutches of the Tampa Bay Baseball Task Force and save the
day for the beleaguered Rain People. 10

Nintendo’s purchase of the Mariners was ill timed. The nation was in the
midst of an economic recession that many economists and politicians blamed
on Japan. Those opposed to the sale pointed out that Japan did not allow for¬
eign investment in its baseball league, as proof that Yamauchi should not be
allowed to buy his way into the major leagues. Baseball commissioner Fay
Vincent stated that he doubted the sale would go through, and a national poll
showed that 61 percent of Americans preferred to keep Japanese investment
out of major league baseball. 11

Lincoln had anticipated the American backlash to the offer. What he did
not expect was a Japanese backlash as well. In Japan, where the economy was
strong and the people enjoyed a favorable trade imbalance with the United
States, Hiroshi Yamauchi was accused of arrogance and criticized for bringing
negative attention to the current prosperity.

He made the decision, he did it, and then all sorts of flack broke out. There was
a backlash in both the United States and japan. ... a negative reaction. We

Run for the Money 437

had, I think, anticipated the negative reaction in the United States. I was a little
bit surprised that there was a negative reaction to some extent in Japan. That
really was because there was a negative reaction in the United States.

—Howard Lincoln

The final sale was approved when three-fourths of team owners in the
American League and a simple majority of owners from the National League
voted to support it. Since the purchase, Yamauchi has proved to be one of the
least vigorous and involved team owners in baseball. In 1999, he would ap¬
point Howard Lincoln chairman of the team, but other than that, he has always
left Mariner affairs in the hands of Lincoln and the team’s front office.

He [Yamauchi] has never seen a single Mariner game. He’s never met John Ellis,
our CEO. He’s never met any of the other Mariner owners. He’s never attended
a game. He was going to come if we made it to the World Series, but he’s never
had to. He’s never met a Mariner player. He’s never met Ken Griffey, Jr.

—Howard Lincoln

In 1994, Yamauchi did become involved with the Mariners for one brief
moment. Early that year, Hiroshi Yamauchi called Arakawa and Lincoln to
tell them about a great opportunity for the team—a Japanese pitcher whom
he thought might do well in the major leagues.

The crowning blow came one year late when Mr. Yamauchi called and said,

"There is this great Japanese pitcher, Nomo. I want the Mariners to get this
guy, and I’ve made arrangements so that the agent will come first to the
Mariners with Nomo. I’m not worried about the budget, anything like that. I
want the Mariners to sign this guy.”

—Howard Lincoln

Arakawa and Lincoln agreed to have Hideo Nomo try out for the team. He
flew out to Seattle, but during a physical, the Mariners’ team doctor said he
had a “bad arm.” Lincoln called Yamauchi and told him that they had decided

438 Run for the Money

to turn Nomo down. A short time later, the Los Angeles Dodgers signed him,
and he finished the season as Rookie of the Year.

He was a starter in the Ail-Star game. Both the Mariners and the Dodgers
made the playoffs and this is the real tough one. During the playoffs, you’ve
got this team with a Japanese owner. They did not broadcast the Mariners’
games in Japan. The Los Angeles Dodgers’ games were being broadcast all
over Japan. So Mr. Yamauchi was a little bit torqued.

—Howard Lincoln

me war

I was tricked into this job!

—Yoshiki Okamoto, producer of research and development, Capcom

Sega of America had this whole Came Institute. Our whole strategy was to hold on and
wait for the next game from [Shigeru] Miyamoto.

—Howard Phillips, former "man who plays games for a living” spokesman,

Nintendo of America

44 ® The War

Acclaim Breaks Ranks

In 1990, Sega Enterprises CEO Elayao Nakayama called Greg Fischbach, CEO of
Acclaim Entertainment, about licensing some of bis company’s games for use on
Genesis. Fully aware that making such an agreement would infringe upon the
exclusivity clause in Acclaim’s licensing agreement with Nintendo, Fischbach
agreed. Acclaim had already risen to the top tier of Nintendo’s third-party part¬
ners and published several bestselling games. Fischbach welcomed the opportunity
to market his products to a new audience and felt it was time to revisit the terms of
the licensing agreement. After careful consideration, Fischbach and cochairman
Jim Scoroposki attempted to contact Nintendo of America president Minoru
Arakawa to discuss their decision. When they were informed that the Nintendo
executives were in Germany on business, Fischbach and Scoroposki called him
and asked for a meeting. Arakawa suggested that they get together for dinner on
Sunday evening, so Fischbach made travel arrangements and had his German
office make arrangements at a restaurant about 25 minutes outside of Frankfurt.

Fischbach and Scoroposki arrived in Frankfurt early Sunday afternoon. They
went to Arakawa’s hotel, where they met him, his wife, and Howard Lincoln.
The five of them could not fit into one cab, so Fischbach and Scoroposki went
in one cab while the Arakawas and Lincoln followed in a second.

Have you been to Germany? Narrow two-lane roads and fast... Everybody
drives fast in Germany. And they use Mercedes 300 series sedans as taxi¬
cabs—little bright ones, kind of cream color.

We were going to make a left-hand turn into the road that leads to the
restaurant, and for whatever the reason, our taxi driver [didn’t] see an oncom¬
ing car. We got broadsided and ended up in a ditch on the side of the road.
Howard, Mr. Arakawa, and his wife watched this happen, and it looked like we
were dead. It wasn’t a good precursor to the dinner or to the conversation.

Nothing really happened, we got scratched up a little bit. The car was
totaled, but we walked away. We got into their car and still went to dinner
because we were men on a mission. We had a really enjoyable meal. Mr.
Arakawa was really quite nice about it and understood what we were doing
and why we were doing it.

—Greg Fischbach

The War 44 s

When asked about that meeting, Howard Lincoln later remembered it a
little differently. Their stories were fairly similar up until the accident; but
after the accident, Lincoln remembered a few additional details.

We grabbed Jimmy and we grabbed Greg and put them in our cab and took
them to this restaurant. Jimmy had glass in his head and these guys were in
a state of absolute shock, and the only thing they wanted to do was to have
a couple of Scotches. They forgot what it was that they had come to tell us;
that they were going to do third-party publishing on Sega. They completely
forgot what they had come for.

Both Arakawa and I knew what they were getting ready to tell us, but
we didn’t say anything. The entire night we just sat there and we just got
these smiles on our faces, waiting for them, and then we let them go that
night. The next day they called and said, "Oh, we remember now why we
had come to see you.”

—Howard Lincoln, former Executive Vice President, Nintendo of America

Rare Becomes Scarce

Acclaim was not the only company to break ranks. Within the next few years,
Konami, Tecmo, Taito, and nearly every other one of Nintendo’s third-party
partners would begin publishing games on Genesis. The two most notable
holdouts were Capcom, which licensed a few games to Sega for Genesis rather
than publishing them, and Square Soft, which maintained exclusivity with
Nintendo throughout the 8- and 16-bit eras.

In 1992, one of Nintendo’s most influential development partners—Rare
Ltd., the British-based development company founded by Joel Hochberg and
the Stamper brothers-—completely vanished from the game publishing world.
Rare had become a fixture in the Nintendo camp, creating more than fifty
NES games that were published by such companies as Acclaim (Iron Sword),
Milton Bradley (Marble Madness), and Nintendo itself (Slalom and R.C. ProAm).

With the outset of the Super NES, Rare created two games for Tradewest-—
Battle toads in Battlemaniacs and Battle toads & Double Dragon: The Ultimate Team. Then,
after having kept up a pace of designing ten games per year, Rare went silent.

442 TtieWar

We [Joel Hochberg, Tim Stamper, and Chris Stamper] went to a developers’
conference at Nintendo of America, and we didn’t like what we saw. Too
many companies were making 8-bit games for a 16-bit machine.

We had just visited Nintendo, and we went to the Bellevue Red Lion Hotel,
and we were talking about company posture and direction. We were busy
and we had a lot of opportunity, but there was a situation taking place that
I was not comfortable with and I’m sure that they were uncomfortable, and I
said, "Let’s do something original. Let’s pay close attention to what our
company’s requirements happen to be for moving forward. ” Those require¬
ments were not taking somebody else’s products and porting them over from
the NES to the Super NES.

—Joel Hochberg, cofounder, Rare Ltd.

As creative people, we didn’t want to be a sort-of conversion house for ma¬
jor third-party developers.

—Chris Stamper, cofounder, Rare Ltd.

The last few years had been particularly lucrative ones for Rare, and the
company had enough money to experiment. As an artist, Tim Stamper was
not satisfied with the idea of making games that looked like everybody else’s.
Chris, his brother, always the technical wizard, suggested that they could de¬
velop a new technology that would change the look of games. Chris Stamper
was the engineer who discovered the NES’s ability to run split-screen games.
If he believed that he could create some new graphics technology for Super
NES, there was every reason to believe him. The decision was made, and Rare
Ltd. withdrew from actively designing games.

A Street Fighter from Japan

In 1982, Konami hired Yoshiki Okamoto, a young college student studying
graphic arts in Osaka, to create posters and character art. The standard Japa¬
nese practice was to hire students in March or April, shortly after graduation;
but Okamoto was given a part-time job in December with the understanding
that he would work full time upon graduating that spring.

The War 443

Looking back on his time at Konami, Okamoto, who did not particularly
enjoy video games before joining Konami, would later decide that his em¬
ployers never intended to hire a graphic artist and that he was tricked into
becoming a game designer. A few months after he started with the company,
Okamoto’s boss asked him to try his hand at designing a game. It was sup¬
posed to be a driving game in which players earned a license by driving through
streets filled with hazards and bad drivers. Okamoto did not like the idea. Since
joining Konami, he had become fascinated with a Namco game called Bosconian,
in which players controlled a spaceship as it flew through minefields, battled
enemies, and attacked space stations.

Okamoto, a freewheeling individualist with a penchant for speaking his
mind and a notoriously short attention span when bored, decided that creat¬
ing a space game would be more fun than creating a game about earning a
driver’s license. Without telling his boss, Okamoto began work on a game
that built upon Bosconian rather than the one his boss had asked him to do.
This was a dangerous decision. Okamoto’s boss knew him well enough to be
suspicious, and the design team had to simultaneously create code for a driv¬
ing game that they could show whenever executives came to check in on
them, at the same time that they made the space combat game.

Then my boss asked if the driving simulation game was finished and came to
check up on me. What I showed him was a totally different game concept,
and he really got angry. The driving game was supposed to be a real simula¬
tion, but when he came, I showed him Time Pilot.

I said, "Why don’t we do a location test?” He did the location test and
[the game] got really good reviews, so he forgave me. At that point my boss
said, "I told you so.”

—Yoshiki Okamoto

Okamoto designed only two games during his time at Konami, but both
games were considered classics. The first, Time Pilot, was a space combat game
in which players flew a futuristic fighter craft through squadrons from differ¬
ent time periods. It began with waves of World War I-era bi-planes, then went
to World War II, and eventually progressed to a futuristic battle against UFOs.

444 Hie War

Gyruss, Okamoto’s second game, was a Tempest-like space combat game in which
players control a fighter that circles around the outside of the screen, shoot¬
ing at enemies as they emerge from the middle. Amazingly, having just created
two of Konami’s most successful games of the time, Okamoto was fired.

I asked for a raise and they said they would give me a really small raise. But
I wanted a little more, so I threatened to quit. So the next day, when I came
to work, they fired me.

So I went to Capcom because it was the only company that would take
me. At that time, Capcom was a really small company. I was the second per¬
son they hired for R S D.

—Yoshiki Okamoto

In 1984, Capcom, which was located in Osaka, was a fledgling company
with only two game designers—Yoshiki Okamoto and Tokuro Fujiwara. Both
men had seemingly endless talent and energy. A competition formed between
them and that competition created enough synergy to make Capcom a lead¬
ing force in video games.

Okamoto created a couple of little known games after arriving at Capcom,
then designed 1942, a top-scrolling flight game in which players controlled an
American fighter flying a World War II mission over the Pacific theater. He
then followed up with a similar game called 1943,

Okamoto’s next few games did not do well. As Okamoto struggled to come
up with new ideas, Fujiwara created such Capcom classics as Commando and
Ghosts ’N Goblins. Okamoto became worried about his job. He created a “soft
porn” version of Mahjongg, a tile game that is popular in Asia, but in the
meantime, he needed a special project—something big. The answer came from
another Osaka-based game company—Taito. While looking at competitors’
games, Okamoto ran across Double Dragon II: The Revenge and realized that with
some of Capcom’s newer technology, he would be able to improve upon this
style of the game.

Double Dragon II was a two-dimensional side-scrolling gang-fighting game
in which players walked along streets, fighting off muggers of all types. It fea¬
tured simplistic three-button combat controls, with one button for attacking

The War 445

enemies to the left, one for attacking to the right, and one for jumping. One
problem with the game was its antiquated graphics. The combatants looked
short and childishly scrawled. Capcom’s research and development engineers
had recently come up with new and more powerful hardware that could make
much more realistic-looking characters and backgrounds. The end product
was a game called Final Fight *

With its simpler controls and much more sophisticated graphics, Final Fight
improved upon the Double Dragon formula. Instead of having three buttons
and a joystick, Okamoto’s game had only “attack” and “jump” buttons. Play¬
ers could execute several moves as they fought off attackers, but they did
not have to master these moves to have fun with the game. The art was the
biggest improvement. The characters in Final Fight looked cartoonish and
moved stiffly, but they had human proportions and detailed faces. One of
the enemies was a giant who looked and fought like Andre the Giant, a real-
life professional wrestler. Released in 1989, Final Fight was one of Capcom’s
most successful games to date, but it was Okamoto’s next game that made
him famous.

Okamoto’s next project was a sequel to a 1987 game called Street Fighter.
The original Street Fighter was a one-on-one martial-arts fighting game. As
Okamoto’s team members created their version of what a Street Fighter game
should be, they decided to include three elements from that game: secret
moves that allowed players to throw fireballs, a character named Ken, and
a character name Ryu.

The sales division said that we needed to make another Street Fighter; they
had been asking for it for a long time. At one of the trade shows. Final Fight
was shown with the title of Street Fighter II, but all the operators said, "Hey,
that’s not Street Fighter. ”

Originally, I wanted to change all the characters, but some of the players
still liked Ryu and Ken.

—Yoshiki Okamoto

* Okamoto did not design Final Fight. By the time he began work on the project, he had
already been promoted to producer.

446 Hie War

It took ten months to complete Street Fighter II: The World Warrior. The game
was a major undertaking and several artists worked on each of the fighters.
The team created multiple hidden moves for each of the eight main charac¬
ters in the game. Okamoto personally believed that this game would be just
as successful as Final Fight, but once the concepts and art were complete and
the fate of the game was in the hands of the programmers, he became ner¬
vous. Restless by nature, he found it impossible to sit around the office waiting
to see the final results, so he often went off to play baseball to distract himself.
These were nervous times for Okamoto. He had committed a great deal of
time and resources to Street Fighter II.

Like Final Fightbeioxt it, Street Fighter II brought marked improvement to an
already existing genre. Not only did it have the same kind of clean, ornately
detailed, yet somewhat cartoony look that distinguished Final Fight, it also had
a colorful cast of international brawlers. Along with returning martial artists
Ryu and Ken, it featured ten other fighters, including a fire-spitting Hindu
mystic, a lumbering Sumo wrestler, and a one-eyed kick boxer. Each charac¬
ter had unique abilities and special moves. Okamoto was well aware of the
arcade prestige given to players who master hidden moves and difficult games,
and he wanted to use that prestige to his game’s advantage.

The game was a major international success. Its combination of brutal ac¬
tion, hidden moves, humorous characters, and bright graphics appealed to
players all over the world. Released in 1991, Street Fighter II brought much-
needed business to the dwindling American arcade industry. This was the first
game since the mid-1980s that actually attracted players to arcades. More im¬
portant, arcade owners bought multiple Street Fighter II machines and set them
up in rows, the way they used to set up Pac-Man machines a decade earlier.
Capcom will not release the final numbers, but some outsiders have estimated
that more than 60,000 Street Fighter II arcade machines were sold worldwide.
According to a former Capcom spokesperson, the arcade version of Street Fighter
//earned more money than the movie Jurassic ParkvccaAt in box office receipts.

Street Fighter II was even more successful as a game cartridge for Super NES.
Capcom released it exclusively for the 16-bit Nintendo console and went on
to sell more than 2 million copies of the game, making it the first third-party
hit for the Super NES. In 1992, as Genesis started to pull away in sales, having
the only home version of Street Fighter II gave Nintendo a needed edge.

The War 447

Battle of the 16-Bitters

Was Genesis ever as advanced a machine as Super NES? Technically, no. I
thought we were able to do better software then they were. They both are
good machines, but I think the big advantage we had was we initially were
able to do better software and it took them a long time to get up to speed on
doing as good a [job on their] software.

—Tom Kalinske, former president and CEO, Sega of America

Nintendo sold 3.4 million Super NES consoles in 1991, a long-lasting record
for first-year sales of new game hardware. This gave Nintendo a good share of
the market. But with a one-year lead and more sales overall in 1991, Genesis
continued to have the larger 16-bit install-base in the United States.*

They [Nintendo] always claim that there was a time after the launch when they
pulled ahead of us, but our research said that there wasn’t. They had a phenom¬
enal initial launch. If you mean in terms of a month, I'm sure there was a month
when they outsold us. You know, I’m sure they outsold us for a few months.

—Tom Kalinske

The fact is that the home video game market is made up of three categories,
and having a good year in one category does not give you the right to claim
overall superiority.'

—Peter Main, vice president of marketing, Nintendo of America

Going into 1992, Sega had several advantages over Nintendo, including a
much lower sales price and a larger library of games. Nintendo was slow in

* Genesis never amassed a significant install-base in japan. Sega Enterprises CEO Hayao
Nakayama may have allowed Tom Kalinske to drop the price and change the game that
came with the console, but he had no intention of following Kalinske’s example. Though
Mega-Drive sales would increase briefly with major events such as the release of the new
Sonic The Hedgehog game, Sega remained a distant third behind NEC and Nintendo through¬
out the 16 -bit generation.

44@ The War

getting games to market, and some of the early Super NES games such as UN
Squadron and Bill Laimbeer's Combat Basketball were not particularly fun. There were
too many golf games early on, and the anticipated third-party titles, such as
Konami’s Contra 3: The Alien Wars, were slow in coming. Sega had ten games for
every game on Super NES, and Sega’s internally produced titles were getting
better and better, Sega had a long line of arcade hits to draw from and several
licensed contracts with Disney, as well as with such sports stars as Joe Mon¬
tana and David Robinson. Capcom may have released only a Super NES version
of Final Fight, but one of Sega’s internal development teams created Streets oj
Rage, a similar side-scrolling gang-fighting game with bigger levels, tougher
enemies, and amazing original music.

Not only were there more games for Genesis, but Sega also continued to pro¬
duce titles at a faster pace. The market seemed to stop and take note every time
Shigeru Miyamoto released a new Mario ox Zelda gdtme, but those games generally
arrived at the rate of one per year. Sega released several anticipated games like
Streets of Rage and Toejam & Earl throughout the year. These games may not have
been as widely anticipated as a Mario game, but they often had an edgy irreverence
about them that helped shape the way people perceived Sega. More important,
they gave Genesis owners something to look forward to buying in the near fu¬
ture, while Super NES owners had to wait for the Christmas season.

Every week we would have an executive review of the games we had in progress.

And the meeting would involve anybody who wanted to join. . . . marketing,
manufacturing executives would be there, producers, etc. We would review the
games in a conference room that was called the Loony Bin. It was kind of funny.

