In 1972, a 29 year old Nolan Bushnell and a 35 year old Ted Dabney were fresh off a sort of successful failure in an arcade game known as Computer Space, which was more or less just a very blatant rip-off of a previous game Bushnell had come across called Spacewar!

The pair had gotten a company called Nutting Associates to produce the game for them, ultimately selling over 1,000 units by the spring of 1972.  For arcade games at the time, this was a major hit, but was less than Nutting had hoped. Ultimately the relationship between Bushnell and Dabney and Nutting deteriorated and the pair went off to form their own company, originally intended to be called Syzygy Engineering, a name they’d already been using but never officially incorporated.

As Bushnell said that despite his inexperience at running a company, he figured if Nutting could make money selling such games, he could to, as he, to quote “couldn’t screw it up more than they did”.

Shortly thereafter in June of 1972, Bushnell and Dabney tried to register their business name, but found someone else was already using it, so they ultimately settled on Atari, a term borrowed from the game GO.

And if you’re wondering here, Syzygy is apparently an astronomy term usually used to refer to three or more celestial bodies lined up in a given gravitational system, though occasionally is also used to describe planets all on the same side of the Sun, even if they aren’t in a straight line.

Their first hire was a 24 year old man, relatively fresh out of college by the name of Allan Alcorn, who Bushnell had previously worked with at a company called Ampex.

At this time, Bushnell had secured a contract with a company called Bally Manufacturing to create a driving game. However, he and Dabney thought this was probably too complicated for a first attempt by Alcorn, who had never never made a game before, though he did have a background in electrical engineering and computer science.

So, instead, they decided to give Alcorn a bit of a warm up assignment. However, they wanted him to take it seriously, so they told him they’d signed a contract with GE to create an electronic table-tennis game. According to Alcorn, the only initial stipulations were that it needed two paddles, one moving spot for a ball, and to have digits that displayed the score.

With the initial set of stipulations for the game, Alcorn found it quite boring, so decided to spruce it up a bit by making the ball bounce off the paddle at different angles, depending on what segment of the paddle was hit.  He also had the ball progressively move at a faster rate after each successful return. Another hallmark of the game was an area of the screen the paddles couldn’t reach. It turns out this was actually a bug. As Alcorn would later state in an interview with IGN:

…one of my lessons learned, is that if you can’t fix it, call it a feature. The paddles on the original Pong didn’t go all the way to the top. There was a defect in the [circuit] – I used a very simple circuit, I had to, to make the paddles, but they didn’t go to the top…. but it turned out to be important, because if you get two good players they could just volley and play the game forever. And the game has to end in about three or four minutes otherwise it’s a failure as a game. So that gap at the top, again – a feature. So that was sort of a happy accident.

Bushnell and Dabney would also later suggest that Alcorn include a cheering and booing sound effect to happen every time a point was scored or lost, so that Alcorn would get some experience with sound effects.  Fortunately (because that would have been really annoying), Alcorn didn’t know how to make those sounds.

As Alcorn stated, “Cheers, applause. How do you do that with digital circuits? Ones and zeroes? I had no idea, so I went in there that afternoon and in less than an hour poked around and found different tones that already existed in the sync generator, and gated them out and it took half a chip to do that. And I said ‘there’s the sound – if you don’t like it you do it!’ That’s the way it was left, so I love it when people talk about how wonderful and well thought out the sounds are.”

Despite the fact that it was initially meant as a training exercise, Bushnell and Dabney were impressed with what Alcorn had come up with in the few months he had been working on the project.  While still pessimistic about its marketability, they decided to try the prototype out at a local bar they already had a business relationship with through their pinball repair side business, Andy Capp’s Tavern, to see how it did.  If it did well, they figured they’d try to sell it to Bally Manufacturing to fulfill their contract instead of the driving game, or if they didn’t want it, they were hoping another company they had dealings with, Midway Manufacturing, would.

It should be noted here that this first prototype Pong arcade game they put in Capp’s Tavern was made by hand wiring all the circuits and then running the video output through a $75 (about $445 today) Hitachi black and white television purchased by Alcorn at a store near the Atari offices.  He then enclosed it all in a wood box and added coin mechanism from a laundromat and a milk jug to collect the coins. The only instructions for how to play the game were, to quote, “Avoid missing ball for high score.”

