1978: Atari Electronics and Pinball

Atari's pinball division continued to produce games through 1978. The first was Middle Earth in February. It included a double playfield with sets of flippers and a theme based on Lord of the Rings. Also released in 1978 was the largest pinball machine ever made (83" tall x 39" wide x 93" deep). Hercules in April 1978, and Space Riders in November 1978.

At the same time the Atari Electronics division released its first product, Touch-Me, which was a version of the arcade game of the same name that was similar to well-known toy inventor and patent defender Ralph Baer's Simon game at Milton Bradley.

"(I did) a little product called Touch-Me, which was a hand-held version of Milton Bradley's Simon, which was Milton Bradley's version of Atari's coin-op Touch-Me." ^lii

- Dennis Koble

Touch-Me was not a huge success, and the Electronics Division never released another product. Three other products were created in 1978, but never sold: handheld versions of Space Invaders and Breakout, plus Pro Coach Football.

1978: Bushnell Leaves

As 1978 continued, Ray Kassar's involvement in Atari moved from mere consultant into a much larger role. As Ray's importance grew -- and confidence in his abilities increased within Warner brass such as Manny Gerard -- Nolan Bushnell and Joe Keenan were systematically pushed out of the company.

"By the time I got to Atari (in the summer if 1978), Nolan was just being phased out by Ray Kassar." ^liii

- Rob Fulop

Bushnell constantly fought with Warner Communications and Kassar over the direction of Atari. By the end of 1978, Bushnell was convinced that Atari was making huge mistakes. He felt that the VCS was in trouble, and needed to be scrapped for a successor.

"The day that we shipped the 2600, I felt we needed to spend engineering money on getting the next one. By the time it was there, the technology had advanced so much that we could build a much better video game. Warner was horrified by the idea. They wanted to be in the 45 rpm record business and just sell records for ever, and I told them, 'It doesn't work that way, every two to three years you need to upgrade your hardware', and their decision to not upgrade the hardware was really what led to the collapse of the business in 1982."

- Nolan Bushnell

He also felt that the incipient Atari computer line needed to embrace outside developers, but the record company execs from Warner -- who were used to completely controlling IP and the delivery medium for it -- wanted to make the new computers completely closed to outside developers.

"I felt that the computer system should not be a closed system, we needed to have third party software developers. I could see Steve Jobs out evangelizing, and Atari was saying that if you write software for the Atari computers, we will sue you. I just thought that was foolhardy. They were from the record world, where you sue people."

- Nolan Bushnell

Bushnell also continued to fight with Warner over R&D, especially his plan to tie up all the N-Channel chip fabricators with alternative Atari designs, so no competitors could get their products manufactured. They also argued over the premium prices Atari put on pinball machines.

History would prove Bushnell correct on all accounts except for the fate of the VCS, and this became his Achilles heel to his superiors. In November 1978, Bushnell laid his feelings bare about the fate of the VCS during a meeting at Warner headquarters in New York City. Atari had manufactured 800,000 units for 1978, but many remained unsold. ^liv It looked like dire straits for all involved, including Bushnell and Manny Gerard.

"The meeting -- Warner's annual budget meeting -- took place in November. It proved to be Bushnell's downfall. Before a crowd of high-level executives, Bushnell and Gerard locked horns, screaming at each other for hours." ^lv

- Steve Bloom

The pair fought about all their outstanding issues, especially the still-poor sales of the VCS.

""It was a very bad year for the company. Clearly we built too many units, which translated into potential disaster. We're talking $40 million worth of inventory that the company was stuck with." ^lvi

- Joe Keenan

Bushnell was convinced that VCS would have a disastrous Christmas season. Gerard was confident that Kassar's marketing plans would show good results. The meeting turned into a complete disaster, and all involved knew that some kind of change had to be made.

The one thing that could have saved Bushnell was if his prediction for terrible VCS sales had come true. However, it never materialized. The success of Space Invaders in the arcades, plus the unprecedented Kassar-initiated TV marketing blitz for the VCS in the fourth quarter of 1978, meant respectable sales for the Christmas 1978 season, and $200 million for the consumer division in fiscal 1978-1979. Bushnell was very much part of that success.

"Don't forget, I also hired Ray (Kassar). If there was a problem with marketing, as Warner claims, I solved that problem by hiring Ray." ^lvii

- Nolan Bushnell

However, his prediction of the VCS's failure was his Bushnell's undoing. Manny Gerard suggested a reorganization that would have kept Bushnell at Atari as director, but Bushnell realized that he could never really effectively control his company again.

"I realized no matter what the title was, the real shots were going to be called from New York." " ^lviii

- Nolan Bushnell

Instead, Bushnell informed Gerard that he wanted to be fired (Warner contended that it fired Bushnell, but the end result was the same) and thus ended the role of the first engineer entertainer in the business of the world's first video game company.

Bushnell signed a seven year non-compete agreement, negotiated for the rights to Chuck E Cheese Pizza Time Theater from his former company (for $500,000 ^lix), and then set off to try to conquer the world in other avenues.

"You can spend your life doing woulda, shoulda, coulda. I wish I hadn't sold to Warner, because I think that the world would be a very different place with Atari being the preeminent video game company today." ^lx

- Nolan Bushnell