When you watch the television commercials, they’re very irreverent, very
cutting edge, and this kind of . . . this attitude pervades throughout the
entire company. When we had these meetings with Tom Kalinske and all the
executive VPs in the room, you could say anything you wanted to. It was
very interesting because people were swearing in the meetings and making
off-color remarks. But it was all accepted. It was just part of the company
culture, people could say anything about the game. They’d say things like,

"That thing really sucked.” Or, "That character really blows,” and the execu¬
tives were right there, taking it all in and very serious about it.

—Terry Huang, former public relations manager, Sega of America

Hie War 449

Sega’s advertising continued to evolve as well. While Nintendo’s advertis¬
ing seemed stuck in a Mario-esque world of cute images appealing to preteen
kids, Sega turned to a noisy underground image. Sega commercials always
ended with the “Sega Scream”: some character screamed “Sega” into the cam¬
era. This new marketing approach, combined with an emphasis on sports
games, Sonic The Hedgehog, and new lines of edgy games, changed some basic
market demographics. Sega was becoming cool to high-school students, and
the cooler Sega became, the less people were ready to admit that they liked
Nintendo. When a Sony marketing team ran focus groups, they found that
teenage boys who owned a Super NES console would not admit it.

I saw that our primary audience was over eighteen years of age. Nintendo tended
to focus on younger kids. We attempted to focus on an older crowd. Forty per¬
cent of our business is over eighteen years old. Teenage and college-age kids
have adopted the Sega Scream. I was backstage at a rap concert, and I watched
rappers who did not know who I was meet each other with the Sega Scream.

—Tom Kalinske

As the year progressed, Nintendo sought to eliminate one of Sega’s advan¬
tages by lowering the price of the Super NES console from $179 to $149.
Nintendo of America vice president of marketing, Peter Main, would later
comment that he wished they had gone with a $149 price tag from the start.
“I could have sold an extra million,” said Main. Sega responded to the Nintendo
price drop by reducing the price of Genesis to $129.

According to the TRST data, sales information recorded by the industry¬
tracking NPD Group, Nintendo sold 5.6 million Super NES consoles in 1992,
edging out Sega by 10 percent. Sega still had a larger install base and sold more
software, but the momentum seemed to be moving in Nintendo’s direction.

As Nintendo and Sega squared off for top honors in the 16-bit arena, NEC offi¬
cially pulled out of the market, turning the sales ofTurboGrafx over to a newly
created company called Turbo Technologies Inc. that it formed with Hudson Soft.
The writing was on the wall for TurboGrafx and had been since before the release
of Super NES. The system had developed a cult following but it would never have
a genuine hit game in the United States. Even Bonk, its mascot game, was almost
unknown to the general consumer. (By comparison, a 1993 study showed that

450 The War

more American kids recognized Mario and Sonic than Mickey Mouse.) Turbo
Technologies continued marketing various versions of the TurboGrafx into 1994,
then closed shop as Atari and 3DO entered the market*

In what may have been the oddest race in video game history, Sega and Nintendo
began developing devices for a new storage format called CD-ROM and raced
to deliver CD-ROM peripherals to retail. In truth, CD-ROM was anything but
new. Computer companies had been using them as a method of mass storage
for years prior to Nintendo and Sega making their discoveries, and NEC beat
them by two years with TurboGrafx-CD. Sega announced plans for the Mega-
CD, the Japanese version of the CD-ROM, drive in early 1991. The plan was to
release the unit in Japan by late 1991, then in United States the following year.

Around Sega of America, the general reaction to the Mega-CD announce¬
ment was euphoric. The drive was seen as a way of turning the technological
tables in Sega’s favor and driving yet another nail into Nintendo’s coffin. Sega
of Japan and its partner on the project, Sony, handled all of the design work,
shutting out Sega of America executives until the project was completed. As
late as mid-1991, Japanese executives continued to keep the unit hidden from
Sega of America, finally sending a crippled “dummy” drive to the U.S. that
summer to show them what it looked like.

When you work at a multinational company, there are things that go well
and there are things that don’t. They didn’t want to send us working Sega
CD units.** They wanted to send us dummies and not send us the working CD
units until the last minute because they were concerned about what we would
do with it and if it would leak out. It was very frustrating.

* It should be noted that NEC was not the only straggler in the market at that time. SNK, a
leading arcade company, released a 24-bit console called NeoGeo in 1990. NeoGeo was a name
familiar to arcade goers, as SNK’s coin-operated NeoGeo was popular with arcade owners.

NeoGeo was expensive. The base unit, which came with only a controller, sold for
$399—$200 more than the Super NES. The full set, which included a game and two
controllers, sold for $599, and additional cartridges (which had the exact same code as the
arcade game) routinely sold for $200.

** Sega CD was the name of the American version of Mega-CD.

The War 451

Somehow they had sent some ROMs, or we had procured ROMs somehow,
and we had a dummy unit that was missing its ROM. I always liked to work
late at night, and so did Shinofau Toyoda,* so it was like one in the morning
and he came to me with this chip and with the Sega CD and the ROMs and
said, "Can you actually make this work?”

I thought, "Yeah, I probably could.” So, I put the chip in. There were a couple
of other things that were unhooked, but we fixed it and plugged it in. So Shinobu
and I were the first people in the U.S. to see the Sega CD boot up. Our take on it
was one of wonder from the product development side, but as soon as we started
to program for it, I think... I think the wonder went away quickly.

It was literally a mass storage extension of the Genesis. It wasn’t a new
system, and that was always the confusion internally. The internal people
believed it to be a completely new system with new abilities. It did have
small expansion abilities, but they were not significant.

—Michael Latham, former executive producer, Sega of America

Although Mega-CD, which would arrive in the United States in 1992 as
Sega CD, had a more powerful processor and handled more colors than the
Genesis processor, the single-spin CD-ROM drive was meant only to expand
the size of games. Genesis and Super NES cartridges generally ranged in size
from 8 to 16 megabits, but a single CD-ROM could hold 640 megabytes—320
times more data. With over 600 megabytes of storage, Sega CD could play
games with digitized video. Before the company could launch the new me¬
dium, however, Sega would need games to support it. As luck would have it,
several suitable games already existed.

The Nintendo Play Station

Nintendo also announced plans to manufacture a CD-ROM drive. Like Sega,
Nintendo turned to Sony Corporation as a partner. At the Winter Consumer
Electronics Show in January 1992, Nintendo claimed that it could manufac¬
ture and distribute the drive within the year. The problem was that Sony
was proving to be a very dangerous partner. Sony executives had already

* Shinobu Toyoda was the vice president of licensing at Sega of America and the executive
who worked most closely with Japan.

452 The War

revealed plans to release their own CD-based video game system called the
Play Station, and Nintendo executives wondered about the wisdom in giv¬
ing them access to Nintendo’s system by having Sony make a Super
NEScompatible CD drive.

After reconsidering the situation, Nintendo executives allowed Sony to
announce plans for the drive at the Consumer Electronics Show, then ap¬
peared the next day to say that they had struck up a deal with Philips N.V.,
the Dutch conglomerate, instead. Sony executives were shut out and hu¬
miliated. Ken Kutaragi, the young engineer whom Sony had placed at the
head of the Nintendo project, went to Sony CEO Norio Ohga to plead for
permission to keep the Play Station project alive, stating that the system
could be built into a stand-alone unit. He proposed looking ahead to the
next generation of game hardware and creating something that would im¬
mediately render Super NES obsolete.

Having just been humiliated by Nintendo, Ohga accepted Kutaragi’s sug¬
gestion and brought it to the company board. The general reaction was
unfavorable. Nintendo clearly had too much control over the market, and
attempting to break in would be too risky. An internal battle ensued, with
Ohga almost alone in his support of the venture. In the end, he decided to
gamble on Kutaragi and approved the project.

As Kutaragi quietly started work on his project, Nintendo executives began
looking for suitable games. One of the first projects to catch their eye was The
7th Guest, a breakthrough puzzle game that was being developed by a Medford,
Oregon, company called Trilobyte.

We got a call one day from a guy working with Don James’s group at
Nintendo. They were trying to find games that would be appropriate for
their CD-ROM drive that was eventually going to happen, and he gave me
a call and said, "Do you have any CD-ROM titles that you’re working on
that we should have a look at?”

I said, "Oh, wow, I’ve got something that you’ve got to see. It’s called The
7th Guest.” So he flew down probably about a week and a half later and was
given the tour of the company and shown the product. He said that he was
very excited. Within a couple of days later, his boss Don James came down
and took a look, and from there, they started negotiating a deal to purchase

TheWar 453

the rights to The 7th Guest for the Nintendo CD-ROM player. A deal was even¬
tually struck, and Nintendo got all CD-ROM game console rights to the product
and Virgin (the game’s publisher) was paid, I believe, $1 million up front.

—Seth Mendelsohn, former senior game designer,

Virgin Interactive Entertainment

Nintendo never released its CD-ROM drive. Nintendo first announced delays
and then claimed that the unit would be ready by August 1993. Behind the scenes,
Nintendo was slowly closing down the project. By 1995, Nintendo would be the
only major video game company that did not have a CD-based game system.

The Birth of Digital Pictures

With the collapse of the Nemo project, which he had begun in conjunction
with Hasbro, Tom Zito had placed his live-action video games, along with
office equipment and other supplies, in a Rhode Island warehouse and largely
forgotten about them. What he did not know was that Sega and Nintendo
had a new medium with enough storage space to handle his games and that a
desperate search for games with digital video was underway.

Ken Melville was working at this company and happened to have a prototype
copy of Sewer Shark in its original version on videotape. So he calls me up and
says, "The weirdest thing happened today. Mickey Schulhof and Peter Guber
were in here the other day. They saw Sewer Shark; they were blown away by it.

I think they’re trying to buy this company because they believe that this com¬
pany owns Sewer Shark and has technology to do products like Sewer Shark.”

Now Guber was the head of Columbia Pictures, which was owned by Sony,
and Schulhof was the chairman of Sony U.S.A. It just so happened that my
younger brother, Bob Zito, was Mickey Schulhof’s PR guy.

I called my brother on the phone and told him the story and he said,

"That doesn’t sound at all possible.”

"I really can’t believe that’s true.” He said, "I’m gonna be with Mickey two
weeks from now. If the opportunity comes up, I’ll ask him. I’ll get back to you.”

About two hours later, my phone rang and it was my brother. He said, "Is this
thing set in sewers?” I said, "Yeah,” and he said, "You shoot at rats and bats?”

454 fa War

I said, "Yes.”

He said, "And you own rights to this?”

I said, "Yeah.”

He said, "I think you better take a red-eye to New York."

—Tom Zito, founder, Digital Pictures

As Nemo collapsed, Zito had purchased the rights to the video-based games
that he had helped create for it, thinking they might some day be useable.
With clear rights of ownership in hand, he met with Schulhof, who signed
him up to create games for the Nintendo Play Station. Zito then formed a
company called Digital Pictures. He spent the next year reworking two of the
games that had been created for Nemo —Night Trap and Sewer Shark —so that
they would run on the ill-fated Play Station. When the Sony/Nintendo part¬
nership failed, Zito turned to Sega.

So then, in the meantime, Sony had gone off and started off with a Play
Station of its own. And we started doing all this stuff for Sega CD; and the
rest, as they say, is history. And meanwhile, I met Shinobu Toyoda at Sega
and was aware that Sega was coming out with a CD system. When Sony went
away, we sort of changed the focus of our development afterwards and started
doing stuff for Sega CD rather than for Sony.

The incredible irony of it was that the video we plugged into the Super
Nintendo was just terrific because Super NES could display 256 colors at once.

Sega CD could only put up 32 colors at a time, so you had this horrible grainy
look to the images.

—Tom Zito

Sega CD was released in the United States on October 15,1992; it retailed for $299
and Zito’s game, Sewer Shark, came packed in the box. Digital Pictures became one of
Sega’s most important partners, creating several original games for Sega CD.

Tom Zito, CEO of tiny Digital Pictures, is one of the first to take advan¬
tage of the technology. Zito, who used to write for the New Yorker and
Rolling Stone, spends some $2 million filming real actors for his CD-based

The War 455

interactive games. Corey Haim (The Lost Boys) and Debbie Harry ( Hair spray)
are among the performers who have starred in his miniproductions. His
most interesting title this Christmas is Prize Fighter, directed by Ron Stein,
who choreographed some boxing sequences in the 1980 Martin Scorsese
classic Raging Bull. Besides trying to knock out a series of actors portray¬
ing boxers, you, the game player, become part of a story. In this case, a
crippled boy on the sidelines cheers for you. 2

PCs Get Game

Sega and Nintendo found themselves facing a new and increasingly more dan¬
gerous opponent in the early 1990s—PC computers. Just as the Commodore
computer had caught up to Atari and Coleco a decade earlier, personal com¬
puters threatened to eclipse the new generation of video game manufacturers
as the era of multimedia began.

The evolution to multimedia began as sound became more common on
computers. Companies such as Roland and Turtle Beach had long offered
sound cards that could handle audio files, and even most of the early PCs
came with cheap speakers built in. But few people owned early sound cards
and the sound that streamed through PC speakers was tinny at best.

In 1989, a company called Creative Labs, founded by a Singaporean entre¬
preneur named Sim Wong Hoo, introduced a reasonably priced PC sound card
called Sound Blaster. The card, which featured an 11-voice FM synthesizer,
input/output jacks, and aMIDI/joystick port, became the top-selling add-on
card in the PC market. Sound Blaster was not the first sound card; it was not
even Creative Labs’ first sound card, but it was the first sound card to see this
kind of success, and Sound Blaster compatibility became a standard through¬
out the industry* Soon companies such as MediaVision and Gravis released
their own Sound Blaster—compatible cards.

* In truth, Macintosh computers were much more suited for gaming than PCs. Macintosh
monitors had slightly higher resolution than standard PC monitors and Apple computers
did not have all of the compatibility problems that still haunt PCs.

Unfortunately, former Apple president Michael Spindler did not want people to see
Macintosh as a gaming computer and did nothing to encourage companies to make games
for them.

456 The War

With the advent of Sound Blaster, PC game companies became very aggres¬
sive about adding audio to their games. Origin Systems, a company with a
well-earned reputation for making technically superior games that would only
run on the latest and most powerful personal computers, published a game
called Wing Commander that began with a virtual conductor directing a symphony.

The next big move toward multimedia came in the form of CD-ROM drives.
Soon companies such as Viacom New Media, Hyperbole Studios, and ICOM
were flooding the market with “interactive movies” that featured bad scripts,
amateurish acting, and minimal interactivity. Sanctuary Woods, a software
publisher that would eventually produce a few impressive products before
going bankrupt, released a series of interactive comics called Victor Vector and
Yondo. CD-ROMs had provided the entertainment industry with a new fron¬
tier, and a wave of entrepreneurs rushed to take advantage of it.

Of the droves of games that flooded the market during the first years of
multimedia, three stood out as the kind of “killer applications” needed to
launch new technologies. The first was Myst, a game that was funded by a
Japanese video game publisher called SunSoft.

Myst was the creation of Rand and Robyn Miller; brothers who had moved
to Spokane, Washington, to start up a game development company called
Cyan Studios. They had sold a handful of games prior to coming up with an
idea for a surrealistic adventure with elaborate puzzles. They needed funding,
however. One of the first companies they approached was Activision; but they
were turned down. Then they ran into Sunsoft.

We hooked up with Sun, which is a Japanese company, in 1991. They said,

"We want a big epic CD-ROM product,” and we said, "We’re ready. We’li tell
you what we need.”

They funded it well. It ended up that they funded half of the project. It
cost more than what we thought; but at the time, we had a relationship with
Broderbund as well. When we showed Myst to Broderbund, they just fell in
love with it.

—Rand Miller, cofounder, Cyan Studios

As a video game company, Sun Soft cared little about PC rights. The way
the final contract was laid out, Sun Soft gave the Millers $350,000 in exchange

The War 457

for the console rights and went on to release Myst on 3DO, Jaguar CD,
PlayStation, and Saturn. None of those versions sold particularly well, but
Sun Soft’s investment still paid for itself in less than one month. Working with
Broderbund, the Millers released their game for Macintosh and it became a
runaway hit. In 1994, Broderbund released a PC version. It became a hit, too.
Myst went on to become the first CD-ROM game to sell over one million
units. It remained on the computer game’s bestsellers list for three years.
Broderbund eventually sold four million copies of the game.

While Myst started out on Macintosh, then migrated to PC, the next mul¬
timedia blockbuster went in the opposite direction. The 7th Guest, the Virgin
game that was licensed by Nintendo, brought a similar mixture of puzzle¬
solving and exploration to PCs. As a showcase for technology, The 7th Cm/was
a masterpiece. It featured a photo-realistic ally rendered virtual haunted house
with live-action video of actors portraying ghosts. With far less puzzles than
Mystdsxd not nearly as visually appealing, The 7th Guest did not enjoy the same
long-lasting success, and critics would later pan it. “A lot of people bought it,
and a lot of people bought hardware just so they could play it,” game designer
Graeme Devine would later say in defense of his game.

The third game, and the one that has had the most long-lasting impact on
the gaming world, was Doom, a first-person perspective game in which players
stepped into the head of a marine who shoots everything he sees, as he works
his way toward a confrontation in the depths of Hell.

Doom was a true team effort, created by a group of young computer enthu¬
siasts who had started a company called id Software. Formed on February 1,
1991, id consisted of John Romero, the well-known creator of dozens of com¬
puter games and a legend among hardcore gamers; John Carmack, a somewhat
otherworldly but brilliant programmer with a nearly unequaled ability to cre¬
ate incredibly complex graphics engines; Adrian Carmack, a talented artist
with a gift for bringing gore and horror to life; and Tom Hall, the main de¬
signer of Commander Keen, id’s first product and a game that helped establish
the company’s reputation.

Romero first came across the idea of 3D games when he called an old friend
at Looking Glass, a company that was designing a game called Ultima Under¬
world. Intrigued by the concept, he brought it up with John Carmack to see if it
would be possible for them to create a similar game.

4$8 Die War

John talked with some of the Looking Class people and they were saying
that they were doing a texture-mapped game, i said I could do that, and
the next month—we were doing games every month—I did Catacombs 3D,
which was our first 3D game. It was about running around in dungeons
with trolls and stuff.

—John Carmack, cofounder, id Software

In 1992, id released its first hit game, Wolfenstein 3D. The game took its
name from an Apple II game created by a man named Silas Warner. Play¬
ers viewed Wolfenstein 3D through the eyes of a commando shooting his
way through a labyrinth filled with Nazi soldiers, SS men, vicious dogs,
and eventually, Adolf Hitler. Although it was an exciting game with great
graphics, part of Wolfenstein’s popularity sprang from its shock value. In
previous games, when players shot enemies, the injured targets fell and
disappeared. In Wolfenstein 3D, enemies fell and bled on the floor.

With Wolfenstein, the shock was only half of the attraction. The main draw
was the super-fast 3D rendering engine and movement. Most of the raves
came from the pure adrenaline rush of speeding at 70 frames per second
through corridors and mowing down Nazis.

—John Romero, cofounder, id Software

id games were distributed via a unique method called “shareware.” The
idea was that consumers could download the first section of the game for free
from the Internet or order it by mail. If they liked the game, they could pur¬
chase the rest of it by contacting the publisher. Shareware offered small
companies the chance to market their games and computer tools without
having to compete with larger, more powerful companies for retail shelf-space.
In the case of Wolfenstein 3D, the game was broken into three separate missions,
the first of which was available as shareware, id and Apogee, the firm that
marketed id’s early games, maximized profits by creating several Wolfenstein
games at once—the basic three missions, The Nocturnal Missions, and the Spear of
Destiny missions, which were sold as a retail product.

