On April 25, 1980, the "Fantastic Four" made it known that they would be producing games for the Atari VCS with their new company, Activision. At first, there was little reaction from Atari. The company went on to announce four games: Boxing, Fishing Derby, Dragster, and Checkers. There was little fan-fare for Activision, and hardly anyone took notice.
More pressing for Atari was the emergence of some serious competition for the VCS. The Mattel Intellivision was test-marketed in 1979 and released wide in 1980. It sold 200,000 units, and was considered superior in some ways to the Atari VCS. However, it was competition that could have been avoided (or at least postponed) if Ray Kassar had respected Nolan Bushnell's SLI chip blocking strategy.
"When I sold the company to Warner and after I left, Ray Kassar looked at and said 'Bushnell is a real idiot, why does he have five different chip manufacturing projects going along?' He cancelled all but the best ones. One went to TI, one went to Bally, and one went to Mattel. All of a sudden, with the stroke of a pen, he generated three major competitors." cxxxiv
- Nolan Bushnell
This has always been a bit of a grey area. The hardware specs of the Mattel Intellivision certainly sounded very similar to a project called The Atari 3200. The 3200 was a system that was supposed to be a successor to the 2600, but development did not start until 1981.
"According to engineering logs, in 1981 Atari began work on a new video game console to replace the Atari 2600 Video Computer System. This new console during development took on many codenames: Sylvia, Super-Stella and also... PAM (with notes next to it saying 'Super-Stella: Multipurpose'. This new console was to be based on a new 10-bit processor and would have more memory, higher resolution graphics and improved sound while maintaining compatibility with all existing Atari 2600 console games." cxxxv
- Curt Vendel
However, this still does not preclude it being the same chip, as no matter when design started on the system, the chip could have been designed long before. The most striking similarity between the 3200 and the Intellivision was the inclusion of 10-bit internals, which were not common at a time when 8-bit was the norm.
The 3200 was never built and Atari moved onto other projects to succeed the 2600. However, if it is true it means that Ray Kassar's contempt for engineering and his misunderstanding Bushnell's blocking strategy led directly to the Atari VCS's fiercest competition in the early '80s.
By 1980 the Atari Electronics Division's future looked very bleak. Touch-Me was not success, and its new products in development looked questionable at best. Al Alcorn, Roger Hector and Harry Jenkins lead a team developing Cosmos, a standalone console that combined and LED screen with holographic images. The holograms looked cool, but were mere window-dressing. The real meat of the games were played out on the LEDs.
"..you played a tabletop game then a hologram appeared. They made you think the GAMES were going to be Holograms!" cxxxvi
- Bill Kunkel
Still, there was much public interest in Cosmos and the team was pushing toward a 1981 CES unveiling for the product.