Riches-to-Rags Trip for Many Instant Millionaires : Hard Times Hit Many Video Games Designers

From The Washington Post

Barely three years ago, Howard Warshaw was a superstar. The wisecracking, shaggy-haired 24-year-old from Scotch Plains, N.J., was raking in nearly $1 million a year, featured in national magazines and hounded for autographs by a devoted cult following of teen-agers.

A rock star? An athlete? A movie star?

None of the above. Howard Warshaw designed video games.

Remember video games? A multibillion-dollar business, they were supposed to be the vanguard of a new generation of home entertainment. Pac Man was the Mickey Mouse of the 1980s, and those few hundred gifted young game designers were going to be the digital Disneys of the computer age.

“We were like renegade Picassos involved in the pioneering of a new kind of technology,” said Warshaw, who began his career as a $24,000-a-year programmer at Atari Inc. a year before the boom. “I don’t know how many people appreciate how much of a trip this really was. This was the most intense experience of my life. This was the greatest thing that ever happened to me.”


The trip is over now. Warshaw’s hair isn’t shaggy, his income wouldn’t impress a yuppie, and, other than friends and family, few can recall who he is. “It’s a good thing I . . . carry an American Express card,” he said ruefully.

Now Sells Real Estate

Warshaw now sells real estate. He expects to receive his California broker’s license within a few weeks.

“I think my talents would be better leveraged in other areas,” he observed.

What happened?

In one of the most dramatic reversals in American business, video games proved to be neither an industry nor a new art form, but a fad with the economic durability of the hula hoop.

Christopher D. Kirby, who once covered video games as a securities analyst for Sanford C. Bernstein, said that when the market peaked in 1983, sales amounted to between $5 billion and $6 billion. “I thought it would decline in some fashion but I certainly didn’t expect it to disappear as much as it has,” he said.

Today, there are virtually no video games companies for Kirby to follow; he now tracks the semiconductor industry.

When the market collapsed last year, the “vid kids”--whose technical talents had brought them to a pinnacle of success in their 20s or early 30s--saw their dreams, ambitions and income evaporate.


“A lot of people handled it well on the way up,” Warshaw recalled, “but on the way down, the people who were losers became big losers. Some people gave up. People grasped at straws. People became desperate. People believed this was never going to go away. Some people just went crazy.

Lost Perspective

“As a group, we were a bunch of screaming babies. We lost our perspective. But to get an industry started like that, you needed a bunch of screaming babies.”

“We thought it could go on forever,” said Dennis Koble, 35, formerly of Atari and co-founder of Imagic, a hot little video games company that saw its sales zoom from zero to $75 million in a single year and is now just hanging on for dear life. “When you get the big money for the first time, you think it’s never going to end.

“There was this opportunity to become filthy rich. It was like winning the lottery back then. There was the distinct chance of winning the lottery. We didn’t know it was unusual to sell a million cartridges. We never really had anything to compare it to. Consequently, I think we didn’t realize there was a real world out there.”

It was easy to make the money in boom times, Koble and other ex-designers assert. Companies such as Atari and Mattel Electronics offered their “talent” tremendous base salaries, royalties on cartridge sales and bonuses as “golden shackles” to prevent them from jumping to other firms.

The money hinged on the designer’s ability to cram a game--the graphics, the play, the sound--into a few lines of computer code. That code, burnt into a silicon chip, determined how images would appear and move across the screen. The cartridges containing the chips cost about $2.50 to make in volume; the video games companies sold them for $30 each. Buyers plugged them into games consoles attached to their TV sets and blasted away at space creatures or zipped through mazes using joy sticks and blaster buttons.

Earnings in Six Figures

“Most of the people who had a moderate-hit cartridge--sales in the several hundred thousand range--could make $200,000 to $300,000,” Koble said. “Even people who didn’t have a cartridge could make $50,000 to $100,000 a year.”

Warshaw was a supernova in Atari’s star system. When the company acquired rights to Steven Spielberg’s hit movie “E.T.” in 1982, it turned to Warshaw to create the video game version in time to catch the Christmas season.

Warshaw designed and programmed his version of “E.T.” in five weeks flat--the computer equivalent of simultaneously composing and playing a minute waltz in under 30 seconds. For his efforts, Atari reportedly paid him $200,000 and threw in an all-expenses-paid vacation to Hawaii.

Warshaw always has prided himself on being fast. “I think of myself as a very quick person,” he said. “During exams, I wanted to be the first one out of the class. You could freak out the class and ruin the curve by leaving early. It’s a great tactic.”

As the industry exploded, games were churned out in assembly-line fashion. Quality placed a distant third behind quantity and speed. Clever and witty games gave way to rip-offs, look-alikes and shoddy imitations. Many designers went along, cheerfully cranking out second-rate products. The money was there.

$40,000 Every Three Weeks

“Every three months, I’d hand in a game, and they’d give me a check for $40,000,” recalled one former Atari designer. “How could I not like working there?”

There are numerous reasons offered for the swift collapse of the market, ranging from the general shoddiness of many games to the rise of MTV, the rock-video cable television channel.