The War 459

Wolfenstein 3DW&S a trilogy; it had three episodes. That’s sort of a shareware
thing. Then we did Spear of Destiny, which is a retail version of Wolfenstein.
it was a completely new adventure but with the Wolfenstein engine.

—John Romero

id’s next hit, and the first game published under the id label, was Doom. It took
John Carmack six months to create the graphics engine, with Tom Hall leading
the game and map designs. Partway through the project, however, Hall left and
John Romero took over, programming DoomEd —the game’s map editor, while
at the same time doing programming and map design. When the project was
complete, everyone in the company knew they had a sure-fire hit. Not only did
Doom have more gore than Wolfenstein 3D, it was decorated with Satanic symbols
and populated with demons, images that thrilled gamers but infuriated critics
of the gaming industry. Since it was originally released as shareware, however,
the critics did not notice it until a few months after its release. In the meantime,
Doom created a phenomenon unlike any PC game before or after it.

We put out a press release in January of 1993 saying what our next game
(Doom) was going to have in it. From January to December, all of 1993, the
entire Internet thing was really growing and we had newsgroups about Doom
already.... before the game was out.

So we’d leak out a little bit more information. There would be an alpha
that would leak or a beta that would leak, and people just started going
nuts. So when the game was released, it crashed the University of Wisconsin’s
computers two times because there were so many people hitting it for Doom.

... We just knew that when the game came out [in stores], that this was it.

This thing was great.

—John Romero

Doom set a precedent for computer games. It established the 3D first-person
shooter genre, a popular style of gaming that would top the bestseller lists for
years. Though it was not the first first-person shooter, it set the standard by
which such games as Dule Nukem 3D, Jedi Knight, Unreal, and Descent would be

460 The War

judged. Doom also brought attention to shareware, validating it as a viable
means of software delivery and establishing the idea of free demonstration
copies as a marketing method.

Doom also demonstrated the entertainment power of multiplayer games.
One of the game’s better options was “death match,” a mode in which players
could hunt each other in teams instead of going after demons and monsters.
Doom would become a lightning rod in later years. It would become a focal
point for those who wanted to regulate or end the perceived stranglehold
that the largest companies held over the entire interactive entertainment in¬
dustry. Even as id completed its game, powerful forces were gathering in
Washington, D.C. The gaming industry was about to come under an attack
that would be felt from Redwood City, California, to Redmond, Washington.

Mora n nbat

I have been a parent for 16 years, a wife for 20, a teacher in Royal Oak, Michigan, for 23,
and a woman since the day I was born. Let me tell you, in all of my labels and all of the
hats I wear, I find that so extremely offensive, and the only words you can say to the
manufacturers and shareholders of the company is, "shame on you.” 1

—Marilyn Droz, Congressional testimony, expert witness, 1993 Joint Hearings

Roses are red, Violets are blue, So you had a bad day, Boo hoo hoo.

—Public letter to Tom Kalinske, Howard Lincoln, former chairman,

Nintendo of America

462 Moral Kombat

I Van iamme Big Game

Ed Boon worked on six pinball games at Williams before moving into coin-
operated video games. The first two video games he worked on were
arcade-style football simulations— High Impact and Super High Impact. John Tobias
began his time at Williams working with Mark Turmell, creator of Smash TV,
NBA Jam, Wrestlemania: The Arcade Game, and NFL Blitz and almost unquestion¬
ably America’s last significant arcade game designer. Tobias worked on
Turmell’s team as he created Smash TV and Total Carnage —games that revived
the same basic double-joystick gameplay that Eugene Jarvis originally created
for Robotron2084. Having just finished recent projects, both men were available
in 1990 when the call went around Williams for a fighting game to compete
with Street Fighter II. Boon and Tobias teamed up to do it.

To make their game stand out from the flood of Street Fighter II imitators,
Boon and Tobias decided that they would use digitized graphics rather than
traditional animation. Having already manufactured Narc and Terminator 2,
Williams had the technology to create the game, and Atari had already proved
that such a game could be made, with Pit Fighter. In designing their game, Boon
and Tobias wanted to make their combatants as large as possible, while still
being small enough to move around the screen freely. They also wanted to
attach their game to a known personality, someone who fit the image of the
kind of fighting they would show in their game. Martial-arts movies were
enjoying a resurgence of popularity at the time, and Boon and Tobias believed
that attaching their game to either Aikido master Steven Segal or European
star Jean Claude Van Damme would attract players. This, however, proved
unlikely. Segal, who had made quite a stir with Above the Law and Hard to Kill,
had already agreed to appear in another game. When they contacted Van
Damme’s agent, he told them that his client, the self-professed “Fred Astaire
of Karate” who had recently starred in such movies as Kickboxer and Bloodsport,
was in discussion with Sega.

Rather than look for an older or lesser-known martial artist, Boon and
Tobias decided to create an entire universe of their own. They created an elabo¬
rate mythology with complex characters fighting each other for the chance
to represent Earth in a battle against an evil monster in a cosmic tournament
that would decide the fate of humanity. The entrants in this tournament were
as colorful as the tournament itself. There was Liu Kang, the strong and silent

Moral Kombat 463

Bruce Lee—type; Raiden, the god of thunder; two mystic ninjas—Scorpion
and Sub-Zero; a female special forces agent named Sonya Blade; a gangster
with a metal plate covering part of his face, named Kano; and a movie star
named Johnny Cage.

Johnny Cage was just kind of a play on the whole Van Damme thing. I mean,
when Van Damme didn’t pan out, we kind of still had this role that was slowly
being created, and we just thought, well. . .

—Ed Boon, game designer, Williams/Bally/AAidway

If one lesson from Street Fighter //was not lost on Boon and Tobias, it was the
importance of hidden moves. In the ten short months it took to create the
game, they fashioned layer upon layer of special moves and hidden secrets. By
the time their game appeared in arcades, it contained special characters, moves,
and ways of ending the fights.

Reptile was a last minute idea. Someone came up with the idea of doing a
green [ninja] as opposed to the red (Scorpion) and blue (Sub-Zero), and
having him be this hidden feature that is seen very rarely. We knew that the
rumors were running kind of rampant about the game and as a last ditch
i effort we just threw Reptile in, saying, "Let’s make this come out very rarely
so only a few people will see it.” We hoped that the people who saw it would
talk about it with a lot of conviction; but since no one else would have seen
it, everybody would kind of call them liars. You wouldn’t know if somebody
was telling the truth or not if you said, "There’s a guy, a green ninja, and you
fight him at the bottom of the pit.”

The things that had to happen to make Reptile come out were so rare....

You had to have flawless victories as you defeated opponents, do a fatality,
and something had to fly in front of the moon. It was a very rare occurrence
that all three things happened, but they happened.

—Ed Boon

Boone and Tobias named their game Mortal Kombat. The name probably re¬
ferred to the background story about mortals entering a fighting tournament

464 Moral Kombat

against beings from another dimension; but critics would later say that it came
from the game’s “fatality” moves. Each match in Mortal Kombat was for the
best of three falls. When a combatant was defeated the second time, he or she
would stand in a swaying stupor for a few seconds, allowing the victor to fin¬
ish the match with special signature moves called “fatalities.”

Other fighting games had this thing where you would get dizzy, and the
other guy would get a free hit on you, and you had to accept the fact that
you were going to get hit. We hated the idea of being the guy who’s dizzy,
but it was great to be the guy who was walking up to go beat the crap out of
him, so we moved that to the end of the fight where damage was already
done. We had this dizzy animation, and then at one point somebody sug¬
gested, "Let’s make it gruesome.” And everything just kind of built on that.

It became a huge part of the game. We didn’t know that was going to be
such a big attraction. It just happened.

—Ed Boon

Fatalities ranged from Kano wrenching his opponents’ hearts out of their
chests to Scorpion pulling out their spines and skulls. These were not the
kind of graphic cinematic sequences you might see in a movie—they were
fast with a splash of animated blood and no kinds of incisions. Knowing how
to perform Mortal Kombat ’s fatalities became a sign of prestige around arcades
because they were not easily executed. Once you won the fight, you had to
get within range of your opponent and then know special combinations of
joystick moves and buttons to punch. When the game first came out, some
arcade goers would stand around watching other people, in the hope of catch¬
ing a glimpse of one of the fatalities.

At the time, we thought these button and joystick combinations were going
to be so hard to do that nobody would ever figure them out. I think the first
time we put Mortal Kombat out at a test location, in that first weekend some¬
body found it.

—John Tobias, former game designer, Williams/Bally/AAidway

Moral Kombat 465

The fighting game craze had already revived the arcade business when Wil¬
liams began shipping Mortal Kombat. The game was an instant hit, easily eclipsing
Street Fighter II in overall popularity with American audiences.

At the time that Mortal Kombat was released, Acclaim Entertainment had a
contract for the exclusive rights to the home-console versions of Williams
arcade games. The partnership would prove very profitable for both compa¬
nies. Under cofounder Greg Fischbach’s leadership, Acclaim had set up the
biggest and best sales networks of any of Nintendo’s third parties.

Acclaim put great quantities of effort and money into the Mortal Kombat li¬
cense, creating a $10 million marketing campaign and stocking nearly $40 million
worth of inventory. Acclaim’s designers created authentic versions of Mortal
Kombat, complete with all of the special moves, for both Genesis and Super NES.*
Super NES, with its multiple processors, was particularly well suited for Mortal
Kombat, and the game looked and moved very much like the arcade game. It was
not, however, tailor-made for Nintendo’s entertainment standards.

I guess it was June 1993 that Nintendo of America was confronted with Mortal
Kombat as a home video game that Acclaim was doing. We had game stan¬
dards that we were enforcing all along. We made a list of what you can and
can’t do: "No excessive blood and violence and what not. ” "No sex. ” Apply¬
ing those standards to Mortal Kombat, we told Acclaim [designers] that they
would have to tone down their version of Mortal Kombat, which, I believe,
was going to come out in September of 1993.

We spent a whole summer screwing around, trying to decide how to handle
that issue. Ultimately, we decided that the death moves or finishing moves
would have to come out.

Acclaim kept coming back and saying, "Look, we’re going to make the
Sega version, and it’s going be right in line with the coin-op game. Having a
toned-down version for Nintendo... Do you guys really want us to do that?

Does that really make sense?”

—Howard Lincoln, former executive vice president, Nintendo of America

* Acclaim also released Game Gear and Game Boy versions of Mortal Kombat. Amazingly,
Acclaim sold 1 million copies of the Game Boy cartridge.

466 Moral Kombat

The home version of Mortal Kombat was released in September 1993, and the
sales went through the roof. Over the life of the product, Acclaim sold ap¬
proximately 6.5 million Mortal Kombat cartridges. The Genesis version, which
included the original arcade fatality moves, outsold the edited-down Super
NES version by nearly three-to-one, propelling Genesis hardware sales to new
levels. Not only did the decision to remove the violence hurt sales, it also
offended many Super NES owners. According to Howard Lincoln, Nintendo
received thousands of angry letters, including a few letters from parents, warn¬
ing Nintendo not to censor their children’s games.

Nintendo made a terrible blunder from a marketing standpoint in putting out
a sanitized version of Mortal Kombat. Sega kicked their butt on that; probably
sold 4 times as many units of MKi bloody than Nintendo did MKi sanitized.

—Tom Zito, founder, Digital Pictures

I remember saying to Fischbach and to Rob Holmes [also of Acclaim], "I can
guarantee you with Night Trap and now Mortal Kombat, we're all going to
end up in front of Congress.”

—Howard Lincoln

I think that all of this stuff that happened with the Senate was really orches¬
trated by Nintendo.

—Tom Zito

A great deal of debate surrounds the events that led up to the 1993 joint hear¬
ings that investigated the marketing of video game violence to minors. People
at Sega and Digital Pictures claimed that Nintendo encouraged the hearings
to stop Sega’s runaway sales. Some people claim that Nintendo director of
communications Perrin Kaplan initiated the debates over game violence when
she delivered a speech to National Organization of Women in the fall of 1993.

Moral Kombat 467

Others claim that Nintendo representatives went to Washington, D.C., and
showed several people in Congress tapes of violent games, in the hope of stir¬
ring up trouble for Sega.

I think Nintendo had taken such a trouncing that they decided to sort of go
for broke and attack Sega. And they made these tapes up that showed Night
Trap and showed Mortal Kombat on Genesis versus Nintendo. They hired a
lobbying firm, and the lobbying firm basically started going around bang¬
ing on doors to see if they could find a congressman who would be interested
in taking this up as a cause. And I think that Nintendo was hoping that the
public would be so outraged at what Sega was doing versus what Nintendo
was doing that there would be pickets in front of every Toys "R” Us store,
saying, "Don’t buy Sega products.”

—Tom Zito

The official account of the events that led up to the hearings is that U.S.
Senator Joseph Lieberman (Democrat of Connecticut) became concerned
about video game violence when Bill Andresen, his chief of staff, told him
about a hot new game named Mortal Kombat. Andresen’s nine-year-old son
wanted a copy of the game, but Andresen, having heard that it was “incred¬
ibly violent,” did not want to purchase it for him. Out of curiosity, Lieberman
suggested that they get a copy and see what it was about.

I was startled. It was very violent and, as you know, rewarded violence. And
at the end, if you really did well, you’d get to decide whether to decapitate
... how to kill the other guy, how to pull his head off. And there was all sorts
of blood flying around.

Then we started to look into it, and I forget how I heard about Night Trap.

And I looked at that game, too, and there was a classic. It ends with this
attack scene on this woman in lingerie, in her bathroom. I know that the
creator of the game said it was all meant to be a satire of Dracula; but none¬
theless, I thought it sent out the wrong message.

—Joseph Lieberman, Democrat of Connecticut, United States Senate

468 Moral Kombat

Once he saw Mortal Kombat and Night Trap, Senator Lieberman became con¬
cerned about the peddling of what he considered the equivalent of R-rated
materials to children. He did some reading and found surveys that showed pre-
Genesis demographics, with the average player being a seven- to twelve-year-old
male. It should be noted that the 16-bit generation was only a few years old, and
Sega was only beginning to gather data that showed the shift Genesis had brought
to the market. It should also be noted that although only 10 percent of the games
on the home market were violent, Street Fighter II and Mortal Kombat were huge
sellers and fighting games seemed to dominate the market.

Having come to the conclusion that video game publishers were market¬
ing violence to children, Senator Lieberman decided to see what his
constituents thought. He asked parents in his home state of Connecticut about
the games. Their answers gave him cause for further concern.

I started to talk to people in Connecticut about it. Part of what I was hearing
back from parents was that they didn’t know what was in the game. Either
there was a generational gap, which meant that they really didn’t know how
to use the machines, or they just didn’t take the time. In a lot of these games,
as you probably know, you have to spend a little time playing until you get
to the so-called good parts.

—Senator Joseph Lieberman

As to allegations that Howard Lincoln approached him, Senator Lieberman
always insisted that Nintendo did not contact him to initiate the inquiry into
the video gaming world. But he also remembers meeting with Howard Lin¬
coln once the plans for the hearing were in place.

He certainly didn’t initiate the process; in other words, we went to him. We
went to the industry. I had not heard about Howard Lincoln before we planned
the whole thing. In fact, to be very honest about it, and there’s nothing wrong
with it, once the hearings were announced, I saw Slade Gorton tU.S. senator
from Washington] on the floor of the Senate one day on a vote and he said, "I
just got a call from the folks from Nintendo, which is real important in Seattle.”

I later learned that they had played this enormous and incredibly sort of
civic role in helping Seattle to keep the baseball team there. So anyway,

Moral Kombat 4^9

Slade was all tied in with them and he said, "There’s a guy named Howard
Lincoln who you’ve called to testify. Do you mind speaking to him or having
your staff speak to him?”

—Senator Joseph Lieberman

As Senator Lieberman proceeded to arrange a hearing on the marketing of
video games, Nintendo, Sega, and other companies found themselves in an
untenable situation. They did not have their own lobbying organization. Many
belonged to the Software Publishers Association, the same trade organization
that represented Microsoft and WordPerfect. Their relationship with SPA,
however, was shaky. Interactive entertainment companies, especially video
game manufacturers such as Sega, Nintendo, and Electronic Arts, had long
felt like the black sheep of the SPA community. The bulk of SPA’s member¬
ship was made up of “serious” software companies that did not consider video
game manufacturers legitimate members of the computer industry, and the
top executives at the game companies did not expect to receive sufficient sup¬
port during the hearings.

Senator Herb Kohl (Democrat of Wisconsin), chairman of the Subcom¬
mittee on Juvenile Justice, and Senator Lieberman, chairman of the
Subcommittee on Regulation and Government Information, presided over
the hearings that officially began on December 9,1993. The proceedings started
off on a strange note. One week before the hearings, Bob Keeshan, a.k.a. Cap¬
tain Kangaroo, held a press conference in which he stated that “It would be
hoped that software manufacturers would understand their role in a nurtur¬
ing society and exercise that accompanying responsibility to commercial-free
speech.” 2 Keeshan did not participate in the hearings but submitted a pre¬
pared statement that was aimed at both the legislators on the panel and
parents, reminding them of the responsibility to nurture their children.

Then, a few hours before the hearings began, representatives of several large
game manufacturers sought to partially defuse the bad publicity by announc¬
ing that the industry had decided to endorse a rating system. The
announcement was well timed, and several senators referred to it through¬
out the meetings.

Most of the hearing was taken up by the testimonies of expert witnesses from
two panels: one consisting of experts on education and child psychology and

47 ® Moral Kombat

the other made up of industry executives. The expert panel consisted of Parker
Page, president of the Children’s Television Resource; Dr. Eugene Provenzo,
Jr., of the University of Miami; Robert Chase, vice president of the National
Education Association; and Marilyn Droz, vice president of the National Coa¬
lition on Television Violence.

Page led the panel testimonies, citing the limited research that existed in
the early 1990s into the effects of violent games on the children who played
them. He finished with three recommendations for the industry: (1) that the
federal government fund independent research projects into the effects of vio¬
lent games and that the results of the research, along with a game-rating
strategy, be made available to parents; (2) that future advertising should rein¬
force, not undermine, game ratings; and (3) that a voluntary industry-wide
cap be placed on how much violence is allowed in games. 3

From the start, an issue that came to the forefront of the hearings was concern
about realistic-looking characters in games. Street Fighter 77and even Eternal Champi¬
ons, an especially violent fighting game for Genesis, were seldom if ever mentioned
in the hearings. Neither were Doom or Wolfenstein 3D. The emphasis throughout
the hearings was placed on games with digitized human images, that is, Mortal
Kombat, Night Trap, and, toward the end of the hearings, Lethal Enforcer. Even the launch
of an arcade game from Strata titled Time Killers, in which players hacked off each
other’s limbs with swords, saws, and axes, went unnoticed.

The next panel member, Dr. Eugene Provenzo, Jr., was well known to video
makers, having published a book called Video Kids: Making Sense of Nintendo, which
took a critical look at the impact that video games had on children. “Video
games are overwhelmingly violent, sexist, and racist,” he testified. 4

Now, if the video game industry is going to provide the foundation for the
development of interactive television, then concerned citizens, parents, edu¬
cators, and legislators have cause for considerable concern and alarm. During
the past decade, the video game industry has developed games whose social
content has been overwhelmingly violent, sexist, and racist—issues that I
have addressed extensively in my research.

