The following is a reprint of an article appearing in FORBES, issue dated: AUGUST 3, 1992 ctsy of Drew Reid Kerr GEnie: D.KERR1 - DELPHI: DRKERR - CompuServe: 70372,3036 There have been no alterations in the text nor any additions. Reprinted by permission of FORBES magazine, August 3, 1992. (c) Forbes, Inc., 1992 CHEAP DIDN'T SELL ================= Computer game maker Atari Corp. is in trouble again, a prime example of the dangers of pinching pennies on everything from marketing to expense accounts by Dyan Machan Only a decade ago Atari Corp., the Sunnyvale, Calif.-based computer company, ranked just behind Coca Cola in name recognition. At its peak a cash machine that was owned by Warner Communications, Atari employed 10,000 people worldwide; sales were over $2 billion. But a flood of poor-quality computer games sent sales into a tailspin in 1983, and Atari lost $500 million. Warner sold the struggling company in 1984 to Jack Tramiel at the bargain price of $240 million in promissory notes. Tramiel built sales back up to just under $500 million a year by 1987. But today things are unraveling again. Sales were a meager $258 million last year, and falling. First-quarter 1992 losses were a staggering $14 million on $44 million in sales, and company sources say second-quarter results, due out in late July, will be far worse. Twenty-seven executives have either resigned or been fired in the past 30 months. Atari stock traded at 16 in 1987, but now bumps along at 1 5/8. What happened? Tramiel made a common mistake. He tried to duplicate a past success under very different market conditions. Tramiel's earlier triumph was at Commodore International, where he undercut the competition with cheap computers and spent next to nothing on marketing, promotion or overhead. The cheap strategy worked beautifully. Commodore's stock market value surged, putting Tramiel in The Forbes Four Hundred in 1987, although by then he had been pushed out of the firm and had sold his stake in Commodore. Could he repeat the trick with Atari? When Tramiel bought the game maker, he appointed his oldest son, Sam, now 42, as Atari's president and chief executive officer. Together the emphasized cheap computers over videogames -- in retrospect a terrible mistake in a world that was rapidly filling up with inexpensive computers. In 1985, Jack Tramiel rolled out Atari's new ST personal computers, an inexpensive line made in Taiwan. Atari launched the ST line in Europe, where Tramiel had contacts from his Commodore days and where there were plenty of companies to write software. Off to a good start, Atari made a profit of $44 million on $493 million sales in 1987. The good times didn't last very long. Miffed that Atari gave away prepackaged software with sales of its machines, European software producers stopped writing programs for the ST series. Another Tramiel blunder, because in the computer industry software sells the hardware. Then Dell Computer, Leading Edge and Packard Bell began selling their inexpensive computers in Europe. Last year Atari's European sales collapsed to $209 million, from $342 million in 1990. Meanwhile, Apple and Commodore were locking up shelf space and dealer loyalty in the U.S. market. And since the Atari ST didn't use the DOS operating system, software makers weren't much interested in writing new ST programs. Consequently, U.S. computer sales never amounted to much. To provide Atari with distribution outlets, Tramiel bought money losing Federated Group, a southern California consumer electronics chain, for $67 million in 1987. He put his youngest son, Garry, then in his mid-20s, in charge of Federated. Garry wasn't up to the job. A year after Tramiel bought Federated Group, the chain lost $124 million and Atari shut the doors. In videogames, Tramiel held back the introduction of the 7800 Prosystem for 18 months, opting instead to take the lower-cost route of updating an older system that couldn't compete with the more powerful Nintendo Entertainment System. When Atari finally did roll out the Model 7800 in 1986, it spent just a little over $300,000 promoting it. Nintendo and Sega were spending $15 million apiece promoting theirs. Nintendo now has an 80% market share. Unable to compete against Nintendo in the marketplace, the Tramiels sued Nintendo for antitrust violations. Last April a jury sided with Nintendo. In 1989 Atari blew another opportunity to knock Nintendo off its perch. Atari's portable videogame, the Lynx, had color graphics and was superior to Nintendo's black-and-white, more basic, portable Gameboy unit. But Lynx could run only four or five games, the result of cutting Atari's software development to the bone. Nintendo's Gameboy could run more than 80 games. Even after cutting Lynx's price to $99 from $179 to get closer to Gameboy's $89, Atari again went the cheap route and spent virtually nothing on national advertising. Result: Today Gameboy has 81% of the market and is sold in 16,000 outlets. That compares to 3% for Lynx, available in fewer than 3,000 stores. The Tramiels seems to enjoy competing against each other to save pennies. Example: In a confidential memo to Sam Tramiel, computer games president Michael Katz, who has since left, complained how Garry Tramiel refused to allow him to spend $54 to air-freight two cartridges he needed for an important presentation to a big client. Atari employees say father Jack personally checks expense reports to make sure that restaurant tips don't exceed 15%. When Atari lost the Nintendo suit, Jack Tramiel took day-to-day charge of the company away from son Sam. Sam has moved out of his fancy corner office into ordinary space, next to purchasing. Two new Atari products are due out in the next 12 months: the Falcon 030, a souped-up ST computer; and the Jaguar, the next-generation videogame console. But industry sources say that to launch both products with the promotion needed to give them a real chance would cost some $40 million. That's about all the cash Atari has on hand, and the company needs $24 million a year just to meet its operating overhead. One Atari official who spoke to FORBES on the condition that he remain anonymous, sums up the company's problem this way: "The Tramiels are not stupid. But their formula for success worked only once. They are not adaptable people." Not a good trait in any business, especially computers. **** ** OPINIONS ON THE FORBES ARTICLE ** Conf : STReport Online Msg# : 21395/21400 Lines: 9 Read: 1 Sent : Aug 06, 1992 at 7:16 PM To : All From : Chris B. Herting at Fnet Node 556-Suitland-MD Subj : Atari. Yes, it has been quite a while since I posted SEVERAL messages criticizing Atari. Right after my messages were published in STR, I received many responses supporting my views. I also received messages telling me I was unfair. Atari can do no wrong. Something STR has been hearing for sometime. Now I think everyone has seen the proof, everyone has read the Forbes article. STR was RIGHT all along, and I was right to speak out. It is about time people start seeing the light, and the ones who haven't start telling the truth. Atari should NOW explain their actions.. TRUTHFULLY. ***********************************************************************