Thursday, December 25, 2014

Moving targets in the marketplace: learning lessons from Pong

“It’s easy to look back on Atari as a huge success, but we had no money. Ever. Investors looked at the video game business as being really specious.” These are the words of Nolan Bushnell, the co-founder of Atari, and regarded by many as one of the fathers of the video game industry. Bushnell spoke in Toronto recently, sharing with the audience his life of serial entrepreneurship, from some of the earliest video games like Pong, to the themed restaurant chain Chuck E. Cheese's, to more recent ventures such as anti-aging games and educational software. Oh, and he gave a college dropout named Steve Jobs his first job after ditching higher education, but more on that in a bit.

Though this blog has aimed to keep its focus on the effects of digital technologies and networks on the creative industries, today we’re going to stray from this theme, ever so slightly, and look at the earliest days of an industry that has become embedded in the devices on our desks, in our living rooms, and in our pockets. An industry that started out as a side interest of ham radio operators and electronics tinkerers and eventually became a global market worth over $100 billion.

From Pong to Breakout and meeting a young Steve Jobs along the way

According to Bushnell, his original plan upon founding Atari in 1972 was to be a research facility that then licensed games to manufacturers. “We had no money”, he reminded the crowd, so that was the option he saw that was open. Atari’s first game was based on a two dimensional tennis bat and ball (albeit square ball, which apparently was cheaper to render) and was called Pong. It became the first commercially successful video game.

But — there’s a but. Of the 150,000 Pong games released to the market, Atari did only 35,000 of them, as the patents weren't yet completed and knock-offs and copies started popping up in arcades, bars, and bowling alleys across America. 

Bushnell’s response: “We decided we were going to bankrupt the people who copied us.” And so they did. Nobody loves a good prank as much as a bunch of engineers. Bear in mind that the early video games, until about 1975 or so, had no program running in them. They were circuit boards that could play a game. From Atari’s HQ in Sunnyvale, California Bushnell was in the thick of that sector, with all the microprocessor plants just down the block. And so, Bushnell was able to have his competitors supplied with circuit boards which he stuffed with the wrong microprocessors. “And then we threw a champagne party to celebrate their demise.”

Steve Jobs, relegated to the night shift
A few years prior a recent dropout from Oregon’s Reed College decided that Atari was the coolest place to work. So he showed up at the office in the then nascent Silicon Valley and informed Bushnell that he wasn’t leaving until he was hired. Remembers Bushnell: “He didn’t shower, he smelled bad, and if he thought you were dumb he would tell you.” Not exactly a team player, so Jobs was put on the engineering night shift...which didn’t actually exist. “But I knew that his friend, Steve Wozniak aka Woz, who worked at HP, would start hanging around, which is exactly what happened.” 

Wozniak and Jobs worked on a 1-player game called Breakout, one of the three dozen or so arcade games that followed in the wake of Pong. Ultimately the duo saw bigger things on the horizon and decided to strike out on their own and start a hardware company. Nolan Bushnell was one of the people they approached to invest in their new venture. Woz and Jobs offered Bushnell one third of their company for $50,000. “I said no”, remembers Bushnell. He takes a breath, then shrugs. “I regret that.”

Jobs and Woz went on their way, and we all know what happened there. So now, back we go to the story of Pong. Bushnell recalls: “We realized we were selling coin-operated games, that would earn about 15 to 20 thousand in coin drops. It was a good business but it didn’t take a genius to figure out we were at the wrong end of the equation.” And that epiphany is what led Bushnell to two ideas: a play-at-home version of Pong, which he would release in 1975, and a foray into the restaurant business, which took place in 1977.
Play-at-home version of Pong,
retailed through Sears'
Sporting Goods department 

So Bushnell and his team created a play-at-home console version of the crazily popular arcade game Pong, and hit the road with it. First stop: the annual toy show in NYC. “We sold zero”, remembers Bushnell. Next he tried Radio Shack. Not interested. Then he approached department stores. Also not interested. Finally, he got a meeting with Sears’ sporting goods department. At the time home ping pong tables were a hot item and the buyer saw an opportunity with an electronic home version of Pong. “He asked me how many we could build. I said 25,000 — not having a clue if we could. He then came in with an order for 150,000, and we found out that we sucked down the complete world supply of knobs — so we used aluminum, wood, bakelite, plastic, whatever we could get our hands on. And that year we sold 240,000 Pong games.”

On the inspiration for Chuck E. Cheese's, where pizza collided with the fun palace

Hot on the heels of the success of the play-at-home version of Pong, Bushnell followed up on part two of his epiphany, the one about holding the wrong end of the stick by putting games into other people’s arcades. He would build his own venue. But this wasn’t just an arcade. This was a new category of eatery meets entertainment meets a warehouse-sized space filled with kids. And it would be called Chuck E. Cheese’s, where a combination of people inside mouse mascot costumes high-fived the miniature customers and giant animatronic animals performed the hits of the day. Where thousands of square feet of arcade games, rides, and jungle gyms were there for the playing, climbing, and jumping pleasure of groups of kids with dribs and drabs of tomato sauce and ice cream still fresh on their hands and shirts. It also seems to have become a popular place for adults to get into knock down, drag out fist fights.

But back to our story. So, was Chuck E. Cheese's a slam dunk for Bushnell? Again, the answer would be no.“We got the size totally wrong”, he admits. “We started with 5,000 square feet. Too small. We then went to 25,000 square feet. Too big. And it turned out 12,000 square feet was the right size. Another thing we got wrong was temperature control. We didn’t realize that with the heat load of games, people, and pizza ovens it was often 110F in there (40C). The problem of the hellfire level of temperature was eventually solved, but other problems weren’t as easy to address. Throughout the late 1970s and early 1980s the video game industry was growing rapidly, and people didn’t need to go to arcades or themed restaurants to play them. By 1984 Bushnell had no choice but to file for Chapter 11 bankruptcy and sell off the assets. Chuck E. Cheese's managed to survive under different management and ownership, but for Bushnell it ended up being a giant money pit.


But fret not. Bushnell is a serial enterpreneur, so the story didn’t end there. In fact it not only went on, it continues today, despite rollercoaster highs and lows, getting banned from companies he started, and making and losing several fortunes.

For the purposes of this blog, let's think about Pong in the context of changing economics and power structures and the evaporation of many of the traditional revenue streams for software-based products. In this way the story of Pong can be looked at as one in which the company stayed alert to not just new contexts for its products but also occupying new spaces in the value chain. Is it in licensing? Is it in software? Is it in hardware? Is it in the consumer/home market? Is it in the restaurant business? Of course the tricky part here is that a video game company knows a lot about electronics and software, and less about, say, operating a chain of 12,000 square foot themed restaurants. But, as it turned out, these were all necessary steps in getting us to today's gazillion dollar a year game industry...and in the entrepreneurial journey of Nolan Bushnell, who thought about the process as much as he did the product, and as a result remains in the game today.

And now I’ll leave you with this, the advice for today's youth Bushnell shared with the audience at the recent talk in Toronto. I don’t think any of these things are part of any curriculum (is typing still taught at high school?), but probably should be.

With thanks to Martin Goldberg for additional information & clarifications about the history of Atari.