For example, in Video Kids, 1 explored the 47 most popular video games in
America. What i found out was that violence was the main theme. Of the 47
most popular games—this is based on Nintendo Power polls, industry polls—

Moral Kombat 4 Ji

40 had violence as their main theme. Of these 47 games, 13 included scenarios
in which women were kidnapped and had to be rescued; i.e., the idea of women
as victims. This represents a total of 30 percent of the games, a number which
is even more revealing when we take into account that 11 of the 47 games were
based on sports themes such as car racing and basketball. 5 *

—Eugene Provenzo, professor of social and cultural foundations

of education, University of Miami

The most telling testimony came from Robert Chase of the National Edu¬
cation Association. Chase warned about the instinct to censor materials and
cautioned against it, while at the same time decrying the level of violence in
some games. Throughout his speech, Chase stood firmly behind the idea of a
rating system that would provide parents with “appropriate tools for making
reasonable judgments.” Then he made a statement that would later be ech¬
oed by much harsher and angrier critics.

Electronic games, because they are active rather than passive, can do more
than desensitize impressionable children to violence. They actually encour¬
age violence as the resolution of first resort by rewarding participants for
killing one’s opponents in the most grisly ways imaginable. 6

—Robert Chase, vice president, National Education Association

The last member of the panel was Marilyn Droz, whose testimony sounded
more like an emotional plea than anything else. In the course of her testi¬
mony, Droz stated that “Girls are very offended by the lack of games for them
to play” and that “playing video games has become a macho boy thing.”

The video industry has done the same thing that the movie industry has done.

They have confused children’s desire for action with violence. My 23 years of
working with children directly has proven to me that children want action,

* It is interesting to note that if 11 of the 47 games were sports games and 40 of the 47 games
had violent themes, then Dr. Provenzo considered a minimum of four sports games to have
violent themes. In fairness, though, some psychologists have pointed out that although
cartoonlike in nature, games such as Super Mario Bros, and even Kirby's Dreamland are violent.

47 2 Moral Kombat

they want excitement. They do not need to see the insides of people splat¬
tered against the wall to understand. You know, they need action, but they
do not need to find murder as a form of entertainment. 7

—Marilyn Droz, vice president, National Coalition on Television Violence

Once Droz finished her testimony, Senator Kohl asked the members of the
expert panel what they would say to the industry panel if they had the chance.
Page said that he would ask about marketing techniques and encourage game
makers to focus on action rather than violence. Provenzo said that “by manu¬
facturing games such as Night Trap" the game companies were “endorsing
violence.” 8 He went on to say that there was an obligation to make good games
and to stop confusing violence for entertainment. As a closing remark,
Provenzo called for guidelines for parents—the rating system that Senator
Lieberman had advocated from the start.

Given his chance to speak, Robert Chase said that he would leave them
with a message of responsibility. Finally, Droz called for a ratings panel that
included people from outside the industry. “I feel to allow them to police
themselves when they have already demonstrated that they are out of con¬
trol,” she said, “is like leaving a classroom in charge of the troublemaker.” 9

Senator Lieberman asked Eugene Provenzo for examples of the video game
racism he cited in his testimony and in his book.

In interviews with children, what I found was that they talked about the ninjas
as being bad. Then you asked them about who ninjas were, and they were
sort of like the japs and the Chinese. It turns out that they perceive Asians,
any Asians, as being extremely violent, as being dangerous, as being evil. It
is operating at a very basic level and at times simplistic.

It carries over into other areas as well. There are depictions, I believe,
although it is hard to prove, but my perception of homophobia operating in
terms of how certain types of women are portrayed. 10

—Eugene Provenzo

Throughout the question-and-answer period, the one game mentioned most
was Night Trap. Senator Byron Dorgan of North Dakota started to comment that

Moral Korabat 473

the committee had the testimony ofTom Zito, “who is not with us,” when Zito
interrupted him from the gallery, yelling, “I’m here, sir. I called, but there was
no time to give a statement.” 11

Reading the transcripts of the 1993 hearings, it is hard to believe that any¬
body had ever actually played Night Trap. Few people bothered to acknowledge
that the goal of Night Trapvra.s not to kill women but to save them from vam¬
pires. Players did not even kill the vampires—they simply trapped them in
Rube Goldberg—like booby traps. Nearly everyone who referred to Night Trap
mentioned a scene in which a girl in a rather modest teddy is caught by the
vampires and killed. The scene was meant to show players that they had lost
and allowed too many vampires into the house. When this was pointed out to
Marilyn Droz, she responded:

Oh, it makes me feel a lot better that if you are a loser, you are dead? No,
it doesn’t. We are dealing with self-esteem here. There are many maga¬
zines out there on the market like the several I brought in here today.
These magazines are filled with game tips on how to play the game. In
no time at all, children become winners and kill, and their kill ratio goes
up. It tells them the secret codes and exactly what to do to become suc¬
cessful in murder.

My statement to people who feel that there is some value to these
games is that if the Pentagon was to ever have suggested years ago that
we put video games that teach children how to aim guns and train them
at the age of eight to be soldiers, and ever invented a game to put in
homes of young boys to train them to be in the military, I can’t begin to
tell you ... you know what kind uproar there would be in this country
if our government was to start training early killers. 12

After interviewing the panel of experts, the senators turned their attention
to a panel of industry representatives that included Howard Lincoln, execu¬
tive vice president of Nintendo of America; Bill White, Jr., vice president of
Sega of America; Ilene Rosenthal of the Software Publishers Association; Dawn
Wiener, president of the Video Software Dealers Association; and Craig Johnson
of the Amusement and Music Operators Association. The battle that was about
to transpire was, if nothing else, bizarre.

4 74 Moral Korabat

Howard Lincoln led off by stating that Nintendo was “just as concerned
about the issue of violence, whether in the movies, television, or video games,
as anyone in the room.” 13 Having made the decision to edit the violence out of
the Super NES version of Mortal Kombat, Lincoln entered the proceedings with
an air of innocence. Senator Lieberman even offered Lincoln an air of cour¬
tesy that was not extended to the people from Sega.

Lincoln went on to extol his company’s virtuous endeavors. He said that thanks
to the security chip, companies had to get Nintendo’s permission to create games
for the NES and Super NES. “Nintendo has video game guidelines which control
game content, and we have applied these to every one of the more than 1,200
games released into the market by Nintendo and its licensees.” M

In the past year, some very violent and offensive games have reached the market
and, of course, lam speaking about Mortal Kombat and Night Trap. Let me say for
the record, I want to state that Night Trap wi 11 never appear on a N intendo System.
Obviously, it would not pass our guidelines. This game, which, as you have indi¬
cated, promotes violence against women, simply has no place in our society. 15

—Howard Lincoln

When Lincoln mentioned that Nintendo had been criticized by children
and parents alike for “sanitizing” Mortal Kombat, Senator Lieberman interrupted
him to ask about it. “We have received letters, we have received literally thou¬
sands of phone calls,” 16 Lincoln responded.

If Lincoln was the welcomed guest, Bill White of Sega was the man on the
hot seat. Both of the games that had prompted the hearings were made for
Genesis, and without ever mentioning Sega, Lincoln had pointed a scathing
finger at the company during his testimony. White tried to improve his
company’s image by restating the vital information that Lincoln and the sena¬
tors seemed to have ignored. He started by stating three points: Sega’s customer
base was older and broader than the previous experts had suggested; Sega al¬
ready had a rating system; and Sega was trying to encourage the rest of the
industry to adopt a rating system.

In recent days, the glare of the media spotlight on this issue has resulted in
the circulation of a number of distorted and inaccurate claims. The most

Moral Kombat 475

damaging of these distortions, in my view, is the notion that Sega and the
rest of the digital interactive industry are only in the business of selling games
to children. This is not the case.

Yes, many of Sega’s interactive video titles are intended for and pur¬
chased by young children. Many other Sega titles, however, are intended for
and purchased by adults for their personal entertainment and education.

The average Sega CD user is almost 22 years old, and only 5 percent are un¬
der age 13. The average Sega Genesis user is almost 19 years old, and fewer
than 30 percent are under age 13. 17

—William "Bill” White, former vice president
of marketing/communications, Sega of America

White went on to explain Sega’s “three-pronged approach” to informing
parents. According to White, Sega not only placed ratings on all Genesis games
but also included a toll-free hotline for consumers to get ratings, and infor¬
mational brochures about the ratings were made available.

Listening to White, Howard Lincoln was apparently seething. Years later,
Lincoln said, “I heard him saying these things that I knew he didn’t believe,
and I’m not sure what came over me.” He sat quietly through Rosenthal’s,
Wiener’s, and Johnson’s testimonies, preparing a response to Bill White.
Lincoln’s anger may have been aroused by the way White tried to speak for
the entire industry, and it may have been in response to the way he character¬
ized Sega as being on the forefront of protecting children from adult material*
It may also have sprung from their past relationship. White had been Nintendo
of America’s director of advertising and PR and had joined Sega a few months
after an ugly split from Nintendo. Whatever his reasons, Lincoln waited until
the question-and-answer period after Johnson’s testimony to speak.

Lieberman directed his first comment to White, stating that the clip he had
seen of a woman being attacked in Night Trap was “gratuitous and offensive
and ought not to be available to people in our society.”' 8 White responded by
reiterating his message about the market maturing and the importance of

* In fairness, a 1991 suit between Sega of America and a game manufacturer called
RazorSoft centered on a game called Stormlord, which Sega rejected because it contained
statues of naked women.

4 J 6 Moral Kombat

ratings. Senator Lieberman continued to pick at White, pinning him down on
whether or not Night Trap was a product for adults, then pointing out that if it
was indeed being marketed only to adults, Sega should be obliged to enforce
the ratings. He then proceeded to show the commercial for Mortal Kombat and
commented that the boy in the commercial appeared to be under thirteen
years of age—too young to buy the game, according to Sega’s ratings.

Senator Lieberman then turned to Lincoln and threw him a softball ques¬
tion. After faintly praising Nintendo for its limited self-regulation, he asked if
Nintendo would be willing to display ratings on advertisements and in bro¬
chures as well as on games. Lincoln said he would, then changed the subject.

Let me make just a couple of other points, i can’t sit here and allow you to be
told that somehow the video game business has been transformed today
from children to adults. It hasn’t been, and Mr. White, who is a former
Nintendo employee, knows the demographics as well as I do.

Furthermore, I can’t let you sit here and buy this nonsense that this Sega
Night Trap game was somehow only meant for adults.

The fact of the matter is this is a copy of the packaging. There was no
rating on this game at all when the game was introduced. Small children
bought this at Toys "R" Us, and he knows that as well as I do. When they
started getting heat about this game, then they adopted the rating system
and put ratings on it.' 9

—Howard Lincoln

What could Lieberman say? He thanked Lincoln for his “forthrightness” and
praised Nintendo for “having been a damn sight better than the competition.”

Well, the truth is that those statistics were very true and I think Howard knew
those statistics were true. He would have to if they kept the same records that
we kept. And having worked there [Nintendo], I imagine they did. Those
were the primary player demographics that we measured, based on war¬
ranty card returns from our games, both software and hardware. And they
represent the actual reported age of the people that play the games.

—William "Bill” White

Moral Kombat 477

White shot back with a videotape showing violent games on Super NES.
Nintendo’s self-regulation did not go far enough, he argued. At least, Sega
games had ratings. The tug of war continued, with Lincoln pointing out that
without enforcement, ratings would not keep violent games out of the hands
of children and White stressing the importance of ratings.

One of the true highlights of the testimony, for me, was when after days of
Nintendo claiming how pure they were in Lincoln’s sanctimonious testimony,

White pulls out the huge bazooka-like gun that Nintendo sold for use with
the Super NES and asked Howard if this was what he meant by saying that
Nintendo controlled the product it made and protected families and kids.

Howard was shaken, ashen, and furious.

—Richard Brudvik-Lindner, former director of communications,

Sega of America

I really had not planned on taking Sega on, but it became such a delightful
opportunity. It was broadcast twice on C-SPAN, and the part when I really
took White on was broadcast on CNN. It was everywhere. I don’t remember
what it was that he said, but it was so dumb. It just brought out the lawyer in
me. I mean, it was a golden opportunity I couldn’t pass up.

—Howard Lincoln

I was surprised when Howard Lincoln and Bill White went after each other like
that. I thought that it looked awful. And I was surprised at the intensity of it.

I guess it gave me this message that this was obviously big business.

—Senator Joseph Lieberman

The meeting continued, with Senators Lieberman, Kohl, and Dorgan ham¬
mering Bill White, until it finally adjourned at 1:52 f.m. Before closing the
meeting, Senator Lieberman called for a second meeting to be held in Febru¬
ary to evaluate the industry’s progress toward adopting a rating system.

i In a lot of ways, the hearings really changed the industry. It was a coming of
age for the industry. It really marked the arrival of Sega as the industry leader.

47 $ Moral Kombat

It created alliances and engendered animosities that exist to this day. It also
created the opportunity for the PC entertainment industry and the video game
industry to check each other out and see if they could be married. It forced
these companies to develop a political savvy that they never really had.

—Richard Brudvik-Lindner

Many changes occurred during the three months between the first Sen¬
ate hearing in December and the much more serene second hearing on
March 4, 1994. Howard Lincoln was promoted to chairman of Nintendo of
America, making him co-equal with Nintendo of America president Minoru
Arakawa. Work had begun on a rating system. Despite Sega’s suggestion that
the industry adopt its system, a new one was being created. Also, largely as
a result of the publicity generated by the hearings, Night Trap had sold out
all across the country. Sega CD had never been more than a niche product,
with approximately 250,000 units sold in the United States. Had it not been
for the hearings, Night Trap would have vanished as just another forgotten
Sega CD game. Given new publicity from the hearings, it was later rereleased
for both PCs and 32X.

Sega wound up selling way more copies of MKi, probably as a result of the
hearings. Night Trap came back to life. You know, I sold 50,000 units of
Night Trap a week after those hearings.

—Tom Zito

New Organizations

Two things became obvious to people pretty quickly. One was that the in¬
dustry ought to attempt to come up with a self-regulatory response to
congressional concerns about content; and the second was that it ought to
consider creating a trade association to represent its interests, not just in
Washington and at the state level but in a variety of forms.

—Douglas Lowenstein, president, Interactive Digital Software Association

Moral Kombat 479

Two organizations were formed as a result of the hearings. In 1994, game com¬
pany executives decided that they had better create their own trade
organization rather than depend on the Software Publishers Association.

Seven industry leaders met to discuss the formation of the organization:
Nintendo, Sega, Acclaim, Electronic Arts, Phillips, Atari, and 3DO. The meet¬
ings, intense and private, took place over a six-week period, punctuated with
hostile power struggles between Nintendo and Sega. The fighting eventually
led to compromise and the creation of the Interactive Digital Software Asso¬
ciation (IDSA), the interactive entertainment industry’s own dedicated trade
and lobbying organization, headed by a seasoned Washington, D.C., veteran
named Douglas Lowenstein. In later years, the IDSA would prove to be very
effective when the industry was under siege.

The creation of the rating system did not proceed without battles. In the
beginning, Sega executives wanted the entire industry to adopt their rating
system. When it became obvious that Nintendo and several other companies
would not use the Sega rating system, Sega took a leading role in trying to
establish a new system that would be mutually acceptable. Even this did not
end the fighting. Several computer game publishers created their own rating
system, which they used for more than a year before eventually accepting the
video game ratings.

Well, I think the real reason they didn’t go with Sega’s rating system was
that it was Sega’s rating system and ... at the time the notion of Nintendo
and Sony as fierce competitors, with Sega adopting a system identified with
Sega's product, was. . . that was very unpalatable.

—Douglas Lowenstein

It’s somewhat ironic that Sega was criticized the way it was, for having actu¬
ally taken a lead in producing a rating system that would provide the very
information that the senators wanted to see on every package across the
industry. I think Sega should have been congratulated publicly for having
taken a lead in establishing ratings for games, albeit amongst games that
were proprietary or running on Sega platforms. And, of course, Sega was

480 Moral Kombat

instrumental in the formation of IDSA and was very proactive in helping bring
the industry into compliance with Senator Lieberman’s requests.

-William "Bill” White

Video game makers also created the Entertainment Software Rating Board
(ESRB), an independent organization to rate games. Led by Dr. Arthur Pober,
a highly respected educator, the ESRB won rave reviews when it presented its
rating system to Senators Lieberman and Kohl. Though they resisted at first,
computer game makers eventually adopted the IDSA’s rating system, which
reinforced the industry’s new unity.

At Williams Manufacturing, Ed Boon and John Tobias made a modification
to their basic game formula as they created Mortal Kombat 2. They kept the
blood, brutality, and fatalities, but they also added a new kind of finishing
move called “friendship.” Friendships worked very much like fatalities—if a
player defeated an opponent for two rounds, the opponent would stand dazed
for a few seconds, during which time players had to tap in the right combina¬
tion with their joystick and buttons. If the code was done correctly, instead of
destroying the opponent in some gory way, the victor would give him a cake,
a doll, or some other gift as the word friendship appeared across the top of the
screen in rainbow colors.

The "friendships” were a result of the hearings. They were put in specifically
because we were getting so much publicity because of the violence in the
game and stuff. We just thought we’d offset the fatalities with friendships.

—John Tobias

With the ratings in place, Howard Lincoln and Minoru Arakawa decided
that Nintendo no longer needed to sanitize games the way it had in the past.
The Super NES version of Mortal Kombat 2 contained as many fatalities and
friendships as Sega’s. This time, it sold better than the Genesis version.

The “Next'’ Generation

(Part 1)

Sega is sending a very confusing message to the customer, saying: "Buy Genesis," "now
it’s Game Gear," "no, actually it’s Sega CD,” "no, it’s 32X,” "forget all of that stuff, it’s
Saturn,” "maybe it’s Titan,” "how about Pico.”

—Trip Hawkins, founder, the 3DO Company

3DO a good value at $299? I’ll sell you mine.

—Tim Stamper, cofounder, Rare, Ltd.

2,8 2 The "Next" Generation (Parti)

You Oughta ie in Pictures

Both Nintendo and Sega spun hit cartoon shows off their mascots. Nintendo
went even further and worked on two movies: The Wizard, starring Fred Sav¬
age; and Super Mario Bros., with Bob Hoskins playing the title role. Neither movie
left much of a mark at the box office.

Sega’s introduction into the film world is less well known and a bit more
brutal. In 1994, Shenobu Toyoda, vice president of licensing at Sega of America,
signed the company up as a sponsor of Robert Redford’s Sundance Film Festi¬
val. Toyoda, who was said to be more interested in movies than games, saw
convergence between the two media on the horizon, due largely to Sega CD. By
sponsoring the film festival, he hoped to create some inroads into the industry.

We were a significant sponsor of the Sundance Film Festival. These were heady
times at Sega. This was a time period in which we really could see the merg¬
ing of Hollywood and the filmmaking industry with the video game industry.

We had the Sega CD, and we were the leading proponent of that marriage
from the video game industry side.

On top of all of that, it was really kind of a vision thing for Shenobu. A lot
of people talk about his fascination or maybe his kind of... he was awe¬
struck by Hollywood.

—Richard Brudvik-Lindner, former director of public relations,

Sega of America

Before the festival began, Sega rented an enormous estate outside of Park
City, the Utah ski resort where the Sundance Film Festival is held. Although
CEO Tom Kalinske did not attend and Toyoda only made a brief appearance,
Sega sent a top-tier team that included Richard Brudvik-Lindner, director of
communications; Michaelene Cristini Risley, group director of licensing and
character development; and Joe Miller, head of research and development.

