Taking On Nintendo : Games: Atari may be crazy to confront the Japanese giant. But it plans to slug it out anyway.
Atari Corp. President Sam Tramiel is not one to shy away from a fight. But taking on powerhouse Nintendo of America in the fledgling market for hand-held video games may be like an 80-pound kid trying to knock out former heavyweight champ Mike Tyson.
Many observers say Atari, primarily a seller of computers overseas, is foolish to go up against the Nintendo juggernaut. On the strength of its Nintendo Entertainment System, found in one-fifth of U.S. homes, Nintendo has won an estimated 80% of the home video game market, bashing the home-based systems of Atari and Sega. And Atari’s main entry in the hand-held category is selling at double the price of the comparable Nintendo model.
“Going against Nintendo is the kiss of death . . . especially with a similar product at twice the price,” said Larry Carlat, editor of Toy & Hobby World magazine in New York.
Despite the long odds, Tramiel is determined to slug it out. His strategy for winning will be to tout the superior graphics, color display and multiplayer capability of the Lynx portable system.
“We’ve decided we’re not going to walk away from the video game business and give it to the Japanese,” said the stocky, mustachioed executive as he downed an unorthodox lunch of avocado and grapefruit in his cluttered Silicon Valley office.
The stakes are high. For 1990, the U.S. home video game market will be worth an estimated $5.1 billion. And Atari, trying to bounce back from an ill-fated venture into consumer electronics retailing, can scarcely afford another financial setback.
Sparring with rivals comes naturally to Tramiel, son of Atari Chairman Jack Tramiel, a scrappy computer industry fixture who for years has ridden a high-tech roller-coaster.
The Tramiels--including Sam’s brothers Garry and Leonard, both Atari vice presidents--are pinning hopes for a hefty share of future sales on Lynx, which barely made it to market in time to compete for holiday business last year with Nintendo’s Game Boy. Such battery-operated portable systems run on small game cartridges plugged into machines a bit larger than a Sony Walkman.
Hampered by what Sam Tramiel called “logistical” problems and “under-ordering” by some retailers, Atari is attempting to speed production and come out with more game titles.
As it was, Atari had only enough supply late last year for the New York City and Tokyo markets, where Lynx’s color display and superior graphics did indeed lure many customers away from the more rudimentary, monochromatic Game Boy. That was despite a selling price for Lynx hardware of $179.99, compared to Game Boy’s $75 to $90.
Since then, Atari has rolled out the product to New Jersey, California, the Chicago area and several overseas markets--although shipments in many cases have been weeks late. By May, Tramiel said, the company expects Lynx to be available nationally in about 1,500 outlets. Game Boy, meanwhile, is in 15,000.
That makes Lynx “a flea on the elephant,” said Toy & Hobby World’s Carlat. “The Lynx numbers are just teeny-weeny at this point. This is sort of a done deal in terms of who wins the marketing war.”
Nintendo of America, the Redmond, Wash., subsidiary of Nintendo Co. of Japan, projects $950 million in 1990 sales for its Game Boy product, introduced in mid-1989. Sam Tramiel calls $200 million an “optimistic” but attainable number for Atari’s Lynx system this year.
Atari’s home computer systems have competed, with mixed success, against the likes of International Business Machines, Commodore International (which Jack Tramiel founded) and Apple Computer.
In some specific markets and with some individual products, Atari has shone. But in general the company is a “distant also-ran,” said Lee S. Isgur, an investment analyst with Paine Webber in New York who has tracked Atari for years.
“They walk to their own tune; they do their own thing,” Isgur said of the Tramiels.
The company focuses on foreign markets, where sales accounted for 82% of Atari’s $424 million in 1989 revenue.
Atari’s fortunes weren’t always so modest.
Founded in 1972 by Nolan Bushnell, the creator of the Pong arcade video game, Atari Inc. was sold to Warner Communications in 1976 and became a leader in the booming business of video games, achieving $2 billion in annual sales. But in 1982, the industry headed into a steep decline as Americans began defecting to videocassette recorders and other entertainment gear. High-flying Atari suddenly dived into red ink.
In 1985, Jack Tramiel saw an opportunity. Years before, the Polish-born World War II concentration camp survivor had parlayed a one-time typewriter repair shop into Commodore International, which became one of the hottest computer companies around.
While at Commodore, Tramiel slashed prices and squeezed competitors such as Coleco and Timex out of the home computer market. Computer dealers complained that Tramiel’s price cutting and penchant for marketing through mass merchants such as K mart and Toys R Us made it impossible for them to make a profit.
When Atari became available for purchase, Tramiel had just emerged the loser from a power struggle with a prominent Commodore shareholder.
