Tramiel Can Now Export Price Revolution : Federated Purchase a Victory for ‘Business Is War’ Philosopher
It has been said that the only thing worse than working for Jack Tramiel is trying to compete against him.
Tramiel is the 59-year-old concentration camp survivor whose Atari Corp. on Sunday agreed to acquire the City of Commerce-based Federated Group consumer electronics retailing chain for $67.3 million.
To employees, Tramiel is a penny-pinching taskmaster who slashed the work force at Atari from about 2,000 to fewer than 200 after buying the nearly moribund maker of video games and computers in 1984.
To competitors, he is a ruthless discounter who, as head of Commodore International, declared that “business is war” and proved it by driving Coleco, Timex and others out of the home computer business.
Industry observers on Monday called Atari’s purchase of Federated’s 67 stores a master stroke that will dramatically expand Atari’s distribution for its well-regarded, inexpensive line of personal computers while enhancing Federated’s ability to compete.
“Circuit City Stores has been moving into Federated’s markets like gangbusters,” said Bruce Entin, a former Atari vice president. “Jack Tramiel should help even out the odds.”
Tramiel himself said in an interview Monday that the Federated purchase is in line with his goal of making his Sunnyvale-based company an international electronics company “selling products from A to Z.” The next item on his shopping list, he said, is a semiconductor company.
Rather than cutting back at Federated, Tramiel vowed to “open up new stores wherever we are weak in distribution.” Federated employs about 2,700, having laid off about 300 workers earlier this year.
“We’ve already made the necessary cutbacks,” said Federated’s chairman and chief executive, Wilfred Schwartz, who will stay at Federated and become a director of Atari. Still, people who know Tramiel are sure he will cut costs further.
“Jack Tramiel always operates in a start-up mode,” said William M. Zinn, president of the Atari Bay Area Computer Users Society. “There are always too few people doing too many jobs.”
Certainly, Tramiel’s blustery negotiating style should serve Federated well in talks with manufacturers and distributors. “His basic approach is to first get suppliers down to cost,” said one former associate. “Then he’ll sit down and say, ‘OK, let’s start negotiating.’ ”
Although Atari’s first-half net income jumped to $28.8 million from $12.4 million a year earlier on a 28.6% increase in sales, distribution--particularly domestically--has been weak.
“For the most part, our dealers are ‘B’ and ‘C’ level--’A’ being the best,” said Gregory A. Pratt, vice president and chief financial officer. “With the major chains like Businessland and ComputerLand handling IBM and Apple, it has been hard to break through.”
Many in the industry, however, believe that Atari’s distribution woes stem from Tramiel’s rough treatment of computer dealers while he was at Commodore. Tramiel’s constant price cutting made it hard for them to earn a profit, and he angered dealers by marketing Commodore’s products through mass merchandisers like K mart and Toys R Us.
“Jack has had a history of difficulty with his retailers since his Commodore days,” said Entin. “Those scars don’t heal quickly.” Tramiel founded Commodore in 1954 and left the company 30 years later after clashing with its principal shareholder.
Analysts say Atari derives more than half its computer revenue from Europe. The Atari ST line--dubbed the “Jackintosh” for its Apple Macintosh-like graphics--is the top-selling computer in Germany.
In the United States, Atari’s machines are prized by hobbyists and home users, although the company is trying to crack the business market with a $3,000 desktop publishing system and a IBM PC clone with enhanced graphics priced at $699.
But Tramiel is clearly thinking beyond his current product line in acquiring Federated. “There’s been talk from Atari about a compact disc player that will work with both computers and stereo systems,” said Drexel Burnham Lambert computer analyst Peter Labe.
Indeed, sources said Monday, such a machine will be unveiled by Atari at the Comdex trade show in November at a suggested retail price under $500.
Compact discs can store vast quantities of computer-readable text and graphics and have been touted as the next major breakthrough in home computer technology. CD players for computers currently sell for $800.
“That’s too expensive for us,” said Atari’s Pratt.
Tramiel would not comment on forthcoming products, but he left little doubt of his intention to compete in every segment of the electronics industry. His strategy is to have research and development expenses shared by retailers and components suppliers, he said, “which is the way they do it in Japan.”
With characteristic bravura, he said his goal is for him and his three sons to build a company with annual revenue of $5 billion to $10 billion a year. To be sure, there are many skeptics. Then again, few predicted Tramiel could revive Atari either.
ATARI 6-month net income $28.8 million 6-month revenue $135.8 million Assets $175 million Employees 1,400 Shares outstanding 57.8 million 52-week range $5,625-$16.125 Monday close (AMEX) $13.50, down 75 cents