As one of the sponsors of the festival, Sega was invited to make a presenta¬
tion one evening. Miller was to deliver a speech and show video clips of games
under development, after which there would be a reception. Knowing of the
“politically correct” attitude that prevailed in Hollywood, Lindner decided to
have Miller put an emphasis on Ecco the Dolphin, in an effort to show that there

The "Next” Generation (fart i) 483

was more to video games than simple shoot-’em-ups. After making his pre¬
sentation, Miller opened the meeting for questions. He had expected a little
animosity—what he got, however, verged on hostility. Members of the Screen¬
writers Guild and other trade organizations pounded him through the entire
session with questions about how game makers would work with unions and
whether game designers got adequate credit for their work.

The storm continued as the presentation ended and the reception began.
Screenwriters and other movie people besieged the members of the Sega team.

The questioning just continued, so much so, that I think most of the contin¬
gent of Sega people felt under attack. I noticed the Sega people getting
more and more compacted together in this little group, and it was like they
were surrounded. It got so bad that they wanted to leave before the recep¬
tion was done.

I remember stopping joe Miller in the parking lot and saying, "You need
to get back in there, these people don’t understand the vision. ” I tried to get
our guys to go back in there and be advocates and extol the vision. And I
remember looking at Joe and Michaelene and some of the other folks who
were there in the parking lot with me and seeing something that was almost
like fear in their eyes. They kind of looked at me, they considered going back
for a fraction of a second, then they said "no,” and we all got in our Chevy
Suburban and drove off.

—Richard Brudvik-Lindner

New and Old Contenders

America’s 3DO already has an advanced games machine on the market,
though at a whopping $699. Atari will launch its Jaguar later this year;
Sony has set up a new joint venture to market a 32-bit machine. Sega has
teamed up with Hitachi to develop new machines. 1

A number of historically insignificant consoles came out during the 16-bit
era: a Japanese game manufacturer named SNK released a CD version of
NeoGeo, Philips released an overpriced education/entertainment deck called

4S4 The "Next” Generation (Parti)

CD-i, and Sega released new reiterations of its CD product. Then, in October
1993, Matsushita (a.k.a. Panasonic) released a CD-based game console called
the REAL 3DO Multiplayer. The introduction of 3DO marked the birth of the
next generation of video game hardware.

The 3DO Multiplayer was the result of an interesting experiment in market¬
ing economics, a partnership in which one company provided all of the
technology while another provided the manufacturing—both without paying
each other. The hardware itself was the creation of RJ Meal and Dave Needle,
the same team of Amiga-veterans that developed the Lynx. Disappointed with
the failure of Lynx, and furious at Atari for its poor handling of the product,
Mical and Needle left Epyx and began working on their next invention the very
next day. Meeting in a restaurant, they discussed possibilities for future plans.
When they landed upon the idea of a truly breakthrough game console, they
sketched out the needed components on a napkin right at their table.

Mapping out the hardware was easy enough—building it would be a different
story. To do so, they would need capital and preferably an investor who would
purchase the hardware rather than just help design it. They turned to Sega.

Dave Morris, who replaced me briefly as president of Epyx, came to me with
RJ and Dave Needle when I was president of Sega. They presented to me the
concept of paying them $2 million and giving them two years to develop the
next "ultimate revolutionary” video game system; and I was all for it, based
on their credentials, because they had developed the Amiga computer and
they had developed Lynx. I had just paid $1.7 million dollars to Joe Montana
to get his picture on a game. I thought it was nothing to pay $2 million to get
the next hardware system developed.

So I recommended that they go to Japan, which they did two or three
times, and present their concept to Nakayama. They were turned down.

—Michael Katz, former CEO, Sega of America

One of the next people they met with was Trip Hawkins, the founder of
Electronic Arts. Intelligent and ever fascinated by technology, Hawkins made
a good audience for their presentation. As the CEO of a major computer and
video game company, he understood the industry and had an army of con¬
tacts throughout Silicon Valley. And he would need them. Buying into Mical

The "Next” Generation (Parti) 4®5

and Needle’s project meant more than breaking into the console market; it
meant taking on Nintendo and Sega. Anybody who signed on with Mical and
Needle would need to be as much an evangelist as a venture capitalist. Trendy,
witty, charismatic, and known throughout the high-tech world as the ulti¬
mate salesman, Hawkins was a perfect fit.

Taking 3DO from concept to reality was a lengthy and difficult process that
required a large team. Looking back at everything that went into making the
console, RJ Mical would later remark that “It took 17 people to design the
Amiga. It took just Dave and me to design the Lynx, and we came in under
budget. Turning the genesis of an idea into the reality of the 3DO took a small
army. On the other hand ... it was a small army.”

Dave Needle, the hardware side of the Mical and Needle development team,
had created a brilliant machine. Their console played games, music, and pho¬
tographs on CD-ROM, hence the name “Multiplayer.” It was built around a
32-bit ARM 60 RISC processing chip and featured 3 megabytes of memory.
Unfortunately, time and the rapid evolution of technology had conspired
against them. Shortly after Needle and Mical completed their work, a break¬
through in chip design made floating-point technology, an efficient way of
making calculations for 3D graphics, more affordable for later consoles.

Floating-point capability is something that we would have had to add at
extra cost and might jeopardize the size of the chip.... Low-cost processors
typically did not have floating-point capability until very recently. Then it
finally became cheap enough and common enough to become available for
use in video game machines.

It would have speeded up the polygon calculations, but I don’t really
think that that makes a hell of a lot of difference, to be honest.

—Trip Hawkins

From the start, Hawkins wanted to do things differently from other game
companies. Nintendo and Sega manufactured their own hardware, while
Hawkins wanted to create a hardware standard and license it out to electron¬
ics manufacturers. Nor did he want to publish games for his new console. In
Hawkins’s business model, he would simply develop the finest technology on
the market, and his profits would come from licensing that technology to

486 lie "Next" Generation (Parti)

others. As the console went into development, Hawkins’s strategy seemed to
be working. Panasonic, Sanyo, AT&T, Creative Labs, and Gold Star all expressed
interest in manufacturing hardware based on the new console’s architecture.
More than eighty companies, including Activision, LucasArts, and Microprose,
signed on to make games for it. Since Hawkins was the head of Electronic Arts
and some of the early development had been handled internally, there was
never any question about whether Electronic Arts would support it.

The creation of 3DO was shrouded in mystery to me. It felt pretty bitter. Trip
Hawkins started the 3DO stuff internally and I think there were some real
issues; but I’m not sure exactly what all went down.

—Don Traeger, former employee, Electronic Arts

In the fall of 1993, Hawkins unveiled his 3DO game console to the press. Backed
by Electronic Arts and headed by the electronics-entertainment world’s best sales¬
man , 3DO became the darling of Wall Street. Not everyone was impressed, however.
Howard Lincoln, chairman of Nintendo, later said in an interview that he never
worried about 3DO because of the way Hawkins set up the business model.

They violated, in my opinion, the cardinal rule. And that is that you cannot
rely on other people to make good games for your system. It’s nice to think
that they can, but these hardware systems need first-class software, and you
have to do it yourself. The model just didn’t work.

—Howard Lincoln, former chairman, Nintendo of America

I’d like to think that we would have had the smarts at Sega to market the 3DO
in the conventional, successful way and not create this, if you’ll forgive the
expression, ridiculous new model that Trip came up with of how to market
and sell 3DO. I mean, not manufacturing the hardware himself and licensing
the technology to other people—it’s ridiculous. Why would more than one
company want to compete against someone else with exactly the same prod¬
uct? Why would a retailer want to buy the same product from more than one
company? Everyone in the industry thought that was ludicrous.

■Michael Katz

The "Next” Generation (Parti) 4®7

Behind the scenes, 3DO suffered from a bit of an identity crisis. Hawkins, whose
background was in software, forgot some of the cardinal rules of video games. He
decided to price the Multiplayer at $699, more than four times the price of Super
NES or Genesis. A Commodore computer inspired this steep price. Remember¬
ing that Commodore had charged $700 for the complete Commodore 64 set up
and feeling that his 3DO Multiplayer had many more capabilities than the Com¬
modore 64, Hawkins thought consumers would pay the same price.

Sadly, the work and technology that went into 3DO technology were par¬
tially overshadowed by the console’s poorly designed controllers. It came with
flat, slender controllers that were reminiscent of the controllers on the Super
NES. They had, however, one major flaw—the direction pad on the left side
of the controller did not handle diagonal movement well. When consumers
called in to complain about this problem, 3DO technicians suggested that
they loosen the screws on the back of the controller. Although this fix helped
diminish the problem, it did not completely solve it.

There was also some confusion about which game to pack in with the 3DO
Multiplayer. Amazingly, the decision was made to bundle Shelly Duvall's A Bird's
///t’with the game player that Hawkins was trying to market as a toy for so¬
phisticated adults. While Shelly Duvall’s A Bird’s Life was a respected piece of
educational/entertainment software, it was a program meant to teach young
children about birds. Fortunately, a company called Crystal Dynamics stepped
in with an impressive new driving game called Crash TV Burn, which was ulti¬
mately selected to be the bundled software. Even with Crash TV Burn in the
package, 3DO owners had little to play at launch. Few games were ready for
the October launch of the 3DO Multiplayer, and only a space-flight game called
Total Eclipse stood out as having much promise.

The public did not bite. According to one published prediction, only 125,000
units were sold in the United States in the entire first year. 2 Panasonic lowered
the price of the 3DO REAL Multiplayer to $399.95 in 1994, but the initial ex¬
citement was already gone and sales remained low. In foreign markets,
however, 3DO fared slightly better. Despite its “made in the U.S.A.” image,
the 3DO Company actively pursued worldwide sales and ultimately sold more
consoles in Asia than in the United States*

* 3DO handled digitized video better than other game consoles. Some of the more popular items
available in the Asian market, which were not available in the United States, were pornographic CDs.

488 The "Next” Generation (Patti)

The first 3DO titles failed to demonstrate the superiority of its 32-bit technol-
ogy. Over the next two years, Electronic Arts published games that highlighted
3DO’s abilities and differentiated it from the competition. First a motorcycle
combat racing game called Road Rash was ported to 3DO from Genesis. Then
Electronic Arts followed up with a solid 3DO version of its titanic Madden NFL
series. Tapping into the CD-ROM—based console’s strengths, the new version of
Madden featured digitized footage of the former Oakland Raiders coach and larger,
more detailed, players. Next, Electronic Arts published a 3DO version of FIFA
International Soccer, with multiple camera angles, a truly 3D field, streaming play-
by-play audio commentary, and a repertoire of special kicks and realistic moves.
This was the game that would demonstrate just how impressive “next genera¬
tion” sports simulations could be. These games came out too late to save 3DO,
however. By the time Electronic Arts finally teamed up with Car and Driver maga¬
zine to create a realistic auto-racing game called Needfor Speed, consumers had
moved on. None of these games were available in 1993 and by the time they
began appearing more regularly, 3DO had lost its momentum.

Atari’s Iasi Oat

In November 1993, Atari released one of the most controversial and ill-fated
game consoles ever made. The system, called Jaguar, was a cartridge-based
console with a Motorola CPU. Although Jaguar had only 16 megabits of RAM,
it had two 64-bit RISC graphics processing chips. Atari marketed it as the first
64-bit game console ever to hit the market, but competitors argued that it
was really a 16-bit game console.

Their CPU is i6 bit. Ours is 32 bit, and our coprocessors are a lot more power¬
ful doing the graphics and sound. Atari has trouble getting good sound
during game play because of how they set up their bus structure. It’s only
because of an ambiguity in the law that they can even say 64 bit without
having to explain what they mean.

—Trip Hawkins

Atari president Sam Tramiel faced a tough battle from the moment he an¬
nounced his new game console. His family’s hardball style of business had

The "Next” Generation (Parti) 4%

alienated much of the industry. Many retailers refused to carry the new con¬
sole, and while more than 200 developers signed up to make games for Jaguar,
very few software publishers ever came through with any games. Only five
games were available when Atari released Jaguar. Despite promises that more
games would be out by Christmas, it took months before Atari released new
games. Even worse, those first few games, which included Cyhermorph, Crescent
Galaxy, and Evolution: Dino Dudes, left consumers completely unimpressed.

Even taking into account the lack of games and the controversy surround¬
ing the processing chip, Jaguar had some marketing advantages over 3DO.
Retailing at $249.95, it was far less expensive. Atari created a catchy advertis¬
ing campaign in which it instructed consumers to “do the math” when
comparing Jaguar’s 64 bits to 3DO’s 32. Then there were the unique control¬
lers that appealed to some players, yet infuriated others. Jaguar controllers
were fat and wide, with curved edges and rounded rolls along their bottom to
create an ergonomic feel. The controller featured a number pad in its center,
giving a “retro” nod to the days of ColecoVision and Intellivision.

Although Atari never solved the dearth of games issue, two British game
designers appeared on the scene to give the system a couple of outstanding
titles. The first was by Jeff Minter, a former Vic 20 designer, who was known
throughout the industry as “The Yak.” Tempest2000, Minter’s first game, was a
brilliant recreation of Dave Theurer’s coin-op classic, updated with shaded
polygonal characters and a techno-rock soundtrack. With its great sound and
fast action, Tempest 2000 proved that Jaguar could be a great game machine,
given the right software. 2 *

Alien vs. Predator, Jaguar’s second big game, came from a British developer
named Andrew Whitaker. Alien vs. Predator was a first-person shooting game of
the Doom varietv that could be played from the perspective of the space para¬
sites from the movie Alien, the intergalactic hunter from the movie Predator, or
a space marine. Each character had its own goals, strengths, and weaknesses.
It took Whitaker seventeen months to create Alien vs. Predator. The hardware
was not completed when he began work on the project, and Atari engineers
changed their design four times during the time that he worked on the game.

* Yes, for those of you who remember, I did give Tempest 2000 a D+ score in Electronic Games.
What can I say, I repent.

490 The "Next” Generation (Part i)

For every Alien vs. Predator or Tempest 2000 that appeared on Jaguar, there
were many more games such as Kasumi Ninja: a weak attempt at emulating
Mortal Kombat, with characters such as a Scottish brawler who shot fireballs at
opponents from beneath his kilt. Despite outselling the $699 3DO in 1993,
Jaguar fell behind 3DO in 1994. In an effort to salvage his sales, Tramiel even
tried running television infomercials.

The Consufitiif Electronics Battleground

Chicago: Sega kept a low-profile at the June 23—25 Summer Consumer
Electronics Show here—in the basement, to be exact—while archrival
Nintendo was roaring like a 200-pound “Donkey Kong "gorilla in a massive
exhibit-hall booth that literally could not be missed. 3

The 1994 Summer Consumer Electronics Show (CES), held in Chicago, was
the scene of grand battles, with Atari and 3DO claiming technical superiority
while Nintendo and Sega clashed on other fronts.

Nintendo entered the show on an unusual up-note. Having spent the last
few years looking helplessly beaten by Sega in image marketing, Nintendo
scored a hit with a game called Super Metroid. Designed by Gumpei Yokoi’s Re¬
search and Development Team Number 1, it was built off an earlier game that
they had created for the NES. Super Metroid-was not enough to turn the tables
on Sega, but it at least served notice that Nintendo was not to be ignored.

In 1994, Nintendo used CES to trickle out announcements about Ultra 64,
the new 64-bit game console it was developing with Silicon Graphics. Com¬
pany executives hired a bus and shuttled small groups of reporters to a hotel
suite, where they were to be shown private screenings of Ultra 64 hardware.
The groups were led into a small showroom with four televisions peering out
of ceiling-high curtains. The reporters never actually saw the console, which
they were told was nothing more than a prototype. Instead, they were shown
a fighting game called Killer Instinct th at they were told ran on Ultra 64 hard¬
ware. Nintendo did not announce a precise release date for Ultra 64 in those
private screenings but indicated that the system would come out in the fall of
1995 for $250. That was the most Nintendo would release.

The "Next” Generation {Part i) 49 1

More salient to Nintendo’s plans for 1994 was a curious little game adapter
called Super Game Boy, which enabled consumers to run Game Boy cartridges
on Super NES with some muted colors. At the time, Super Game Boy seemed
like a ridiculous idea. Game Boy sales had slowed, and the Super Game Boy
sold for $60, more than Game Boy itself.

Nintendo’s other hope was a game that was designed using a new technol¬
ogy —Donkey Kong Country.

The Return of Rare

Though Rare, Ltd., had dropped out of active game development, the com¬
pany did not remain silent for long. Chris Stamper began work on technology
that would allow him to create games with 24-bit graphics on a Silicon Graphics
workstation, then convert them into the kinds of two-dimensional images
that would run smoothly on the 16-bit Super NES. Once operational, Stamper’s
device would give Rare an edge over every other game company. While com¬
petitors would still be creating cartoon sprites, Rare would be able to
pre-render art on high-end workstations. As Chris Stamper completed the
device, his brother Tim began designing a boxing game that would serve as a
demonstration of the new technology. Then they invited Nintendo of Japan
out to their headquarters in the tiny English town of Twycross to see what
they had created.

We had a visit from Mr. Takeda [Genyo Takeda—one of Nintendo’s top engi¬
neers]. We decided to show him a demonstration of a boxing game we had
created, using rendered graphics on a Silicon Graphics workstation. He was
very impressed and asked, "What would this look like on a Super NES?” So
into the evening and the next day, we had two of our engineers work on
taking the 24-bit true color imagery and converting it to Super NES.

—Chris Stamper, cofounder, Rare, Ltd.

One of the strengths of Chris Stamper’s design was that it showed objects on
the Silicon Graphics workstation with the same amount of detail that they would
have when displayed on the Super NES. Hence, when the Stampers showed

492 The "Next” Generation (Part i)

Takeda their boxing game on a Super NES the next day, it looked almost identi¬
cal to the game they had shown him on the workstation the day before.

When we took the guys from NCL [Nintendo Co., Ltd. ] to the art department and
showed them what we had, they kept looking under the table. I asked what they
were doing. They said they were looking for the big computer because they didn’t
understand that everything was being done in the small box.

—Tim Stamper, cofounder, Rare, Ltd.

Impressed with what he had seen, Takeda returned to Japan and reported
the invention to Nintendo chairman Hiroshi Yamauchi. When Yamauchi re¬
sponded by asking the Stampers what kind of game they wanted to make,
Tim said that he wanted to make a game with the character Donkey Kong.
With Yamauchi’s and Donkey Kong creator Shigeru Miyamoto’s blessing,
Stamper and his design team began work on the game.

Knowing that they were working on an all-important holiday release, the
people at Rare went to great lengths to ensure the quality of their game. Their
in-house musician created several themes to accompany the game. The art
was inspired by concept drawings that Miyamoto sent over, but Tim Stamper’s
team had license to take the concepts in their own direction. Stamper mapped
out the levels for the game by drawing sequences of sketches on Post-it notes,
then arranging them in a straight line.

The process for creating the objects and characters in Donkey Kong Country
involved building 3D images using flat polygons. Once the shapes were com¬
plete, the artists would assign textures and colors to various polygons to add
skins for their wire-frame creations. The artists used objects from Rare’s con¬
verted farmhouse-headquarters to create images. When they needed textures
for trees, they plucked leaves from a tree. When they needed a texture that
resembled rusted metal for a wheelbarrow, they scanned an old shovel.

The end result was a side-scrolling game with characters that moved
smoothly but looked as real and three-dimensional as the dynamations in a
Ray Harryhausen movie. Rare had created new characters for the game, and
the storyline was filled with British puns and humor.

When editors and buyers saw their first demonstrations of Donkey Kong Country
at CES, they immediately knew what the big game of 1994 was going to be.

The "Next" Generation (Parti) 493

The first time I saw Donkey Kong Country, I realized that Super NES could do
everything that Nintendo said it could do.

