Atari, Inc.

In 1966, Nolan Bushnell saw Spacewar! for the first time at the University of Utah.[2] By 1968, Bushnell had become an employee of Ampex in San Francisco, and worked alongside Ted Dabney. The two found they had shared interests, including the game Go, Bushnell shared with Dabney his gaming-pizza parlor idea, and had taken him to the computer lab at Stanford Artificial Intelligence Laboratory to see the games on those systems.[3] They jointly developed the concept of using a standalone computer system with a monitor and attaching a coin slot to it to play games on.[3]

Bushnell and Dabney worked with Nutting Associates to manufacture their product. Dabney developed a method of using video circuitry components to mimic functions of a computer for a much cheaper cost and a smaller space. Bushnell and Dabney used this to develop a variation on Spacewar! called Computer Space where the player shot at two orbiting UFOs. Nutting helped to manufacture the fiberglass cabinet. While they were developing this, they took on duties under Nutting to repair pinball machines. Computer Space did not fare well commercially when it was placed in Nutting's customary market, bars; Nutting reported they had produced 2,300 units but only had sold 750.[3] Feeling that the game was simply too complex for the average customer unfamiliar and unsure with the new technology, Bushnell started looking for new ideas.[4] They decided to start a separate venture initially called the Syzygy Game Company, each putting in US$250 of their own funds to support it.[3] They subsequently made sure that Nutting used "Syzygy Engineering" labels on each Computer Space game sold to reflect their work in the game.[3][5]

The original Pong upright cabinet

Bushnell began seeking other partners outside of Nutting, and approached pinball game manufacturer Bally Manufacturing, who indicated interest in funding future efforts in arcade games by Bushnell and Dabney if Nutting was not involved.[3] The two quit Nutting and established offices for Syzygy in Sunnyvale; at that point not taking a salary yet since they had no products.[3] Bally then offered them a US$4,000 a month for six months to design a new video game and a new pinball machine.[3] With those funds, they hired Al Alcorn as their first design engineer. Initially wanting to start Syzygy off with a driving game, Bushnell had concerns that it might be too complicated for the young Alcorn's first game.[4] In May 1972, Bushnell had seen a demonstration of the Magnavox Odyssey, which included a tennis game. According to Alcorn, Bushnell decided to have him produce an arcade version of the Odyssey's Tennis game,[6][7][8] which would go on to be named Pong. Bushnell had Alcorn use Dabney's video circuit concepts to help develop the game, believing it would be a first prototype, but Alcorn's success impressed both Bushnell and Dabney, leading them to believe they had a major success on hand and prepared to offer the game to Bally as part of the contract.[3] In anticipation, Bushnell and Dabney went to incorporate the firm, but found that Syzygy (an astronomical term) already existed in California. Bushnell wrote down several words from Go, eventually choosing atari, a term that in the context of the game means a state where a stone or group of stones is imminently in danger of being taken by one's opponent.[3] Atari was incorporated in the state of California on June 27, 1972.[9]

Bushnell and Dabney offered to license Pong to Bally, but the company had no idea what to do with the game, and did not immediately take the license. Instead, Bushnell and Dabney opted to create a test unit themselves and see how it was received at a local establishment.[3] By August 1972, the first Pong was completed. It consisted of a black and white television from Walgreens, the special game hardware, and a coin mechanism from a laundromat on the side which featured a milk carton inside to catch coins. It was placed in a Sunnyvale tavern by the name of Andy Capp's to test its viability.[10] The Andy Capp test was extremely successful, so the company created twelve more test units, ten which were distributed across other local bars.[3] They found that the machines were averaging around US$400 a week each; in several cases, when bar owners reported that the machines were malfunctioning, Alcorn found that it was due to the coin collector had been overflowing with quarters, shorting out the coin slot mechanism.[3] They reported these numbers to Bally, who still had not decided on taking the license. Bushnell and Dabney realized that they needed to expand on the game but formally needed to get out of their contract with Bally. Bushnell told Bally that they could offer to make another game for them, but only if they rejected Pong; Bally agreed, letting Atari off the hook for the pinball machine design as well.[3]

After talks to release Pong through Nutting and several other companies broke down, Bushnell and Dabney decided to release Pong on their own,[4] and Atari, Inc. was established as a coin-op design and production company.

Around 1973, Dabney felt he was being put to the side by Bushnell; Bushnell had left him out of several high-level meetings, assigned him to overseeing the manufacturing process but not the design work, and Dabney discovered Bushnell had patented his video circuit concept without him as an inventor. In March 1973, Dabney formally left Atari, selling his portion of the company for US$250,000.[11][12][13] While Dabney would continue to work for Bushnell on other ventures, including Pizza Time Theaters, he had a falling out with Bushnell and ultimately left the video game industry. Dabney's contributions towards Atari's founding were generally forgotten until 2009, when he gave an in-depth interview with Edge on his role.[3]

The third version of the Atari Video Computer System sold from 1980 to 1982

In 1973, Atari secretly spawned a "competitor" called Kee Games,[14] headed by Bushnell's next door neighbor Joe Keenan, to circumvent pinball distributors' insistence on exclusive distribution deals; both Atari and Kee could market (virtually) the same game to different distributors, with each getting an "exclusive" deal. Though Kee's relationship to Atari was discovered in 1974, Joe Keenan did such a good job managing the subsidiary that he was promoted to president of Atari that same year.

In 1974, despite Atari's success domestically it was struggling to sell games overseas. In a 2018 interview Alcorn described the situation as "an utter disaster beyond recognition".[15] In the same interview, Bushnell said:

We didn’t realize that Japan was a closed market, and so we were in violation of all kinds of rules and regulations of the Japanese, and they were starting to give us a real bad time.

Ron Gordon was hired as International Marketing Director, and according to Bushnell "fixed all that for us for a huge commission".[15] Bushnell has claimed that deals arranged by Gordon saved Atari.[16]

In 1975, Bushnell started an effort to produce a flexible video game console that was capable of playing all four of Atari's then-current games. Development took place at an offshoot engineering lab, which initially had serious difficulties trying to produce such a machine. However, in early 1976 the now-famous MOS Technology 6502 was released, and for the first time the team had a CPU with both the high-performance and low-cost needed to meet their needs. The result was the Atari 2600, released in October 1977 as the "Video Computer System", one of the most successful consoles in history.