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Pure Bollocks Issue 21_003
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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