—RJ Micai, former fellow, the 3DO Company

Sega’s Showstopper

When you have an installed base as large as Sega has with the Genesis, and
you come out with anything that costs less than $200, some people are going
to buy it. That makes the release of the 32X a very nice financial event for
Sega as a company.

—Trip Hawkins

Sega’s big CES product was 32X. Originally named “Mars,” 32X was billed as the
poor man’s entry into “next generation” games. It was a mushroom-shaped pe¬
ripheral that snapped into the cartridge slot of the Genesis console, giving it 32-bit
processing power that Sega said would enable the system to work 40 times faster.
In the heart of 32X sat two Hitachi 32-bit RISC chips, a 3D graphics processor ca¬
pable of rendering 50,000 polygons per second, and some minor enhancements
designed to work in tandem with Genesis audio and visual technology. Sega had
already announced plans to release a superior 32-bit CD-based system called Sat¬
urn in Japan; but retailing at $159,32X was supposed to be a much less expensive
alternative for people who already owned a Genesis. The one question Sega was
not answering, however, was whether a Genesis with Sega CD and 32X would be
able to read Saturn software. Always happy to report his competitors’ flaws, 300-
founder Trip Hawkins charged that it would not.

Everyone knows that 32X is a Band-Aid. It’s not a "next generation system.”

It’s fairly expensive. It’s not particularly high-performance. It’s hard to pro¬
gram for, and it’s not compatible with the Saturn.

—Trip Hawkins

Sega executives argued with Hawkins’s rhetoric, furiously telling people
that he did not know what he was talking about. Even as they did this,

494 The “Next” Generation (Parti)

however, they refused to state once and for all whether the 32X and Sat¬
urn were compatible.

Both systems have the same architecture. You read between the lines.

Sega has never abandoned its customer base. When we released the Gen¬
esis, we created an adapter that allowed them to play Master System
cartridges. The 32X lets you run titles from your Genesis library.

—Richard Brudvik-Lindner

Hawkins, of course, had been correct. The 32X was not powerful enough
to run Saturn software. It was, however, a huge improvement over the origi¬
nal design that was created by Sega of Japan. The project, which eventually
turned into 32X, began as an entirely new console that was developed in Ja¬
pan. When the unit was demonstrated to American executives, however, the
reaction was less than favorable.

We were told that there was going to be a thing called the Genesis 2. It was
going to be another version of Genesis—an entire system. The only differ¬
ence was that it was going to have double the colors and a lower cost.

So joe Miller said, "Oh, that’s just a horrible idea. If all you're going to do
is enhance the system, you should make it an add-on.” He said, "If it’s anew
system with legitimate new software, great. But if the only thing it does is
double the colors...”

—Michael Latham, former executive producer, Sega of America

Joe Miller, head of Sega of America’s research and development, fought
against the idea of releasing an entire new game console that was little more
than a Genesis with a larger color palette. At his suggestion, 32X was changed
into a peripheral and made more powerful with a new set of processing chips.
At Miller’s suggestion, Sega of Japan made 32X a more significant product.
What the company would not do is make it into a Saturn.

Joe may have been "the father of the 32X,” but in his defense, he had to
choose between bad choice number one and bad choice number two. I think

The "Next” Generation (Parti) 495

he picked the better choice and made a valiant effort to make the best of an
impossible situation.

—Michael Latham

Once the design specifications were completed, Sega worked hard to evange¬
lize the new platform in the third-party community, but the system was a tough
sell. The top developers knew about Saturn and Ultra 64. They also knew about
a new console that Sony planned to release in 1995. Anybody who had read the
design specifications of any of the new consoles knew that 32X could never hope
to compete, and no one felt any enthusiasm about its chances.

Sega got the same response from journalists. More seasoned journalists,
such as Electronic Gamese .ditors Arnie Katz, Joyce Worley, and Bill Kunkle, ques¬
tioned the logic of releasing inexpensive and full-priced game consoles that
basically played the same games.

Sega claims it is segmenting the market like General Motors. “The Sat¬
urn [the 32-bit machine] is the Cadillac, the Neptune [a never-released
Genesis-32X all-in-one console] is the Oldsmobile, and the Genesis is the
Chevrolet,” says Rioux. Already analysts are worrying about this wide
array of products. “There are too many planets; it is a confused strat¬
egy,” says Edward Brogan of Jardine Fleming.' 1

In an effort to win journalists over, Sega held a huge party at a San Fran¬
cisco dance club. The event turned out to be a fiasco. Sega flew journalists in
from all around the country and put them up in the Sofitel, a hotel located
beside Sega’s Redwood City headquarters.* That evening Sega hired buses to
drive the journalists to the dance club. The party began with Tom Kalinske
giving a speech, then a local rapper performed a lengthy piece about the great¬
ness of 32X. The music was too loud and the 32X games that Sega had placed
around the dance club were so unimpressive that no one wanted to play them.
Most attendees crowded into the lobby of the dance club to escape the loud

* Coincidentally, Sega headquarters was located on Marine Drive, a location that had once
been used for a safari park and was the exact location Nolan Bushnell used for the coming
out party that he threw for Sente Games.

496 The "Next" Generation (Part i)

music. Some journalists tried to leave, only to discover that the buses had
departed and would not return until the party was over.

The retail community, on the other hand, greeted the news about 32X
enthusiastically. Sega could not keep up with the demand among retailers,
but when the unit actually went on sale, the public did not bite. One problem
was that only six games were available at launch. While two of the launch
titles were strong— Virtua Racing and Doom —other 32X games were inexplica¬
bly bad. One, a fighting game called Cosmic Carnage, looked and played so poorly
that reporters made jokes about it.

We were rushed. We had to get games out for the 32X and it was going to be
such a close cycle. When Cosmic Carnage showed up, we didn’t even want to
ship it. It took a lot of convincing, you know, to ship that title.

—Michael Latham

As some members of the press predicted, 32X did not sell well. Within a few
months, Sega dropped its price to $99 and it was ultimately cleared out of
stores at $19.95. And Sega’s woes were just beginning.

The Return of Kong

The video game market fell into a three-year slump in 1993. In September
1993, Nintendo Co., Ltd., reported a 24-percent drop in profits. The follow¬
ing September, Nintendo reported a 32-percent drop in worldwide sales. 5

After a decade of torrid growth, the market is slumping. Sega’s earnings
plunged 64 percent last year. Nintendo reported a 41-percent drop; its
stock has declined drastically over the last year, and no respite is in sight.
Nintendo has “another bad year coming,” predicts Joseph Osha of Bar¬
ing Securities in Tokyo. 6

The late November release of Donkey Kong Country stood in stark contrast to the
gloom and doom faced by the rest of the video game industry. After three
holiday seasons of coming in second to Sega, Nintendo had the biggest game

The "Next" Generation (Part i) 497

of the year. Sega still outperformed Nintendo in overall holiday sales, but the
500,000 copies of Donkey Kong Country that Nintendo sent out in its initial ship¬
ment were mostly sold in preorder, and the rest sold out in less than one
week. Shortages were inevitable, and many retailers accused Nintendo of pur¬
posely undermanufacturing the game to drive up demand.

While analysts criticize Nintendo for trying to milk its existing technol¬
ogy, the 16-bit machine, even as others were leapfrogging that technology
by moving to 32-bit machines with a CD-ROM drive, the bestselling item
in the industry this Christmas was Donkey Kong Country, a game written
for that supposedly outmoded 16-bit platform. In the last 45 days of 1994,
Nintendo’s new game sold 6.1 million units, making it the fastest-selling
game in the 20-year history of the video game industry and clearly a
hotter item than Sega’s new Sonic & Knuckles title. Visually, the game is at
least as impressive as those played on 32-bit machines. 7

By the end of the 16-bit generation, Nintendo would go on to sell 9 million
copies of Donkey Kong Country, making it the bestselling game since Super Mario Bros.
3. Donkey Kong Country made Rare, Ltd., Nintendo’s most important second-party
developer. It established the Super NES as the better 16-bit console and paved
the way for Nintendo to win the waning years of the 16-bit generation. More
important, Donkey Kong Country sounded the death knell for Jaguar and 3DO by
convincing consumers that the first systems in the next generation of game
consoles had little to offer that could not be found on Super NES. Donkey Kong
Country may not have destroyed the competition, but it certainly cleared the
way for the more impressive competitors that were about to arrive.

The “Next" IGeneration

(Part 2)

For a company that is so new to the industry, I would have hoped that Sony would have
made more mistakes by now.

—Trip Hawkins, founder, the 3DO Company

$299.

—The entire text of a speech at the first Electronic Entertainment Expo, Steve Race,

former CEO, Sony Computer Entertainment of America

500 The "Next” Generation (Part z)

Hi Industry-Wide Low

By 1995, the video game industry appeared to be dying. According to the toy
market-tracking NPD Group, the U.S. console market netted $4.55 billion in
1993. By 1995, that number was down to $3.07 billion. The NPD Group’s TRST
data showed a 17-percent drop in 1994, followed by a 19-percent drop in 1995.

In 1992, the year Sega smashed Nintendo’s dominance in the U.S., Sega’s
U.S. video game sales rose 50 percent, but it barely made a profit on them.

In 1993, Sega’s earnings dropped 64 percent to $112 million. In contrast,
Nintendo profits fell 40 percent in 1993, but it still pulled in $500 million in
net profits and over $1 billion in pretax profits. It also has no debt and $3.3
billion in cash, and controls 70 percent of the world video game market.
Sega has $700 million in debt and about 25 percent of the world market. 1

Having lost the temporary boost it received from Street Fighter II and Mortal
Kombat, the arcade business was in even worse shape. Taito, the company that
ushered in the golden age of arcades with Space Invaders, closed its U.S. offices in
1995, and Data East sold its pinball division to Sega of America. That year’s
Amusement and Music Operators of America show, held in Dallas, was even
smaller than in previous years, and rumors of companies closing were ram¬
pant around the floor of the show. One Data East employee was so unsure of
his company’s future that he applied for jobs at the show in a unique fashion.
Data East was demonstrating an arcade machine that took people’s photo¬
graphs and printed them on sheets of half-inch stickers. The employee made
stickers of himself holding a little sign that said, “hire me,” attached them to
his business cards, and handed them out to other companies.

The two companies hit hardest by the 1994 and 1995 drops in the market would
ultimately be the 3DO Company and Atari. They had failed to build sufficiently
solid customer bases to withstand the storm that was about to strike in Japan.

The Tsunami Hits Japan

On November 22, 1994, Sega released a 32-bit video game console called Saturn
in Japan. Breaking with tradition, the launch took place on a Tuesday, causing
added annoyance for Tokyo commuters because the response to Saturn was so

The "Next” Generation (Part 2) 5®

phenomenal. The 200,000 consoles that Sega shipped sold for 44,800 yen, or
approximately $469. Most stores had customers pre-reserve their consoles and
sold out their entire inventories more than a month in advance. Days before
the launch, lines formed in front of those stores that sold their Saturn inven¬
tory on a first-come, first-served basis. Their supplies came nowhere near to
meeting the demand. But the star of the day was not the Saturn console but a
Saturn game— Virtua Fighter.

It was developed by Sega’s most famous internal development team—AM2,
led by Yu Suzuki. Suzuki was Sega’s answer to Nintendo’s Shigeru Miyamoto.
Having created such arcade classics as Space Harrier, Hang-On, Out Run, and Virtua
Racing, Suzuki had reached minor celebrity status. But Suzuki’s biggest con¬
sole hit was the Saturn version of Virtua Fighter, a fighting game featuring 3D
polygonal combatants using a variety of authentic fighting styles, ranging from
Kung Fu to professional wrestling.

Suzuki’s games reflected his wide-ranging tastes. Suzuki was a man of so¬
phisticated discernment who collected fine wines and drove a Ferrari to work.
His game designs often reflected his style, offering a nearly perfect mixture of
realism and fantasy, wrapped in the most technologically advanced arcade cabi¬
nets on the market. Suzuki constantly pushed his managers to allow him to
add features to his designs. His games generally had force-feedback controllers
that rumbled or shook in response to action in the games and the largest and
highest-resolution monitors of any games on the market. When his bosses balked
at the cost of building his proposed Space Harrier cabinets, Suzuki promised to
return his salary if the game bombed. It was a major success.

In the early 1990s, Suzuki was one of the first arcade designers to experi¬
ment with 3D polygonal graphics.* His first use of this technology was a game
called Virtua Racing, which went on to become an international arcade smash.
Suzuki followed up with Virtua Fighter.

The brawlers in Virtua Fighter sn<zxz not as ornate as the 2D combatants in
MortalKombatox Street Fighter II. Because of the early technology available at the

* Dave Theurer, the Atari designer who created Missile Command and Tempest, introduced 3D
polygons into arcades in his 1984 game FRobot. Suzuki openly admits that he got the idea of
using his technology in a driving game after seeing a 3D racing game called HardDrivin',
which Atari released in 1989.

502 The "Next” Generation (Part z)

time, the artists who created the game had to create each character with less
than 1,200 polygons. This resulted in fighters with square shoulders and boxy-
looking arms. Although Suzuki’s foray into 3D graphics did not compare well
against the polished cartoon look of other fighting games, it paved the way
for beautifully fluid body movements.

As an arcade game, Virtua Fighter was one of Sega’s most successful games in
Japan. The incarnation of Virtua Fighter that appeared on Saturn was almost in¬
distinguishable from the arcade game. It did not come bundled with Saturn (no
games were packed in with the console), but at a price of 7,800 yen (more than
$80) the Virtua Fighter AZfsold at nearly a one-to-one ratio with Saturn consoles.

On December 3, 1994, Sony launched a new console called PlayStation into
the Japanese market. Unlike Sega, Sony was not an established game company,
and only 100,000 consoles were shipped at a retail of39,800 yen. The launch was
not as highly anticipated, and many people who had not preordered consoles
were able to purchase them at stores before the inventory ran out. Unlike Sega,
Sony did not have famous in-house design teams. The most notable game for
PlayStation was Ridge Racer, a solid translation of an arcade racing game. Namco
published both the arcade and PlayStation versions of this game.

To show that consumers would choose Saturn over PlayStation, Sega waited
until the day the Sony console launched to ship more Saturns. Once they did, and
the systems were sold side-by-side, Saturn proved the more popular system.

1 lew Show

So, for some period of time, there was a pitched battle between E3 expo and
CES for exhibitors, with CES obviously arguing that they were the show of
choice because Nintendo was going to be there and E3 Expo arguing they
were show of choice because they had Sony, Sega, and most of the major
third parties lining up.

—Douglas Lowenstein, president, Interactive Digital Software Association

Back in the United States, Nintendo and Sega continued to wrangle for lead¬
ership of the video game industry. Sega lost the battle over the rating system,
but a new struggle erupted over trade shows.

The "Next” Generation (Part z) 5®3

Since the early days of Atari, video game companies had unveiled their prod¬
ucts at the Consumer Electronics Show (CES), a show run by a trade
organization called the Electronic Industry Association. CES was about more
than interactive games, however. It was the place where manufacturers un¬
veiled new televisions, car sound systems, telephones, and refrigerators. Despite
the bad years for video games, more and more computer software companies
were publishing games, and floor space was becoming a limited commodity.
In an effort to keep the game makers happy, the Electronic Industry Associa¬
tion proposed a show called CES-I.

With the creation of the Interactive Digital Software Association (IDSA),
the video game industry had its own trade organization and was large enough
and prosperous enough to run its own show. As the Electronic Industry Asso¬
ciation made plans for CES-I, a large international publishing company called
IDG Communications approached the IDSA with a proposal for an annual
show called the Electronic Entertainment Expo (E3) that would supplant CES
as the show for the interactive entertainment industry. Sega, Sony, Atari, and
several leading software publishers immediately announced support for the
show, while Nintendo and Microsoft threw their weight behind CES-I.

When we decided to create a trade show, everyone, including Nintendo, sup¬
ported a dedicated trade event for the industry. Two organizations were
presenting and seeking our support at the time and we had to decide which
one to endorse. EIA (Electronic Industry Association) had put together a ver¬
sion of its CES Spring show that was very broadly defined as interactive
television entertainment. At the same time, IDG had developed the concept
for the Electronic Entertainment Expo. Both organizations were pitching for
our support, and, ultimately, we voted to endorse E3, and Nintendo made a
decision to sign up with the CES Philadelphia show.

—Douglas Lowenstein

Nintendo became isolated. As more companies queued up in support of
E3, Nintendo eventually had to fall in line.

At the end of the day, after some period of time . . . Nintendo recognized
that the industry had essentially voted with its feet, with an overwhelming

504 Hie "Next” Generation (Part 2 )

number of companies signing up with the E3 event. They [Nintendo] then
eventually joined the rest of the industry in signing up.

—Douglas Lowenstein

The Electronic Entertainment Expo was about to become the next great
battlefield.

Inside Sony

The other thing that really helped us, and this is important, is that when you
put those four letters on a product, S-O-N-Y, it gives you tremendous cred¬
ibility. It gives the customers great permission to buy, particularly when
they’ve been burned by the 3DOS and the Jaguars of the world.

—Jim Whims, former executive vice president,

Sony Computer Entertainment of America

Ken Kutaragi, the engineer who created PlayStation, faced many obstacles
while completing the game console that would eventually be known as the
Sony PlayStation. His final unit bore almost no resemblance to the Play Sta¬
tion CD-ROM device that he was creating for the Super NES. He designed the
final version around the 32-bit R3000A RISC chip, a processor that was sup¬
posed to be capable of rendering up to 500,000 texture-mapped polygons per
second. PlayStation’s performance, however, rendered approximately 350,000
polygons per second. While Saturn and PlayStation supposedly had fairly simi¬
lar capabilities on the surface, there were several very important differences
in both design and marketing.

PlayStation had a single processing chip with a 3D geometry engine in its
CPU. This processor, along with the excellent development tools Sony made
available, made PlayStation extremely easy to program. That ease of program¬
ming, along with Sony’s liberal $10 per game licensing fee and its aggressive
marketing plans, made PlayStation an attractive prospect for game designers.
Nearly 100 game companies had signed licensing agreements with Sony by
the time PlayStation launched in the United States, and more than 300 indi¬
vidual game projects were planned or underway.

The "Next" Generation (Part z) 5®5

Before Sony could become a serious contender in the game market, it would
have to overcome its past. Along with being humiliated by Nintendo over the
Super NES CD-ROM drive, Sony also had a dismal history as a entertainment
software publisher. Sony Interactive, a small and unsuccessful software arm
of the giant electronics company, had earned critical success with a game called
Mickey Mania for Super NES, Genesis, and Sega CD, but most of its games were
panned by the press and ignored by consumers. Sony published a series of
ESPN Sports simulations that were generally acknowledged to be among the
worst sports games on the market.

In what seemed like a poorly aimed attempt to buy its way into respectabil¬
ity, Sony bought Psygnosis, a Liverpool-based software company, for $48
million. At the time of the purchase, it seemed a strange move. Psygnosis’s
only hit, a game called Lemmings, had been created by outside developers; yet
Sony paid top dollar for the company.

We got into this business for one and only one reason, and that was to be¬
come leaders in the next generation marketplace. And eight months ago we
were the new kids on the block, with a lot of hopes and dreams and aspira¬
tions and an absolutely o percent market share.

—Jim Whims

When it came to marketing PlayStation in the United States, Sony left little
to chance. Sony Computer Entertainment of America (SCEA), the American
organization charged with the task, was built around a group of experienced
game-industry veterans.

Steve Race, the president of SCEA, had been the vice president of Atari’s
European division during the heyday of the 2600. After the crash of 1982, Race
and several friends founded Worlds of Wonder—the company that created
Teddy Ruxpin and helped market the Nintendo Entertainment System. In
1990, as Tom Kalinske became the new CEO at Sega of America, he brought
Race in as a marketing consultant.

