Atari and the video game crash of 1983

Atari, Inc., the Warner Communications subsidiary that made the Atari 2600, went from about US$2 billion in sales in 1982 to a loss of more than US$500 million in 1983. The turn became public on December 8, 1982, when Warner warned that disappointing sales of Atari cartridges would cut its fourth-quarter earnings roughly in half. By July 1984, Atari, Inc. had laid off most of its staff, dumped surplus stock in a New Mexico landfill and been sold by Warner to Jack Tramiel. By then, the New York Times noted, Texas Instruments, Mattel and Timex had all left the home computer business since October 1983.

The warning of December 8, 1982

On December 8, 1982, Warner said its 1982 earnings would be only 10 to 15 percent above those of 1981. The New York Times reported that Warner now expected fourth-quarter profit of roughly 60 cents a share, against US$1.17 a year earlier and the US$1.60 to US$2.00 that Wall Street analysts had been expecting. It was the company’s first per-share decline in 31 quarters. Warner’s chairman, Steven J. Ross, later said Atari’s estimates had been missed because “of unexpected cancellations and disappointing sales during the first week of December.”

The news hit Warner hard because Atari, Inc. had become most of its business. In the first nine months of 1982, Atari contributed half of Warner’s US$2.9 billion in revenue and two-thirds of its US$471 million in operating profit. Warner stock fell US$16.75 on the first day of trading after the announcement and went from US$51 to US$29.50 by December 23.

Two other disclosures came with it:

• On December 8, Warner said that Perry D. Odak, president of Atari’s home video game division for six months, had been dismissed. Both sides said the reason was a difference in management style, not the shortfall in cartridge sales.
• On December 23, Ross disclosed that Atari’s chairman, Raymond E. Kassar, had sold 5,000 Warner shares on December 8, the day of the announcement, and that executive vice president Dennis D. Groth had sold 6,376 shares on December 1. Warner took the information to the Securities and Exchange Commission. Kassar said the sale was part of his year-end tax planning.

Why the cartridges did not sell

The New York Times traced the shortfall to a decision made a year earlier. In October 1981, Atari, Inc. asked its distributors to commit to orders for almost all of 1982. Atari had not been able to deliver everything that was wanted in previous years, so distributors ordered more than they expected to need. By the second half of 1982, Coleco, Activision, Imagic, Parker Brothers and others were selling cartridges for the 2600, and the order cancellations came in. “We were just dumb,” Emanuel Gerard, Warner’s co-chief operating officer, told the paper.

Reports from the same month describe a crowded market:

• Geoffrey Wheeler of Game Merchandising magazine counted about 100 different cartridges on sale in June 1982 and about 400 in December.
• The number of cartridge producers had more than tripled, to 20, and Atari held 56 percent of the game system market.
• Richard Simon, an analyst at Goldman Sachs, expected 10 percent of the 1983 titles to account for 75 percent of sales.
• Cartridges sold for US$25 to US$35. Starpath offered tapes for the 2600 at US$15.95, played through an adapter of about US$70.
• Games by Apollo, a cartridge maker in Texas, had filed for Chapter 11 protection in November 1982.

Gerard also told analysts that Atari had been “lulled” by its own success. According to the Times, the home version of Pac-Man had been widely criticized for its graphics but had still sold very well, which convinced the company that it could sell almost anything. For the second half of 1982 Atari relied on two film licenses, E.T. and Raiders of the Lost Ark, and neither became the hit it expected.

Pac-Man and E.T.: the figures and where they come from

None of the 1982 and 1983 reports used for this page gives unit figures for either cartridge. The numbers usually quoted come from later accounts, and they do not agree:

• Pac-Man (1982). According to Steven L. Kent’s The Ultimate History of Video Games (2001), Atari manufactured 12 million cartridges, although its own research showed that fewer than 10 million people owned and used a 2600, and sold seven million. Snopes gives the same 12 million and 7.7 million sold. The New York Times wrote in December 1982 only that the game had “sold extremely well”.
• E.T. the Extra-Terrestrial (1982). The BBC reported in 2016 that Atari had paid a reported US$21 million for the rights in July 1982, and that its programmer, Howard Scott Warshaw, was given about five weeks, with a deadline of September 1. According to the BBC, Atari ordered an initial run of four million cartridges and budgeted a reported US$5 million for advertising. Warshaw said the game “still sold nearly 1.5 million units”. Snopes gives five million cartridges produced and three and a half million returned, without naming a source for those two figures.

1983: layoffs, a new chief and a home computer price war

• February 1983. Atari, Inc. announced 1,700 layoffs in Silicon Valley, where it employed about 7,000 people out of some 11,000 worldwide. Bruce Entin, an Atari vice president, said manufacturing of home computers and video games would move to Hong Kong and Taiwan by July. Coin-operated games, prototype design and the headquarters stayed in California.
• July 1983. Kassar was replaced. Warner brought in James J. Morgan, a marketing executive from Philip Morris.
• June 1984. The Times reported that the company was down to about 1,100 employees, from more than 7,000 a year earlier.

The video game slump ran into a price war among home computers. In June 1983, Texas Instruments said it would lose as much as US$100 million in the second quarter because of its home computer business. Its 99/4A had fallen from US$400 to under US$100 since the fall of 1982, in a race against Commodore, then run by Jack Tramiel. The same New York Times article noted that Atari “has never made a profit in home computers”. In January 1984 the Times wrote that Atari’s computers were considered to offer less performance than competing machines at the same price, and that of the four new models Atari had announced, only the 600XL and 800XL had reached the market. The Atari 8-bit computers page covers those machines.

