Atari's bet on home computers

Information Processing

Computers

Business Week

June 15, 1981

Because the home computer still does not have much of a market--despite the initial wave of enthusiasm three years ago over its huge potential-nearly all of the personal computer makers are concentrating their development and marketing efforts on where the action is: the business and professional customers who are responsible for U. S. microcomputer sales soaring ahead at more than a 40% clip this year.

But Atari Inc. is absolutely committed to the consumer business, and despite the fact that it is almost alone in believing that now is the time to do it, the Warner Communications Inc. subsidiary is betting its future on the home computer and ignoring today's high-flying markets. A senior Warner executive admits that Atari seems to be ignoring the conventional wisdom, "but sometimes you've just got to go with your gut feeling," he says, "and home computers will be one of the most important consumer electronics products of the 1980s."

No threat

"Perhaps the market doesn't exist today, but we're prepared to make it happen," the Warner executive declares. Atari believes the market is about to explode for two reasons: To the man on the street, the computer is becoming so easy to use that it will no longer represent a technical threat, and enough software is finally becoming available to make the computer attractive for a variety of jobs in the home.

Today's home computer market is definitely puny. Sales last year hit 52,000 units worth a mere $38 million. But the outlook for 1985 is a bullish one: 1.5 million computers worth $500 million in retail sales. By then the number of consumer computers sold will match the number of units sold in the commercial marketplace, predicts Roger H. Badertscher, president of Atari's Computer Div. To accomplish this crossover by that time, however, will take some "substantial improvements in software and prices," adds John V. Roach, president of Tandy Corp., one of the industry leaders with its Radio Shack line.

To start the ball rolling in that direction, Atari in recent weeks has slashed the price of its lowest-priced unit, the Model 400, by 37% to $399, poured millions into new software for the home, and added department stores throughout the nation to its distribution network. The company recently launched a multimillion-dollar advertising campaign aimed directly at consumers.

The Sunnyvale (Calif.) company goes back a long way with the affluent home owner. In the mid-1970s, Atari almost single handedly created the market for video games such as Pong and Asteroids. ln fact, video games, including the programmable players that can play a wide variety of games through the use of plug-in cartridges, accounted for the major share of Atari's $425 million in revenues last year. Now, Atari's strategy is to gain a leading position in the home computer market.

Little Choice

Last October, Atari spun off its computer line as a separate division. Raymond E. Kassar, Atari's chairman, is confident that the new division will soon move out of the red and become a moneymaker--and will even become the company's largest and most profitable division within five years.

Atari may have had little choice in choosing its new strategy. Its computer division lost an estimated $10 million last year on what one analyst estimates to be just $10 million in sales. Ever since it introduced its two computers two years ago, the consumer products company had been trying with little success to sell its products to businessmen. "It doesn't fit our overall strengths to be in the business market," Badertscher says now. "We're a consumer company--part of Warner, which is a consumer company." Comments competitor Ed Juge, computer merchandising manager for Tandy's Radio Shack Div.: "It was hard enough for us to convince people we were a serious computer company. It would be super difficult for Atari to walk into GM [General Motors Corp.] and say: 'Here's a computer from the folks who brought you arcade games.' "

Small business market

Nevertheless, Badertscher is hoping that once his computers gain acceptance in the home, they will also find a niche in the very small business computer market where ease of operation is just as important as it is in the home. While he refuses to comment on Atari's plans to move in this direction, insiders say that Atari is currcntly holding discussions with mainframe and minicomputer manufacturers about teaming up. Atari would concentrate on consumer sales while its partner would go after the business customers.

One entree to millions of American households, as far as Badertscher is concerned, is the educational market. He is making a concerted push for this business, which already accounts for 25% of Atari's computer sales. "It's important that kids be weaned on Atari," Badertscher declares, since his strategy is that any children who use an Atari computer at school would then press their parents into buying one for the home.

To get into the schools, Atari is offering a free, 30-day trial offer. "It's going to be hard for any school to give the computers back after the kids and teachers get 30 days to use them," says Stanley H. Goldman, a product marketing manager at Computerland Corp. His San Leandro (Calif.) company operates 166 retail computer stores that sell Atari machines.

Atari has tried to make its computers simple enough so that almost anyone can use them. No programming experience is required; users just snap in a program cartridge and type two command words to operate the machine. This approach is similar to that of Texas Instruments Inc., one of the few other personal computer makers aiming solely at the home market. But Atari says that it has learned some important lessons from TI, which initially stumbled badly with its entry. One lesson, it says, was not to depend on in-house software. Atari, like TI, is running a contest now to reward outside software authors who write programs for Atari computers. And even though TI recently reduced the price of its computer to $525, it is still much higher than Atari's.

Software gap

But Atari still faces some major stumbling blocks in its move to open up the consumer market. For one thing, both Commodore Corp. and Radio Shack offer lower-priced machines. And the company cannot churn out software fast enough and has had to turn to independent software suppliers for help. Badertscher acknowledges that the computer will not become a mass consumer product until there are programs for everything from entertainment to home management, and that includes mundane tasks such as deciding which cosmetics to wear with which dress, and choosing the colors of carpets and drapes for the home.

But there is an even more important role that the computer can play in the home that could help Atari and the other computer makers to open up this market. "Home information networks will make the home computer market explode," Badertscher says. He brashly predicts as a result that computers will be in 95% of the nation's 70 million homes by 1990.

Atari is already getting important support from its $2 billion (in annual sales) parent. At the same time, Warner is counting on Atari's computer to unlock the demand for a whole range of Warner information products and services. The two companies already have joined forces with CompuServe Inc., a subsidiary of H&R Block Inc., to test an interactive home information system. And subscribers to Warner's QUBE television service will be able to use an Atari computer to call up the latest news, stock market quotations, and information from other data banks, as well as services such as electronic mail and electronic shopping.

But Atari and Warner have plenty of competition in this embryonic market. Apple Computer Inc. and Mattel Inc. are working on similar systems--and all computer makers will face stiff competition from TV set makers. The TV manufacturers plan to incorporate terminals in their equipment that can do the job of a computer in home information systems, according to Grant S. Bushee, an industry analyst with Dataquest Inc., the Cupertino (Calif.) market researcher. "It's going to be a battle," he acknowledges, "but Atari has an advantage since it has shown it understands the home market."

It is a battle that Warner is determined to win. "It's a critical part of its long-term strategy for tying together its various cable, video, and entertainment operations," notes one industry executive close to the company. Both Atari and its parent are thus moving quickly into the home market even though such an early move could mean further short-term losses. "We're in this for the next decade," asserts a Warner executive. "We're not in this for tomorrow."

GRAPHIC: Picture, Badertscher predicts that home information networks will result in 95% of U.S. homes having a computer by 1990. Robert A. Isaacs