Race’s senior vice president of marketing was Jim Whims, who, like Race,
was an ex—Worlds of Wonder executive who had a long history with video
games that included stints with iMagic and Data East. Tall, comfortable around
strangers, and athletically built, Whims had the look of a leader.

506 The "Next" Generation (Part z)

For his head of third-party relations, Race hired Bernard “Bernie” Stolar,
whose roots in the industry reached all the way back to Marty Bromley and
David Rosen. In earlier days, Stolar headed a small arcade company called
Game Plan that made the 1981 game Shark Attack. Knowing that Sid Sheinberg,
head of Universal Studios, might approach him about a possible infringement
on the movie Jaws, Stolar met with and outsmarted the intimidating studio
chief. Thinking he was giving Stolar a break, Sheinberg said that he would not
demand a royalty on the first 1,000 machines. Stolar responded by cutting his
manufacturing run after building the first 990.

As the person responsible for working with third-party companies, Stolar
played a major role in luring outside developers to make games for PlayStation.
Some of his decisions proved absolutely brilliant. Stolar actively courted Wil¬
liams Manufacturing and arranged a six-month exclusive deal for the highly
anticipated game MortalKombat3, a move that virtually guaranteed PlayStation
sales among members of the game’s rather large cult following. On the nega¬
tive side, Stolar felt that role-playing games, while very important in the
Japanese market, were unnecessary in the United States.

Race hired an old friend named Peter Johnson away from Sega to handle
marketing and communications. Though Sony was new as a company, its
administrative team was composed largely of seasoned game executives.

We had a lot of people with very, very good industry experience, and quali¬
fied guys who I could trust and women who I could trust who had either been
in the industry or I had worked with before in some capacity. We got enor¬
mously lucky with the talent pool that we had, and we got dealt a great
product, and then the rest we just put together.

—Steve Race

In October 1994, tragedy struck Sony. Peter Johnson, the man Race had
hired away from Sega to run marketing communications, was killed in a plane
crash while traveling to the East Coast on business.

I was a basket case for a long time. Peter and I had worked at three different
companies together and he was a close personal friend. The night before the

The "Next” Generation (Part z) 507

crash, I had gone to a Rolling Stones concert with him and his wife. I was
devastated by it.

—Steve Race

There was never any question about the quality of the PlayStation hardware
or the personnel Race hired, but other issues plagued SCEA. Kutaragi and other
executives at Sony did not always share Race’s vision for how to run the com¬
pany. They fought over everything from the length of the cords connecting the
PlayStation’s game pads to the launch price for the console itself.

I’d been over to Japan a couple of times and we disagreed about pricing, po¬
sitioning, advertising, color, and ninety-nine other things that you would do
for a product to Americanize it or to make it acceptable in the United States.

It was funny. I would say, "Why are we doing this controller? It should
look like this or it should be this size.” Norio Ohga was the president of Sony
at the time, and they’d sort of say, ” 0 h, no, no, no. Mr. Ohga wants it this
way. Mr. Ohga designated this one.”

I kept thinking to myself, what is a guy running a $44 billion company
doing going around with controllers for a game system?

—Steve Race

Race’s problems with Sony Computer Entertainment in Japan were well-
known throughout the industry. Rumors about Race being fired were
widespread. Opinionated and outspoken, Race sometimes seemed like a
strange fit for the role of an American executive working in a Japanese com¬
pany. The battles continued as Sony prepared for the official American
unveiling of PlayStation at E3.

Inside Sega

Clearly, Sega broke some promises about times and dates and all that. If you
look at the recent legacy with Sega, between Sega CD and 32X and ... well,
I guess Nomad’s still around, there were a lot of disappointing products that

508 Hie "Next" Generation (Part 2 )

[Sega said] were next-generation systems that weren’t fulfilled. They cer¬
tainly weren’t supported by the third-party community.

—Jim Whims

As Trip Hawkins had predicted, Sega had stretched its resources by maintain¬
ing too many incompatible platforms. By the end of 1995, Sega of America
found itself juggling seven separate and incompatible game platforms—Sat¬
urn, Genesis, Game Gear, Pico, Sega CD, 32X, and 32X CD. Amazingly, even
Master System was rumored to still be active in some South American mar¬
kets. There was no way one company could support every one of those systems.
With an eye toward the future, Sega Enterprises CEO Hayao Nakayama made
the logical choice to concentrate on Saturn.

From the Japanese perspective, Nakayama made the only possible decision.
Mega-Drive, the Japanese name for Genesis, never caught on in Japan. Sat¬
urn, on the other hand, was outselling PlayStation and looked to be the
dominant system. What made sense in Japan, however, was about to become
a disastrous move in the United States.

I would absolutely defend the American management on that. Tom knew that
the 16-bit business was going to be there. Paul Rioux knew it, and so did Shenobu
Toyoda; but Japan refused to believe. They were convinced, and they would
not listen to Tom [Kalinske]. They would not listen to Paul [Rioux], They would
listen to no one and they absolutely bullied the U.S. into launching the system.

It very much compromised their ability to keep the 16-bit business.

—Michael Latham, former head of Omega Team, Sega of America

Back in the United States, the magazine Next Generation ran an article in
which the internal components of PlayStation and Saturn were shown side
by side. The editorial staff had developed a preference for PlayStation over
Saturn, based on game performance, and that preference became far more
pronounced as more games were published. Next Generation's editors described
PlayStation’s design as “elegant” because all of the components fit neatly on
one single circuit board. The Saturn design, by comparison, seemed jumbled,
with its CD-ROM controller placed on a separate daughterboard.

The "Next” Generation (Part 2 ) 5®9

I think a lot of people are confused about that. I’ve heard a lot of people say,

"Oh gee, look at all these chips they’ve got.” Well, there’s a reason for it and
the reason is that our people feel that they need the multiprocessing to be
able to bring to the home what we’re doing next year in the arcades. That
kind of power requires what we’ve got and we don’t think the other ma¬
chines can take advantage of.

—Tom Kalinske, former CEO, Sega of America

In theory, Saturn, which featured two Hitachi SH2 32-bit central processing
chips, was more powerful than PlayStation. The truth was that the SH2 chips
were somewhat inferior to the chip Sony had selected. There was even a rumor
that Nakayama had selected the chip as a favor to a golf buddy. All rumors aside,
programming Saturn was difficult, and allotting different operations to both of
the processing chips proved nearly impossible. In an interview with the press, Sega
star arcade-game designer Yu Suzuki openly admitted having trouble with the
dual-processor design while working on the Saturn version of his hit game Daytona.

As E3 approached in mid-May, Sega announced that the release of Saturn
would take place on September 2—Sega Saturn Saturday. Behind the scenes,
however, Sega was preparing an E3 surprise.

Inside Nintendo

I realize that Nintendo keeps saying [that the Ultra 64 will be released in]

1995, but there is absolutely no evidence to support that. What they did in
Chicago [at the 1994 Summer Consumer Electronics Show] was show people
the coin-op hardware, which has absolutely no connection with the Ultra 64
from an internal standpoint. No way, Jose. It’s a big promotional head fake.

If he [Nintendo vice-president Peter Main] told you six months, mark your
calendar and call him on that date. He'll tell you, "No, six months from now,”
and he’ll still be blowing smoke at that point.

—Trip Hawkins

On August 23, 1993, Nintendo announced plans to collaborate with Silicon
Graphics on “Project Reality,” a new technology that would be incorporated

510 The "Next” Generation (Part 2 )

into a future game console. The pairing seemed perfect. Silicon Graphics was
the leading company in high-end computer graphics. Hollywood special-effects
studios used their workstations to create the effects in such movies as Terminator
2 and Jurassic Park. The new system, which Nintendo claimed would be released
in 1995, would include a modified version of the technology used in Silicon
Graphics’ expensive Indigo workstations and would sell for under $250. Nintendo
would not give many specifics on what the system’s architecture would look
like, but it was stated that the final product would have a 64-bit processor.

He’s [Howard Lincoln] convinced that the new Nintendo momentum
will carry over into 1997. “One of the things I find most incredible,” he
says, “is how anyone could possibly conclude that Nintendo will not have
a predominant share of the next-generation platform. We have the best
technology—namely, Silicon Graphics’ proprietary technology. Mr.
Nakayama [Sega’s president] wanted that technology as badly as Yamauchi
[Hiroshi Yamauchi, president of Nintendo Co., Ltd.), but Yamauchi got
it,” he says. “Sega and Sony have world-class 32-bit systems. But unfor¬
tunately for them, we will be marketing a world-class 64-bit system at
the same time.” 2

In 1994, Nintendo kept up a fairly regular rhythm of announcements. In
March, Nintendo of America chairman Howard Lincoln announced that the
British developer Rare, Ltd., would make games for Nintendo’s new Project
Reality console. This announcement was made two months before the unveil¬
ing of Donkey Kong Country, so few people knew anything about Rare. A quick scan
of old Nintendo cartridges would have revealed that Rare was the company
behind Battle Toads, but that was the only thing anyone outside of Nintendo knew.

On May 2, 1994, Nintendo announced that a Scottish firm called DMA De¬
signs had signed up to do games for Project Reality. No better known than
Rare, DMA had one significant claim to fame—it was the company that cre¬
ated Lemmings, Psygnosis’s one big game. Three days later, Nintendo announced
that Project Reality would use cartridge media instead of CD-ROM. This was
a much more significant announcement.

At the time, Howard Lincoln claimed that the reason Nintendo decided to
stick with cartridges instead of moving to CD-ROM was speed. With CD-ROMs,

The "Next” Generation (Part z) $11

game consoles access information and load it into memory. These “access
times” could take a few seconds with early CD-ROM drives such as the ones
used in Sega CD and 3DO. Nintendo said that waiting for the games to load
up diminished the experience. Because cartridges have ROM chips built into
their circuits, access time is not a problem.

What makes Nintendo’s platform so much cheaper than competing
machines is the lack of a CD-ROM drive. Critics claim this is a great weak¬
ness. Everyone thinks the transition to CD-ROMs is inevitable because
they can be manufactured much more quickly and inexpensively than
cartridges. They also have much more memory, which allows develop¬
ers to throw in movie and music clips. There is a problem, however. There
is a difference in data-access speed of 1,000 times. To get around this, com¬
panies have had to build in lots of internal memory in the machines.
But that is expensive. For software houses, it is cheaper to make CD
games, but Nintendo says its cartridges will be priced the same as CDs
and that for hot titles there will be plenty of margin for profit. 3

Cartridges are a very expensive medium, however, and many game devel¬
opers resented Nintendo’s decision to continue using them. Sony’s licensing
structure was built around a $10-per-game arrangement that included manu¬
facturing disks, manuals, and packaging. Compared to the cost of pressing
CDs, manufacturing cartridges for Project Reality would be prohibitively ex¬
pensive. At the time, it cost more than $20 to manufacture an 8-megabyte
cartridge, compared to less than $2 to press a 640-megabyte CD. And the ad¬
ditional storage space on CDs could be used for video clips, animations, audio
files, music, and larger games. Even as Lincoln told the media that Nintendo
had forms of compression that would vastly increase the amount of informa¬
tion that could be crammed into an 8-megabyte cartridge, it was widely
accepted that Project Reality games would simply be smaller than those on
Saturn and PlayStation.

Speculation about why Yamauchi had chosen cartridges ranged from curi¬
osity to antagonism. Tom Zito, founder of Digital Pictures, said that Nintendo
went with the cartridge format because cartridges are harder and more ex¬
pensive to copy—making it easier for Nintendo to avoid piracy. Other game

512 The "Next” Generation (Part 2 )

company executives claimed Nintendo went with cartridges so that it would
have complete control over the manufacturing of games for the console and
maximize its profits.

It was a combination of things. There was a technology element to it and
there was that counterfeiting element to it, big time.

The technology argument, I think, at the time was legitimate. ... At the
time, Takeda [Cenyo Takeda, the Nintendo engineer working with Silicon
Graphics to design Project Reality] and those guys felt very strongly that it
was absolutely essential to have it on a cartridge in order to do the kind of
things that we wanted to do with Super Mario.

The counterfeiting thing, I think, turned out to be correct, with the huge
counterfeiting problem that Sony has.

i’ve seen speculation about how this was some plot to control third-party
publishers. That’s completely nonsense. There is just not a grain of truth in
that thing. No discussion like that ever occurred; that was never an issue. It
was strictly technology and counterfeiting.

—Howard Lincoln

In the days leading up to the 1994 Summer Consumer Electronics Show,
Nintendo made two more announcements. On June 5, Lincoln announced
that Alias Research, one of the leading computer-graphics companies, would
create custom software tools for Project Reality. On June 23, Lincoln an¬
nounced that the final name of Nintendo’s new console would be “Ultra 64”
and that Acclaim Entertainment would create a game called Turok: The Dinosaur
Hunter for it. Then came the closed-door meetings at CES, in which reporters
and analysts were shown glimpses of Killer Instinct and told they were running
on prototype Ultra 64 hardware.

On January 5, 1995, Nintendo announced that Silicon Graphics had com¬
pleted the final chip set for Ultra 64 and gave the console’s final specifications.
Critics, such as Trip Hawkins, openly challenged Nintendo’s assertion that
Ultra 64 would be ready in 1995. But with the announcement that the chip set
was complete, Nintendo’s claim that a powerful system would be ready later
that year seemed more believable.

The "Next” Generation (Part z) $13

According to the announcement, Ultra 64 would indeed have a 64-bit pro¬
cessor—easily the fastest processor in any of the next-generation consoles. Ultra
64 would also have a separate graphics processor that could generate 100,000
texture-mapped polygons per second, while handling several graphics-enhancing
processes such as ray-tracing, anti-aliasing, and tri-linear mip-mapping inter¬
polation—processes that were not available on PlayStation or Saturn.

After announcing that the chip set was complete, Nintendo began disclosing
new partnerships with more “dream team” developers. Williams Manufactur¬
ing, the arcade company behind such Acclaim cartridge hits as NBA Jam and
MortalKombat, joined on, as did noted PC flight simulation publishers Sierra and
Spectrum HoloByte. Angel Studios, a computer-graphics company best known
for making special effects for movies, and Paradigm Simulation, a company that
designed high-end virtual reality software, joined the team. Then Ocean of
America and GameTek—and the team started looking haphazard. Once, when
asked why he selected Ocean as part of his “dream team,” Lincoln was unable to
stop himself from laughing. When he was able to respond, he smiled and said,
“I’m surprised you did not ask, ‘Why GameTekf ”

But Ultra 64 was not the only “next-generation” system Nintendo planned
to release in 1995. Nintendo’s research and development Team 1, led by Gumpei
Yokoi, had created a portable game system called Virtual Boy.

Compared to the multimillion color-producing consoles being created by
Sega, Sony, and Nintendo, Virtual Boy was an anomaly. Supposedly the heir
to Game Boy, it had single-color graphics. The system was built around red
LED arrays, so it only showed red objects against a black background. The
catch, however, was that it had two mirror-scanning stereoscopic displays
that enabled it to create the illusion of three-dimensional objects. Reflections
Technology, a Massachusetts-based company that was not normally associ¬
ated with games, had created Virtual Boy’s stereoscopic LED technology years
earlier. But marketing the idea to game companies had proved difficult.

I turned down Reflections Technology twice. They came to me when I was with
Mattel and showed me this thing called "Red World.” Then they came to us be¬
fore going to Nintendo and I looked at it and thought, "This looks very familiar. ’’

—Tom Kalinske

$llf The "Next” Generation (Part z)

When Reflections Technology executives took their idea to Nintendo,
they found a willing advocate in Gumpei Yokoi. Yokoi, who designed Game
Boy, was looking for a new technology that might “encourage more cre¬
ativity” in games.

I saw that the market was so saturated with video games that it became nearly
impossible to create anything new. There were a lot of creative ideas for
games for the NES and for Game Boy. But there were not so many new ideas
for games for the Super Nintendo. I think game companies ran out of new
ideas. I wanted to create a new kind of game that was not a video game, so
that designers could come up with new ideas.

—Gumpei Yokoi, former head of Research and Development Team i,

Nintendo Co., Ltd.

Yokoi appears to have been less than excited about creating a system with a
single-color display. He looked into making a color version of the technology
but found that it would have to retail for over $500, far too expensive.

In the beginning of the development, we experimented with a color LCD
screen, but the users did not see depth, they just saw double. Color graphics
give people the impression that a game is high tech. But just because a game
has a beautiful display does not mean that the game is fun to play.

i also wish to explain that LEDs come in red, yellow, blue, and green. Red
uses less battery and red is easier to recognize. That is why red is used for
traffic lights.

—Gumpei Yokoi

As the project progressed, Yokoi made his new game console less like a vir¬
tual reality head-mounted display and more like a Viewmaster. Deciding that
head-tracking caused motion sickness, he created his system without track¬
ing technology. Then he decided that wearing a heavy helmet was
uncomfortable, so he mounted the unit on a stand. Instead of a visor, he ended
up with a console shaped like a diver’s facemask with a rubberized seal for
blocking outside light.

The "Next” Generation (Part 2 ) 5*S

Nintendo first announced work on a virtual reality project in the summer
of 1994. In November, the console was unveiled at Shoshinkai, a proprietary
trade show Nintendo held in Tokyo every winter. The general reaction was
less than favorable. One reporter dubbed the system “Virtual Dog.”

The November unveiling of Virtual Boy in Japan signifies an impor¬
tant change in direction for Nintendo. Either it has gone completely
mad or it deems the future of videogaming to be crude, red, and likely
to induce headaches.' 1

At the show, Nintendo announced that Virtual Boy would retail in Japan
for 19,800 yen (approximately $207). Show attendees seemed unimpressed by
the hardware and equally unimpressed by the games, which included a re¬
make of the 1981 arcade classic Mario Bros., a pinball simulation, and a boxing
game called Telero Boxer. Of the three, only Telero Boxer tried to take advantage
ofVirtual Boy’s 3D capabilities.

Even worse, several people who tried the system complained about having
headaches after using it. Players needed to focus the mirrors inside Virtual
Boy before every use to avoid getting headaches. And even if they did, staring
at the red and black screen for prolonged periods of time could still produce
headaches or dizziness. By the time Virtual Boy came to the United States, it
bore a statement warning that extended use could cause headaches.

In January 1995, Nintendo of America unveiled Virtual Boy at Winter CES
in Las Vegas but did not give specific launch information and only showed the
partial games that were shown at Shoshinkai. For final launch information,
reporters would have to wait for E3.

Nintendo Comes listi

On May 4, 1995, a Wall Street Journal reporter named Jim Carlton interviewed
Greg Fischbach about Acclaim’s annual report. As he reviewed the report, he
noted that while Acclaim had earnings projections for Saturn and PlayStation
sales, there were no projections for Ultra 64 sales. When he asked Fischbach
about this, Fischbach quickly said, “No comment.”

Armed with this information, Carlton called Nintendo marketing and com¬
munications manager Perrin Kaplan and told her what he had found. She
said she understood and asked for one hour to prepare a response. Kaplan

§l6 The "Next" Generation (Part 2 )

went directly to Howard Lincoln, chairman of Nintendo of America, and
Minoru Arakawa, president of Nintendo of America, and told them what had
happened. With no other option, they admitted that Ultra 64 would not be
released in 1995, and Carlton had a scoop for the next day’s paper.

The next morning, Howard Lincoln came in early and called reporters
around the country to warn them about the Wall StreetJournal article and to let
them know that Ultra 64 would not be out for another year.