What Atari, Inc. lost

The figures reported for Atari’s results differ by a few million dollars from one article to the next:

Period	Atari, Inc. result	Reported by
1982	Earned US$323 million	The New York Times, January 1984
Second quarter of 1983	Lost US$310.5 million	The New York Times, September 1983
First nine months of 1983	Lost US$536 million	The New York Times, January 1984
Full year 1983	Operating loss of US$538.6 million on revenue of US$1.12 billion	Associated Press, July 2, 1984; Popular Computing Weekly, July 1984
Full year 1983	Lost US$538 million (rounded)	The New York Times, July 3, 1984
Full year 1983	Lost US$535 million on revenue of US$1.1 billion	UPI, July 2, 1984

Warner as a whole had a net loss of US$417.8 million in 1983, according to the Associated Press (UPI rounded it to US$417 million). The nine-month loss and the full-year losses are almost identical, and none of these reports explains why.

Alamogordo, September 1983: what was reported at the time

The disposal that later became a legend was reported in local and national papers while it happened:

• From Thursday, September 22, 1983, semi-trailers from an Atari warehouse in El Paso, Texas, unloaded at the city landfill of Alamogordo, New Mexico. The Alamogordo Daily News reported it on September 27 under the headline “City to Atari: ‘E.T.’ trash go home”, as the city commission considered limits on dumping from outside the area.
• Bruce Entin of Atari told the paper that the merchandise was “by and large inoperable”, and that the El Paso plant had moved from manufacturing to recycling scrap and defective merchandise.
• The New York Times reported on September 28 that Atari had dumped 14 truckloads of discarded cartridges and computer equipment, that guards kept reporters and spectators away, and that workers poured concrete over the material.

Goldberg and Vendel, as quoted by Snopes, describe the El Paso loads as faulty and unused stock and parts, and write that most of Atari’s surplus cartridges were disposed of in a dump in Sunnyvale, California. No 1983 report of that California disposal was found for this page. An archived Atari Historical Society page, “Atari’s Mass Burials and Other Tales”, collected other disposal stories; they are not repeated here, because no period source for them was found.

The 2014 dig and the count of cartridges

On April 26, 2014, a crew working on a documentary for Fuel Entertainment and Xbox Entertainment Studios, directed by Zak Penn, dug into the Alamogordo landfill and recovered Atari cartridges, E.T. among them. James Heller, the former Atari manager who had organized the 1983 disposal, was at the site. He told the Associated Press that he had been asked to find a cheap way to dispose of 728,000 cartridges held in a warehouse in El Paso, and that he had concrete poured over them after local children got into trouble for scavenging and reporters started calling him.

The people involved in the dig give slightly different totals:

Source	Cartridges buried	Cartridges recovered
James Heller, Atari manager in 1983 (AP, 2014)	728,000	not given
Joe Lewandowski, dig site manager (Polygon, 2014)	792,000	about 1,300
Andrew Reinhard, archaeologist on the dig (tDAR)	about 800,000	just over 1,300

In September 2014 the Alamogordo city council voted 7–0 on how to distribute the recovered cartridges, which covered 59 Atari titles. The city sold 881 of them on eBay for a total of US$107,930.15, the highest price being US$1,535 for an E.T. cartridge. The filmmakers kept 100 and 23 went to museums. The titles offered for sale included Pac-Man, Ms. Pac-Man, Pelé’s Soccer, Yars’ Revenge, Baseball, Centipede and Warlords.

Legend and record

Two claims about the crash circulate more than any others:

• “E.T. caused the crash.” Warner’s December 1982 warning concerned Atari cartridge sales as a whole. The period press blamed distributor over-ordering, a wave of new cartridge publishers and, during 1983, the home computer price war; E.T. appears in those reports as one of two film licenses that disappointed. Warshaw, speaking to the BBC in 2016, put it this way: “the truth is a little more complex.”
• “Atari buried millions of E.T. cartridges.” The 1983 reports count truckloads, not cartridges. The people who handled or excavated the site later gave 728,000 to about 800,000 cartridges in all, and the 2014 sample of about 1,300 covered 59 different titles.

The July 1984 sale and Atari Corporation in 1985

Under an agreement signed at 4 a.m. on July 2, 1984, Warner sold Atari’s home computer and video game businesses to a new company headed by Jack Tramiel, who had resigned from Commodore in January. Warner received no cash: it took US$240 million in long-term notes and warrants for a 32 percent stake in the new company, and Tramiel and his partners agreed to invest US$75 million. Warner kept the coin-operated games division and Ataritel, its telecommunications project, which together made up about 20 percent of the old company. Warner said it would report a second-quarter loss of about US$425 million because of writedowns and operating losses at Atari. The New York Times noted that Tramiel was the man who, according to many industry experts, “led the price-cutting war that buried Atari last year”.

Atari Corporation’s first year was followed with skepticism. At the Comdex show in Atlanta in May 1985, the Times found “more doubters than ever”: the shipping date of the Atari 520ST had moved to July, Atari officials could not name one dealer that would carry it, and Bill Gates said Microsoft had no plans for the machine. The Times reported on July 10, 1985 that the 520ST was shipping to distributors. The coin-op division that Warner kept has its own article, a history of Atari’s arcade division, and the later owners of the name are covered in Atari corporate history.