Atari: The original lean startup

(Editor’s note: Sylvie Leotin is the president at Atelier Leotin, a boutique consultancy firm. A modified version of this story originally appeared on her blog.)

Long before the words “lean startup” crossed anyone’s lips, Atari was leading the charge for what has become one of today’s most popular entrepreneurial philosophies.

The forerunner in the video game world used a disciplined approach to testing new products and ideas. It followed lean manufacturing principles applied to innovation (such as rapid hypothesis testing and validated learning about customers) and had a disciplined approach to product development.

Atari came to life in the time of mini-computers, but at $2,000 apiece, those systems were prohibitively expensive as a platform to market games. Atari founder Nolan Bushnell quickly realized this and knew he would have to invent a radically cheaper platform if he wanted to enter the market.

Working with his team, he helped build a proprietary circuit board that brought the cost down considerably. After adding the TV screen and other required accessories, Atari was able to provide a complete entertainment system for $1K – roughly the same price as pinball machines and jukeboxes, which dominated bars and restaurants at the time.

Bushnell understood three fundamental elements: 1) technology (he had a degree in EE), 2) the entertainment industry (he worked at amusement parks through high school and college) and 3) the distribution channels (from his experience with arcade games). By marrying his understanding of customers and distributors with an appreciation for what is technically feasible, he was able to envision innovative entertainment experiences that were marketable.

The first game Atari sold was not its own, but rather an MIT-created title called “Computer Space”. The company’s innovation lay in building a new platform to make video games affordable and prove marketability of the concept (with a minimum viable product). Computer Space was reasonably successful (selling approximately 1,000 units) – enough to encourage Atari to keep going, but not enough to enable the company to stand on its own.

The company needed funding to build a business. Their first product was good enough to get the attention of Bally (the pinball and slot machines leader), which offered the company a contract to develop a new game.

An engineer in the team came up with a coin-op version of a ping-pong game that everybody loved internally. It was meant to be a simple learning exercise, but Bushnell decided to put it out on location as a test. Bally was not impressed, though, and pulled out of the contract (returning the game’s rights to Atari).  Bushnell’s instincts told him to stick it out – and he was soon proven right.

Looking at his team, Bushnell realized it was chiefly comprised of B2B engineers, with no viable understanding of customer needs. Recognizing this as a drawback, he quickly institutionalized some significant cultural changes.

Bushnell felt his engineers had to experience being in the shoes of both customers and distributors to experience their pains first-hand. Engineers were charged with running games in test locations, with P&L responsibilities, like real distributors. As a result, these engineers found problems and defects before customers or distributors and got a better sense of which games worked and which didn’t.

Atari also rotated its engineers onto rotation on the assembly line, so they could learn to design products for ease of manufacturability.

Beyond internal changes, Atari owned its test locations – and was able to count quarters to get quasi real-time feedback on games, allowing it to iterate quickly and within its manufacturing constraints. By using these locations to try out games before rolling them out in large quantities, the company was able to predict earning profiles for new games, and to tell distributors what to expect.

Ultimately, Atari was largely responsible for the video game industry. Despite their late decline, they left a lasting legacy in Silicon Valley clearing the path for B2C companies with a fast-ramp model and an enlightened understanding of customers.