The Really Big Show

The first Electronic Entertainment Expo took place in the Los Angeles Con¬
vention Center on May 11—13, 1995, and all the major players were ready to
put on a show. On the first day, Tom Kalinske, president of Sega, and Olaf
Olafsson, president of Sony Electronic Publishing, were scheduled to give key¬
note presentations from 8:30 a.m. to 9:45 a.m. Kalinske discussed Sega’s heritage
in arcades and as a game company. He announced that the retail price of the
Saturn would be $399 and began describing what a powerful system it was.
Then he gave the punchline—the console had already shipped. September 2,
Sega Saturn Saturday, was still going to be the official launch date for Saturn,
but 30,000 systems had already been shipped to four key retailers: Toys “R”
Us, Babbages, Software Etc., and Electronics Boutique.

Next came Sony’s turn to drop a bomb. Olafsson was supposed to discuss
“what it’s going to take to be successful storytellers in coming years.” The
topic obviously gave him room to discuss the technological strengths of
PlayStation, and he was expected to announce the system’s price and launch
date. At the time, it was generally assumed that PlayStation would likely be as
expensive, or possibly more expensive, than Saturn. Olafsson started his speech
as expected, then interrupted himself.

Olaf [Olafsson] was about two-thirds of the way through his speech when he
said, "I’d like to call up Steve Race to tell you a little bit more about the Sony
PlayStation.” So I walked up. I had a whole bunch of sheets of paper in my
hands, and I walked up, put them down on the podium, and I just said,
"$299,” and walked off stage to this thunderous applause.

—Steve Race

The "Next” Generation (Part z) JIJ

Sony clearly won the first battle of E3. By sending Saturns to four retailers
only, Sega offended several of its best outlets. Kay s 'bee Toys responded by drop¬
ping Sega from its lineup. More important, releasing in spring or summer,
typically slow seasons for video game hardware sales, did not give Sega any
advantage. Having a surprise launch meant that Sega had forfeited any chance
of having a big send-off for Saturn and gave the appearance of being afraid of
head-to-head competition with PlayStation.

I think Japan was scared of PlayStation; at least more than we were in the
U.S. Tom was not afraid. Tom was ready to go to battle because Tom was
used to hardware that wasn’t necessarily the best in the market anyway.

—Michael Latham

Sony’s surprise was more effective. Even though Saturn came bundled with
a highly desirable game, Virtua Fighter, it was too expensive for the consumer
electronics category. The $399 price point was known to be more of a high-
end electronics ticket, something that people might pay for a stereo
component but not for a video game console. Sega was making the same mis¬
take Trip Hawkins had made with 3DO.

I’m sure that price came from Japan. Tom was frequently dealt some very
difficult cards to have to play, and he did a very good job of melding his
deck and doing as much as he could with the cards that he was dealt. My hat
is off to the guy.

—Steve Race

While Nintendo, Sega, and Sony threw million-dollar parties at E3, Trip
Hawkins held a quiet and elegant dinner at a fine restaurant. In his typical
socially graceful fashion, he left one seat open at every table and shuttled
from one table to the next through the meal so that he could speak with all
of his guests. During the meal, a reporter asked him what he thought of
Sony. Sighing and looking a bit tired, Hawkins replied, “For a company that
is so new to the industry, I would have hoped that Sony would have made
more mistakes by now.”

Jl8 The "Next” Generation (Part z)

Nintendo executives focused on Super NES, Game Boy, and Virtual Boy
rather than Ultra 64. There were no Ultra 64 prototypes for guests at the
Nintendo booth, and by this time everybody knew that Nintendo had no plan
to release the console in 1995. Lincoln did announce, however, that Virtual
Boy would come out in August for a suggested retail price of $179. Nintendo’s
other big announcements were three Super NES game— Donkey Kong Country 2,
Killer Instinct, and Yoshi’s Island*

The Launch Season Begins

One problem with launching Virtual Boy, along with the general lack of in¬
terest most consumers had in the product, was that the only way to see its 3D
images was to place your face against it. This meant that shoppers would not
see the 3D images as they walked past them in stores. Also, the system could
not be effectively demonstrated on television.

Virtual Boy was released on August 14 to generally lackluster reviews. Al¬
though reviewers at Entertainment Weekly and Popular Science gave it glowing reviews,

* An interesting story lies behind Yoshi’s Island. When Shigeru Miyamoto first demonstrated
the game to Nintendo’s marketing department, it was rejected because it had Mario-related
graphics rather than the waxy, prerendered graphics of Donkey Kong Country. Rather than
change to an artistic look he did not like, Miyamoto made the game even more cartoon¬
like, giving it a hand-drawn look. The second version was accepted.

Miyamoto, who is rightfully proud of his work, was offended that the first version was
rejected. That same month, I interviewed Miyamoto and Tim Stamper, creator of Donkey
Kong Country, together and noticed that Miyamoto was a bit hard on Stamper, making such
statements as "Donkey Kong Country proves that players will put up with mediocre gameplay
as long as the art is good.”

In a later interview, Miyamoto admitted that Yoshi’s Islatidhad been a touchy subject
at the time:

I think that it happened after Donkey Kong Country mas introduced. In comparison with
the graphics of the Super Donkey Kong, there was not enough punch to Yoshi’s Island.

That was what I was told by the marketing people.

I intensified my hand-drawn touch on Yoshi’s Island from the initial part of the
program. Everybody else was saying that they wanted better hardware and more
beautiful graphics instead of this art.

Even while I was working on the Super Mario World, I was thinking that the next
hero should be Yoshi. Other people have created games based upon Yoshi. .,. Yoshi’s
World Hunters, Yoshi’s Egg, Yoshi’s Cookie, and so forth—games that I don’t really like. So I
decided that I should make an authentic Yoshi game.

The "Next” Generation (ftirt z) 519

game magazines panned it. When the editors at Next Generation opened the box
in which their Virtual Boy was packed, they began playing volleyball with the
inflated bags Nintendo had used as packing material. “It was the most fun we
were ever going to have with anything in that box,” editor in chief Neil West
explained when asked about it.

By mid-August, the industry had already lost interest in Virtual Boy, as
Microsoft became the focus of worldwide attention. On August 24, 1995,
Microsoft launched Windows 95 (Win95), a major upgrade from previous Win-
dows operating systems that included technology for running games smoothly.
Though Microsoft published a few games to accompany the launch of Win 95,
it would take months before people realized the deep impact the new operat¬
ing system would eventually have on gaming. By the end of the year, people
would even be able to play first-person shooters without leaving the Windows
environment, making computer game installation suddenly easier.

Though it did not make computers as simple to use as consoles, Win 95
went a long way toward closing the gap. Computer games did not catch up to
console games in overall sales, and the top console games still sold at two to
three times the rate of the top PC titles, but video game publishers began eye¬
ing PCs as a viable new platform.

The next big event was the September release of PlayStation. One person
who was not going to see this release, however, was Steve Race. On August 7,
Race resigned as president of Sony Computer Entertainment of America and
resurfaced quickly at Spectrum HoloByte. Few people were surprised by Race’s
departure; his ongoing battles with his employers in Japan were well-known.

We had celebrated differences of opinion as to where the product should be
and how it should be priced and positioned. I wouldn’t say we had scream¬
ing matches, but we just had long pregnant pauses, and I questioned their
heritage, from whence they came. ... something about female dogs.

—Steve Race

Sony shipped 100,000 PlayStation consoles for release on September 9, al¬
most all of which had been prereserved. The entire shipment sold out. Two
days after the release, Sony had already sold more PlayStations than Sega had

520 The "Next” Generation (Part z)

sold Saturns in the five months since the surprise announcement at E3. By
the end of the year, Sony boasted of having shipped 800,000 PlayStations into
North America while Sega claimed to have sold 400,000 Saturns.

We told people we would ship on September 9th. We shipped on September
9th. We told them we’d have 10 to 15 titles in the first 30 days, and we had 15
titles in the first 30 days. We said we’d have 50 new titles out by the end of
the calendar year. We had 55 out by the end of the calendar year. We built
credibility not only with the consumer, but with the trade.

When you have two competitors as firmly entrenched as Sega and
Nintendo, which are both great companies, make no mistake about it, you
have to differentiate yourself. I think we did that.

—Jim Whims

In the meantime, things unraveled for 3DO and Atari. As far as the public
was concerned, Nintendo had blown a hole in 3DO’s claims of technological
superiority with Donkey Kong Country. In 1995, Crystal Dynamics released a game
about a wise-cracking Hawaiian lizard called Gex that brought the same highly
polished graphical look to 3DO and supplemented it with the voice files that
would never have fit in a Super NES cartridge. Standup comedian Dana Gould
performed the voice-over for Gex, the main character, giving the game a cer¬
tain charismatic wit. Realizing that Gex was the most surefire game in the 3DO
lineup, Panasonic bundled it with their company’s version of the console*

Gex and other highly improved games were not enough; 3DO had lost its
position as the most desirable game console the moment Tom Kalinske an¬
nounced that Saturn had already shipped. By the time Sony launched in
September, the only tricks 3DO manufacturers Panasonic and GoldStar had
left were to offer rebates and to bundle more software. As one GoldStar print
ad stated, “The GoldStar 3DO system is jammed full of space-age technology
and comes with lots of FREE stuff.”

3DO’s window of dominance had been shut, and, in his own evangelical
way, Hawkins helped close it. Seeing that there was no way to compete with

* Once, while visiting a game store, Gould asked if a clerk had Gex. “It’s pronounced Jex,”
the clerk replied, “it’s about a dinosaur.”

The "Next” Generation (Part 2 ) |2I

Sega and Sony, he began talking about the disappointment of the 32-bit gen¬
eration and the real strengths that 64-bit processing had to offer. Hawkins
changed his focus to M2, a 64-bit console that he promised would shame
PlayStation and Saturn. M2 never materialized. 3DO sold the technology to
Matsushita for $100 million, and though many game companies did receive
M2 development kits, no M2 systems were ever released.

Things were even worse at Atari. Atari president Sam Tramiel struggled to
find ways to bolster sales and cut costs. In 1995, he stopped manufacturing
Jaguars and concentrated entirely on selling off the existing inventory. He
slashed the price of the console to $149, released an attachable CD-ROM pe¬
ripheral, and openly courted new game developers. He ran infomercials to
try and sell additional consoles, but the infomercials did not reach the right
audience. Toward the end of 1995, Atari finally convinced Wal-Mart to carry
Jaguar in its superstores, but by that time people knew about Saturn and
PlayStation and weren’t interested. Nothing seemed to work. The company
was hemorrhaging money. The end came when Sam Tramiel suffered a m i l d
heart attack and his father, Jack, came in to run the show in his absence.

Sam had just finished riding a bicycle. He got off the bike, felt somewhat
faint, felt a pain in his chest, drove himself to the Stanford Medical Center,
and there was informed that he had had a mild heart attack.

jack came back in [to Atari while Sam was recovering]. Jack knew how
bad it was. It wasn’t that Jack didn’t know, Jack knew. Jack knew all the
numbers, all the time.

—Bernie Stolar, president and COO, Sega of America

Many theories arose about why Jack Tramiel purchased Atari. Some people
said that he bought the company as a means for exacting revenge on Com¬
modore, the company that he founded, then left under unpleasant
circumstances. Another theory was that he purchased Atari to make one last
fortune, enough money to ensure the future of his three sons, Sam, Leonard,
and Gary. A third theory suggested that he bought Atari as a way of bringing
his sons together. If any of these were his reasons, he succeeded. Atari outlasted
Commodore, had a few enormously profitable years, and united his sons in a
common goal.

522 The "Next” Generation (Part 2 )

On July 30, 1996, Atari Corp. merged with JTS Corporation, a company
that manufactured 3.5-inch disk drives, in an $80 million stock swap. Jack
Tramiel was active on the JTS board after the merger. Two years later, Hasbro
Interactive purchased the Atari library from JTS.

We were trying to license Jour products, including Centipede, Missile Com¬
mand, Tempest, and Pong. During the licensing arrangement, we realized
that |TS was in financial dire straits, so we decided to take it to a higher level.... we
moved very quickly and very aggressively and turned this into an acquisi¬
tion opportunity. We acquired all of the trademarks, patents, copyrights,
and intellectual property for all of Atari, lack Tramiel was involved in the
discussions. He was a tough negotiator, as always, but they needed money.

The acquisition cost us $5 million.

—Tom Dusenberry, president, Hasbro Interactive

Time Warner put Atari Coin-Op on the sales block in 1996 as well. In an in¬
teresting twist, one of the first people to bid on it was Nolan Bushnell, the man
who originally had founded the company. Time Warner turned down his offer,
however, and sold Atari to a familiar competitor—Williams Manufacturing.

Nintendo Unveiled

In late November 1995, Nintendo finally unveiled its 64-bit, cartridge-based
game console at its Shoshinkai trade show, held that year in a cavernous, ware¬
house-like convention center called the Makuhari Messe. As a proprietary show
featuring only games for Nintendo systems, Shoshinkai was considerably
smaller than E3 or the Tokyo Game Show. The entire show fit into one section
of the Makuhari Messe and filled less than two-thirds of the floor.

Nintendo’s next-generation console underwent three name changes by the
time it was unveiled. First known as Project Reality, then Ultra 64, the final
name of the console was “Nintendo 64 (N64).” Although Nintendo had re¬
leased many details about the new console during the months leading up to
the unveiling, no information was ever leaked about the system’s controller.
Created by Genyo Takeda and Nintendo Research and Development Team 3,
N64 had a new and revolutionary three-handled controller that featured both

The "Next” Generation (Part z) 523

a traditional digital directional pad and a new analog directional lever. The T-
pad, which was especially good for fighting games, worked a lot like a light
switch. It did not read how hard you pushed, it simply noted when you pushed
down on it and from what direction you pushed, then moved you in that
direction at a constant speed. The analog lever, on the other hand, responded
to pressure. Push slightly to the right, and the character you were controlling
would inch in that direction. Push the lever all the way over, and your char¬
acter would run at full tilt.

We tried a motion sensor wristwatch-style controller. We made a prototype
and applied for a patent. Everything was good, but players didn’t understand
the internal mechanism and had trouble controlling it, so we abandoned it.

—Cenyo Takeda, manager RSD Team 3, Nintendo Co., Ltd.

Hiroshi Yamauchi was clearly proud of the new controller. In a lengthy
speech given the first day ol the show, he said, “If you think this is just an¬
other game pad, then you know nothing about video games.”

Most of the floor space was dedicated to Super Famicom (the Japanese name
for Super NFS), with a fairly large section for Game Boy and a much smaller
corner of the floor for N64. Obviously, most people at the show crammed in
around the N64 area, taking turns playing the only two games on display—
Super Mario 64 and Kirby's Air Ride. Although the show ran smoothly, it was
obvious that some decisions had not been made until the morning of the show.
When an American reporter emerged from the N64 area, Howard Lincoln
approached him and asked what he thought of the game. “The Mario game
was great, but that other game wasn’t amazing.”

“We’re only showing one game,” replied Lincoln, who had not been told
about a last-minute decision to show Kirby’s Air Ride.

The Last Days of Yokoi

Across the floor of Makuhari Messe, in the corner farthest away from N64,
Gumpei Yokoi manned the little booth where Virtual Boy was being displayed.
As he always appeared when in public, Yokoi was impeccably dressed in a dark
suit, crisp white shirt, and modest red tie. He was a thin man with narrow

524 The "Next” Generation (Part 2)

shoulders whose head always appeared slightly large for the tiny frame of his
body. The touches of white along his temples added to his dignified air. Few
people stopped by his booth, so Yokoi was able to personally demonstrate
games to those who did.

This was his punishment, the Japanese corporate version of Dante’s Inferno.
Gumpei Yokoi, the engineer who had created Nintendo’s first toys in his spare
time, had been placed in the proverbial doghouse for creating the debacle
that was Virtual Boy. Having received shipments of Virtual Boy less than one
year earlier, Tokyo stores were now discounting it so heavily that customers
could buy it for less than $100—under half the original cost.

When employees make high-profile mistakes in Japan, it is not unusual for
their superiors to make an example out of them for a period of time, then
return them to their former stature. Such seemed to be the case with Yokoi.
Yamauchi would pretend to have forgotten that Game Boy, Metroid, and Dr
Mario had all come from Yokoi’s team; would leave him to man a booth with
a dying product; then eventually would bring him back into grace. So, armed
with Bound High, a first-person perspective game in which players sat inside a
bouncing ball and tried to steer it, and an adventure game called Dragon Hopper,
Yokoi greeted buyers and the media and cheerfully tried to explain that there
was still life in Virtual Boy. Not many people came by, but he seemed happy
to have an audience when they did.

Yokoi left Nintendo the following August, after spending nearly thirty years
with the company. He started his own handheld game company and named
it Koto, a word meaning “small town.” (It is also the name of a classical Japa¬
nese string instrument.) His company’s first project was a monochrome
handheld game system that was similar to Game Boy but slimmer and with a
better speaker and a larger screen. Eventually named Wonder Swan, Yokoi’s
new game system had other nice touches, too. It had directional pads in two
different corners so that it could be used to play games with either vertical or
horizontal orientation. It also operated on a single AA battery. Yokoi licensed
the new handheld to Bandai, Japan’s largest toy manufacturer.

On October 4, 1997, Yokoi and a friend were involved in a small accident on
the Horukiko Expressway in Kyoto when they rear-ended another car. Both
men climbed out to inspect the damage and were struck by a passing car. While
his friend suffered fractured ribs, Yokoi sustained much more serious injuries

The "Next” Generation (Part 2) 525

and died two hours later. As the father of Game Boy, his death attracted a lot of
media attention. In the United States, Yokoi’s obituary was read on National
Public Radio and appeared in the New York Times and People magazine.

In 1999, Bandai released a new handheld video game system called “Won¬
der Swan.” Though obsolete compared to Game Boy Color, Wonder Swan
was launched with some fanfare. One of the first games for the new handheld
was a curious strategy game in which players tried to complete circuits of
lines by adding tiles with junctions. The game was called Gunpei*

* Several people who have written about Yokoi have used an “n” instead of an “m” when
spelling his first name. Although his name appeared with an “m” on his business card,
David Sheff chose to use the "n” in Game Over, which may be a more appropriate representa¬
tion of his name.

The Mainstream and
All Its Perils

Things are the same as usual here. Dudley’s diet isn’t going too well. My aunt found him
smuggling doughnuts into his room yesterday. They told him they’d have to cut his pocket
money if he keeps doing it, so he got really angry and chucked his PlayStation out of the
window. That’s a sort of computer thing you can play games on.'

—Harry Potter, Fledgling Wizard

Since 1957, in America, the per capita assault rate has gone up seven-fold. In Canada,
since 1964, the per capita assault rate has gone up between four- and fivefold. In the last
15 years, in European nations, the per capita assault rate has gone up approximately
fivefold, in Norway and Greece, fourfold in Australia and New Zealand. It has tripled in
Sweden, and doubled in seven other European nations.

Now, the only common denominator in all of those nations is that we are feeding our
children death and horror and destruction as entertainment. And the worst of these is the
violent video games, the simulated training devices. 2

—Congressional testimony, Lieutenant Colonel (retired) Dave Grossman,
professor, Arkansas State University, 1999 Senate Hearings

$28 The Mainstream and All Its Perils

The Last Great Hope for Arcades

Steven Spielberg, a longtime fan of video games, made an annual pilgrimage
to the Electronic Entertainment Expo (E3), often bringing his children with
him. He was said to have several arcade machines in his home and was known
to have visited Sega Enterprises in Japan on several occasions. In 1996, three
elements came together at one time, creating the opportunity for Spielberg
to enter the arcade business in a big way.

I had been talking to Steven [Spielberg] about doing something in the ar¬
cade business for years. Then