
      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.




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