The two aforementioned companies, Bally and Midway were interested initially in the game.  However, within about a week of the test run, the game started malfunctioning and Alcorn was sent out to fix it.  What he found was that the game was malfunctioning because the milk carton used to collect the coins had overflowed and as the space filled up, it eventually caused shorts in the coin operating circuitry.

The manager of the tavern also told Bushnell that he actually had customers lining up before opening time just to come in and play the game.  At this point, Bushnell backtracked on his offer to sell the game and decided to have Atari manufacture it, even though they didn’t actually have the money at the moment to hire anyone to build the machines needed, nor the money to buy the equipment.

And then even if they did drum up the money, which they did through a line of credit from Wells Fargo bank, there was also a problem of how to do this while maintaining a good business relationship with both Bally and Midway?

He solved the problem in part by downplaying the game’s potential, as well as convincing Bally that Midway didn’t think the game had any potential.  At the same time, he convinced Midway that Bally had backtracked and no longer was interested in the game.

As a result, ultimately they both withdrew any interest in the game, freeing Bushnell up to market it himself.

After some funding and then manufacturing difficulties, Pong as an arcade style game was finally released and was wildly successful, earning an unprecedented $40 per day, per machine (about $225 in today’s dollars). Soon enough, Atari was struggling to keep up with the number of orders coming in for it.

An even bigger step forward for Pong, though, was when Atari released a home version of the game, originally through Sears Sporting Goods under Sears’ “Tele-Games” brand name.  That home version sold 150,000 units the first Christmas it was released.

From that and subsequent sales, this simple training exercise is generally today considered the first mass-successful video game, spurring the video game boom that followed.

There was one problem for Atari though.

Magnavox claimed that Bushnell had copied Pong from their previously developed table-tennis game for their Magnavox Odyssey.

The game in question, among other things, was created by a now legendary figure in the world of electronic gaming history Ralph Baer, who interestingly enough also created the first shooting game that featured a light gun, very similar to what Nintendo would later make for Duck Hunt.  He also was the inventor of the popular pattern matching game Simon, among many other things.

In any event, Magnavox claimed that Bushnell had played their electronic table tennis game a few months before Atari made Pong at a trade show in San Francisco. Bushnell would ultimately state that he did see the Magnavox game, but it was quite boring in its implementation.  He would also correctly note that such electronic table tennis games had been around before Magnavox’s game. Although, it should also be noted that according to Alcorn himself years later, Bushnell’s inspiration for giving him that assignment in the first place, besides as a relatively easy training exercise, had been Magnavox’s game.

Ultimately the potential cost of the court battle and potential that they’d lose, which would have been devastating to the young company, caused Bushnell to choose to settle out of court. As Magnavox itself also wasn’t fully confident they’d win in court, they gave Atari quite reasonable terms given the amount of money Pong was raking in at the time.

The deal that was struck was such that Atari agreed to pay $700,000 to Magnavox (about $3.2 million today) for the rights to continuing selling Pong. On Magnavox’s side, they agreed to go after any Pong copy-cats out there and force them to pay high royalties. This was great for Atari as it eliminated a lot of competition for their game. And even where it still existed, Atari could charge less for the same profit margin.

(It is noteworthy here that when Nintendo was eventually sued by Magnavox for violating their patents on the aforementioned electronic table tennis game, Nintendo used the prior art defense here that would have been the basis for Atari’s defense as well, but lost the court battle.)

There was one other major stipulation in the deal though-  for one calendar year, Atari had to agree to hand over the rights to any new consumer product they released to Magnavox.

Atari agreed to this, but then coincidentally did not release a single new product until that contract was up. When Magnavox representatives occasionally stopped by Atari headquarters to see what they were working on, Atari employees just generally gave them the run around and made excuses as to why they hadn’t come up with anything new to sell to consumers.

It’s also humorous to note that the timing that the contract expired also just so happened to be one week before the major Consumer Electronics Show, allowing Atari to then finally debut everything they’d actually been working on the last year.

