The second prong of Bushnell’s two-pronged effort to bring arcade games to more children was a secret project codenamed Stella.
In 1975 Atari had successfully converted its smash-hit Pong arcade machine into a home version, but Bushnell worried that releasing dedicated devices that only played one game was not a sustainable business model, fearing that consumers would quickly baulk at the idea of constantly having to buy new equipment just to play whatever the latest craze was.
The solution was ultimately determined to be a microprocessor-based console – but in early 1975 microprocessors were still far too expensive to be used in a consumer product. But, luckily for Atari technology was marching along and later that year MOS Technology introduced the 6502, an 8-bit processor with a wholesale price of only US$8 – making a microprocessor-based console an achievable prospect.
Excited by the sudden viability of the project, and afraid competitors might beat them to market, Atari’s engineers sprang into action. They brought in additional talent, including Joe Decuir, who named the project Stella, after his bicycle. By December 1975 the team had designed the first prototype around the 6502 processor. By March, 1976 a second prototype had been completed, using the cheaper, feature-reduced MOS 6507 processor, and a custom chip known as the Television Interface Adaptor (TIA) that handled both graphics and sound.
Afraid that competitors would steal the design of the TIA, Bushnell made arrangements with chip manufacturers not to make similar chips for other companies – but he was too late, as Fairchild Semiconductor would beat Atari to the market, launching its microprocessor and cartridge-based console, the Video Entertainment System (VES), in November that year.
The VES used a rather sophisticated processor for the time – so sophisticated in fact that it had to come as two chips, as Fairchild couldn’t acquire a chip package with enough pins. The F8 CPU was fast enough that VES games were able to feature computer opponents – a first for home consoles – but the VES’s graphics capabilities were quite poor.
Bushnell felt Atari’s potential domination of the home videogame market slipping from his grasp. While Stella’s video was to be superior to the VES, and feature legitimate conversions of popular Atari arcade games rather than ‘clones’, Bushnell knew the tremendous advantage Fairchild enjoyed being first-to-market with its console. The development team was under tremendous pressure to get Stella to the manufacturing stage but this required money Atari did not have.
Bushnell considered taking Atari public, but the performance of the stock market at that time was poor, and Bushnell was unwilling to risk a failed IPO that could destroy Atari. For whatever reasons, private investors were either uninterested or unwilling to come up with the required capital, and Bushnell realised the only way he could get the substantial funds (US$100 million) required to bring Stella to market in time was to sell Atari outright, which he did, to Warner Communications, for US$28 million.
While Bushnell had lost control of Atari, he was comforted in the knowledge that his vision was on-track to be realised. Warners, eager to establish a dominating presence in the videogame space similar to that of their movie studio and record label, came up with the cash, and the ‘Video Computer System’ (a dig at Fairchild’s VES) was showcased in mid-1977 at the Summer Consumer Electronics Show, and consoles were shipped to retailers in November 1977, just in time for the Christmas season.
However, initial sales of the console were slow. The games available at launch were not particularly stellar, and consumers were – perhaps surprisingly – concerned about the ongoing expense of buying new cartridges, seeing the much less expensive Pong machines as one-and-done transactions that would keep their children happy for the near future. To get the price of the units down, Atari moved production to Hong Kong in 1978, but it didn’t help that much and sales were still slow.
The biggest problem was a lack of attractive titles; most of the early games released for the VCS were derivatives of older games such as Pong or Breakout, or of each other, and so despite the promise of future, more advanced games consumers saw little additional value in the immediate term over a dedicated console, such as Atari’s own Video Pinball, which came with 7 built-in games. But a few titles, released in 1979, such as Superman, an adaptation of the 1978 movie featuring more advanced graphics than had been seen previously, and Canyon Bomber led the VCS to be the best selling console of the 1979 Christmas season, at 1 million units sold.
But from Warners’ perspective sales of 1 million was just a drop in the bucket. Rather than relying strictly on its own properties for games, Atari began to license titles from other arcade manufacturers, such as Taito’s Space Invaders, which was responsible for doubling the number of consoles sold in 1980 to 2 million.
Meanwhile, Atari’s game developers began to get disgruntled over how Warners’ management treated them like employees while software developers in other industries such as home computers were receiving regular royalties from sales. Several of them quit to form companies such as Activision and Imagic – but this only helped sales of the VCS as an increasing number of (initially) better quality games landed on store shelves.
By late 1981 it looked as if there was no limit to the potential success of the platform. The VCS was king.
Atari had tried to keep software development for the VCS entirely in-house, seeing game sales rather than the consoles as the major potential source of revenue from the platform, and when several employees left to form Activision, Atari sued, but their attempt to stifle third-party development failed. This resulted in the founding of several game companies, including US Games, Telesys, Games by Apollo and others. No longer able to effectively compete in the low-end game market, Atari shifted its focus (and its pocketbook) to licensing the rights to popular arcade games and movies, which it saw as surer bets.
Unfortunately for Atari, that optimism translated into an increasing amount of laziness regarding the development of new titles, with a general assumption that arcade conversions and movie-related ‘blockbusters’ would always be successful regardless of quality, and fend off the increasing amount of third-party games flooding the market. But after the 1982 releases of the extremely shoddy VCS Pac-Man adaptation and the nonsensical ET: The Extra-Terrestrial the general public signalled they had had enough, and they simply stopped buying new games.
The party was over.