Home computers, more sophisticated than the Atari-type games consoles, were thought to be the next medium for interactive entertainment. Industry experts expected home computers would generate a new wave of video computer game demand.

“The biggest surprise in retrospect is that the home computer game and software market never materialized to the extent expected,” Kirby said.

Regardless, by the end of 1983, it was becoming obvious that the public’s infatuation with video games had been sucked into the black hole of indifference. The novelty was never replaced with something more substantial.

But during the industry’s peak years in 1982 and 1983, there were all sorts of ways to make money. “If you were at a start-up games company, you could also get stock,” said Koble. “When you read in the New York Times that you’re going to be worth $15 million, your whole perspective on life changes a little bit.”

Conspicuous Consumption

Games designers became the most conspicuous of consumers. Some of them bought multimillion-dollar houses on the beach; indulged in Alfa Romeos and BMWs, sheltered their money in risky tax write-offs, lent money to relatives, acquired unusually acquisitive girlfriends (almost all of the designers were men) and became regulars at Club Med.

One designer went out and bought a million-dollar house on the eve of his company’s initial public offering, which would have made him a millionaire. The offering was withdrawn when Atari reported lower-than-expected earnings--and the designer had to give up the house.

“The money has a way of running out very quickly,” said Koble. “A lot of us are sadder but wiser.”

Take Tod Frye. In 1982, he was struck by financial lightning. Frye was anointed by Atari to do the home video game version of Pac Man--the monstrously profitable arcade video game. Despite technical flaws, the home version of Pac Man was a Gargantuan hit.

Instant Millionaire?

“It’s probably the world’s most successful piece of software,” boasted Frye. “Millions and millions of cartridges were sold.”

Valley legend has it that the Pac Man cartridge turned Frye--then 25--into a millionaire. “Tod made a bundle,” Warshaw said.

Frye declines to comment. But his earnings allowed him to collect antique jazz guitars and to acquire other items that struck his fancy.

Today, little remains.

He bought some land in New Mexico--but had to sell when the industry collapsed. “I bought an Alfa Romeo Spider convertible,” he said, “but I got rid of it.”

“I miss the money,” he confessed. “I’ve been very broke before but I’m just now having to seek new sources of income.”

His major regret?

“A lack of very conservative tax planning,” he said. “Uncle Sam took a good chunk of it away. I didn’t take the steps necessary to learn how to handle the assets I acquired. I didn’t take the good advice when I got it.”

Many of the designers sought to shelter their money from the IRS and, thinking that their riches would continue ad infinitum , entered into long-term deals that required substantial yearly payments.

Tax Problems

When their incomes sagged, many could not keep up their tax-shelter payments. But to their dismay, they discovered that dropping out of a shelter often meant that they were subject to what the tax code calls “recapture”--they had to pay the taxes they thought they had eluded a year or two earlier.

“The woods are full of problems with shelters,” said Koble. “It’s a hassle. Remember, all of us were pretty naive at the time. What’s worse is that a lot of these deals were multiyear deals where you had to pay in year after year. And, of course, all the money in video games went away in a year or two.”

Many designers who saw their net worth shrink to very manageable proportions are now trying to figure out what to do next.

Some, like Koble, have tried to stay in the business. Koble is now a designer with Bally Manufacturing Corp., which makes video arcade games. David Crane, the popular Activision Inc. designer who created the best-selling Pitfall video game, is still at his original firm.

Others have gotten what they call “real jobs” at companies like Hewlett-Packard Co. A handful remain at Atari, which was purchased from Warner Communications Inc. for virtually nothing by Jack Tramiel, former head of Commodore International Ltd. Still others, feeling that lightning can and will strike twice, have joined the legions of venture companies that dot Silicon Valley or are trying to become entrepreneurs themselves.

Search for Backing

“The obvious thing to do is to develop one’s own company,” said Pac Man’s Frye, who is thinking of ways to “use the computer as a video editing facility.”

While he has drawn up a business plan, he has yet to find financial backing.

“I’m hopeful,” he said.

Most of the vid kids, however, have left the business.

Matthew Hubbard, who designed the popular Dolphin game for Activision, was laid off late last year as the company continued to lose money.

The week after he was laid off he appeared on the television game show “Jeopardy” and won $25,000. He used his winnings for a trip to Europe and now is back in California looking for a job.

He would like to get into rock ‘n’ roll, he said, but hasn’t been able to break into the music business. So, “I’m looking for something as a programmer.”

Frye is now with a self-fulfillment group in California called “Actualizations.”

“Of course, I knew this was all going to end, but I didn’t think it was going to end quite as fast,” he said.

Meanwhile, Warshaw, whose peers consider him among the savviest of the designers, believes that his new career offers him the same prospects for riches that video games once provided. “Now, I’m just starting in real estate,” he said. “I expect to make several million in the next five or six years, I hope.”

“We thought it could go on forever. When you get the big money for the first time, you think it’s never going to end.”

--Dennis Koble, video games designer