In other business shenanigans, not long after the release of Pong, Atari created a separate company called “Kee Games” that functioned as a competitor to themselves, though keeping the connection between the two companies secret. Bushnell hired his neighbor, Joe Keenan, to manage the separate company.

The idea here was that the two companies could give supposedly exclusive deals to certain distributors who required this stipulation, even though the other company was then free to offer a given product, with extremely small modifications, to other companies, without technically breaking the exclusive contract.

This ruse lasted a full year before the connection between the two companies was discovered and Kee Games was shortly thereafter merged with Atari in late 1974, though Joe Keenan had done such a good job managing it, including creating one extremely popular original game called Tank, variations of which are still popular today, that he was named president of Atari after Kee Games was dissolved.

As to all these shenanigans, and many others like them by others in the industry at the time and in the coming decades, such as Bill Gates and Steve Jobs who similarly did a lot of things like this, Al Alcorn would sum up the general attitude in running a company,

You’ve got to see how far it goes before it blows up. We had no management experience, no business experience, we were just engineers, picking it up as we went along. To me personally, coming out of Berkley in the 60s… I had no aspirations of being a capitalist pig or anything, but this was a fun thing to do.

If you liked this article, you might also enjoy our new popular podcast, The BrainFood Show (iTunes, Spotify, Google Play Music, Feed), as well as:

• How the Gun in the Original Duck Hunt Worked
• When Pinball was Illegal
• That Time the Inventor of Whac-A-Mole Accidentally Blew Up His Warehouse
• Buried in the Desert: E.T. and One of the Biggest Video Game Flops of All-Time
• The Surprisingly Long History of Nintendo

Bonus Facts:

• The project to design the home system of Pong was code-named “Darlene”.  Darlene was an apparently very attractive woman who worked at Atari…. Nerd flirting or sexual harassment?  (or both)
• The Atari 2600, which was the first Atari system to be able to play multiple games, currently holds the record for the longest-lived home video game console, in terms of continual production, at fourteen years and two months, finally being retired in 1992.
• Initially, the Atari 2600 wasn’t very popular due to the fact that many people didn’t understand you could play other games besides the various derivatives of Pong, which had slowly dwindled in popularity.  In its first year after its release, the Atari 2600 sold only 250,000 units.   However, with the release of Space Invaders, licensed through the company Taito in 1980, sales skyrocketed with Atari grossing $2 billion that year and by 1982, Atari had sold 10 million consoles and nearly just as many of each of its most popular games, including Space Invaders and Pacman.
• The Atari 2600 featured one of the more powerful home-based system CPUs on the market when it was created.  This processor, a specialized version of the MOS Technology 6507, featured a whopping 1.19 MHz clock speed and their cut-down version of the chip could only address a max of 4 kB of memory.  The console itself had 128 bytes of RAM.
• The Atari 2700, which was never publicly available, had wireless remotes that had 1000 foot range.  The problem with this was, of course, that any other Atari consoles within 1000 feet could be affected by these remotes.  It also featured touch sensitive buttons, rather than the traditional plunger style.  Unfortunately, problems with the system itself and interference issues from the huge range of the wireless controllers caused  it to be shelved.
• Just four years after founding Atari and on the cusp of releasing the soon to be wildly successful Atari 2600 console, Bushnell sold Atari to Warner Communications for around $30 million (about $120 million today).  Just 9 year later, Warner sold Atari to the founder of Commodore International, who had left that company, Jack Tramiel, for $240 million in stock, which is equivalent to over half a billion today.
• Interestingly, the groundbreaking Magnavox Odyssey’s failure as a home game console is largely thought to be because people didn’t understand it would work with any TV.  Most thought it could only be used with Magnavox TVs.  This and other marketing failures by Magnavox allowed companies like Atari and, eventually, Nintendo, to take over a market that likely would have been Magnavox’, given how far ahead of the competition Magnavox was at the time.
• Nintendo entered the home video game console business in 1977 after releasing Color TV Game 6.  This console could play six different versions of ping pong.  They followed that up with Color TV Game 15, which, not surprisingly, had 15 versions of the game.  These Pong clones by Nintendo were actually quite successful, selling over one million units and saving the then struggling business from going under.