He and a group of investors paid $240 million in notes for Atari’s home video game and personal computer divisions, with Tramiel staking an estimated $45 million of his personal fortune on the Atari venture.
(When Warner sold Atari, it was split into two independent companies. The other entity is privately held Atari Games, which produces arcade games and develops software for, among other equipment, Nintendo Entertainment System.)
A tough executive who is fond of saying that “business is war,” Tramiel slashed the Atari work force to fewer than 200 from 2,000.
Tramiel’s hard-driving strategies seemed to pay off. He predicted more than once that the company would reach $1 billion in sales (although that level continues to elude Atari).
Profit climbed, and, defying skeptical industry analysts, Atari went public in November, 1986. (The Tramiel family holds about 52% and Time Warner owns 22%, according to Sam Tramiel; the rest is owned by small or institutional investors.)
Yet Tramiel’s treatment of computer dealers apparently haunted him. Atari had well-regarded computers but few places to sell them.
The situation prompted a costly misstep. In August, 1987, seeking a quick way to expand distribution, Atari paid $67.3 million for the struggling Federated Group consumer electronics chain of 67 stores, based in City of Commerce.
Troubles soon escalated. A year after the purchase, Atari sued several former Federated officers and investment advisers, alleging that they had overstated the company’s assets, causing Atari to overpay for the chain. The suit is still in the courts.
Since then, Atari has sold the Southern California Federated stores and has begun treating Federated Group as a discontinued operation, even though a handful of stores remain open in Texas. Atari took a $100-million hit against 1988 earnings for writeoffs of merchandise, stores and reserves for future losses from the chain. As a result, Atari showed a loss of nearly $85 million, contrasted with a profit of $57 million in 1987.
For 1989, the company reported a profit of $4 million on sales of $424 million. Sales shrank 6% from the previous year’s level. Lynx and Portfolio, a new $400 hand-held computer, together contributed sales of $25.5 million.
With the Federated mess mostly behind them, the Tramiels are focusing on Nintendo.
In February, 1989, Atari filed a $250-million suit against its huge rival, alleging that it has violated antitrust laws by preventing designers of software for its game consoles from selling their wares for other systems. Nintendo has said the suit is “meritless.”
(Atari Games’ Tengen subsidiary is embroiled in its own legal battle with Nintendo, alleging that a “lock-out” chip allows Nintendo to monopolize the software available for its system. Atari Games has said the chip exists solely to prevent competition. Nintendo argues that the chip is necessary to ensure quality.)
Nintendo’s hefty market share has caught the attention of the Federal Trade Commission and a congressional panel, which Sam Tramiel said are conducting investigations. Jack Tramiel, 61, plans to testify at a congressional committee hearing in Washington on May 3.
“All we’re asking for is to be allowed to compete,” said Sam Tramiel, a just-turned 40-year-old with a passion for red Ferraris. He recently sold a Ferrari GTO for $500,000 and used the proceeds to buy a house in Lake Tahoe.
As with all video games, Sam Tramiel said, software is crucial to Lynx’s success. Blessed with more plentiful games and a lower price, Game Boy has zapped Lynx in terms of numbers of units sold.
Tramiel noted that more than two dozen programmers worldwide are working full tilt to produce games. Even so, Atari projects that it will have only 25 Lynx software titles available by year-end, compared to as many as 70 for Game Boy.
Meanwhile, both Nintendo and Atari are gearing up expensive marketing campaigns. Nintendo this year will spend $8 million to $12 million nationally, said William B. White Jr., Nintendo’s director of advertising and public relations. In early May, print advertising will urge wives to buy Game Boy for their husbands as Father’s Day gifts.
Atari plans “a slew of advertising” this year, valued at about $10 million and created by the highly regarded Venice firm of Chiat/Day/Mojo.
The hope, Tramiel said, is that Lynx can help boost to 30% from 20% the portion of the company’s revenue from video games.
Atari is encouraged by recent surveys showing that Lynx competes well head-on with Game Boy, particularly with adult customers.
“It wins hands down in face-to-face and side-by-side competition,” said Craig Gordon, director of Grassroots Research, a San Francisco-based company that studies trends.
In a poll last month of 13 retailers and a catalogue company, Grassroots Research found that Lynx’s popularity is growing faster than its supply.
Isgur, the Paine Webber analyst, noted that getting the word out to more potential customers could simply aggravate Atari’s supply problem. Sam Tramiel acknowledged that shipments have been slower than expected, but he said the company should be able to meet its goal of shipping 800,000 to 1 million hardware units by year-end.
Tramiel maintains that Atari plans to keep its hand in the hand-held video game business, despite Nintendo’s prowess.
“Lynx,” he said, “will be around for a long time.”