Atari's success drew new console manufacturers to the market, including Mattel Electronics and Coleco, and fostered third-party developers such as Activision and Imagic.

Looking to stave off new competition in 1982, Atari leaders made decisions that resulted in overproduction of units and games that did not meet sales expectations.

Morgan attempted to turn Atari around with layoffs and other cost-cutting efforts, but the company's financial hardships had already reverberated through the industry, leading to the 1983 crash that devastated the U.S. video game market.

Bushnell shared with Dabney his gaming-pizza parlor idea, and had taken him to the computer lab at Stanford Artificial Intelligence Laboratory to see the games on those systems.

[4] To create the game, Bushnell and Dabney decided to start a partnership called Syzygy Engineering in 1971, each putting in US$250 of their own funds to support it.

While Bushnell blamed Nutting for its poor marketing, he later recognized that Computer Space was too complex of a game as players had to read the instructions on the cabinet before they could play.

Using investments and funds from a coin-operated machine route, they leased a former concert hall and roller rink in Santa Clara to produce Pong cabinets on their own with hired help for the production line.

[26] Kee was further led by Atari employees: Steve Bristow, a developer that worked under Alcorn on arcade games, Bill White, and Gil Williams.

[27] Bushnell said "We didn't realize that Japan was a closed market, and so we were in violation of all kinds of rules and regulations of the Japanese, and they were starting to give us a real bad time.

Atari struggled to find a distributor for the console but eventually arranged a deal with Sears to make 150,000 units by the end of 1975 for the holiday season.

Atari, as a private company under Bushnell, gained a reputation for relaxed employee policies in areas such as formal hours and dress codes, and company-sponsored recreational activities involving alcohol, marijuana, and hot tubs.

[24][35] Atari had about $40 million in annual revenue;[36] for Warner, the deal represented an opportunity to buoy its underperforming film and music business divisions.

Atari's pinball machines were built following the technology principles they had learned from arcade and home console games, using solid-state electronics over electro-mechanical components to make them easier to design and repair.

Among other concerns about the direction Kassar was taking the company, Bushnell cautioned Warner that they needed to continue to innovate on the home console and could not simply release games for the VCS indefinitely like a music business.

[34] In a November 1978 meeting with Warner Communications, Bushnell said to Gerard that they had produced far too many VCS units to be sold that season and Atari's consumer division would suffer a major loss.

[34] Further, after Warner refused to include programmer credits into game manuals over concern that competitors may try to hire them away, Robinett secretly stuck his name into Adventure in one of the first known Easter eggs as to bypass this issue.

[34] Similarly, Rob Fulop, who programmed the arcade conversion of Missile Command for the VCS in 1981 that sold over 2.5 million units, received only a minimal bonus that year, and left with other disgruntled Atari programmers to form Imagic in 1981.

The original development team, including Meyer, Miner and Decuir, estimated the VCS had a lifespan of about three years, and decided to build the most powerful machine they could given that time frame.

While Tod Frye was able to get a version of Pac-Man on the VCS within the system's limitations, the resulting game was critically panned for many technical issues such as excessive flickering of the on-screen characters.

However, because of the poor technical implementation, Pac-Man caused consumers to become more cautious on rushing to purchase new games in the future, and tarnished Atari's image given that the company was trying to compete against low-quality third-party titles that were starting to flood the market.

was critically panned and later became known as one of the worst games ever made, though it sold 2.6 million copies in 1982, in 1983 suffered massive returns making it a financial failure.

[56] In December 1982, Warner Communications announced that it was expecting significant decline in investor earnings of about 40% for the fourth quarter of the year mostly as a result of slower game cartridge sales from Atari.

In one case, we were fed mis- and disinformation on a frighteningly regular basis, from a highly-placed someone supposedly in charge of all publicity concerning the computer systems.

[69] Coleco had legal grounds to challenge the claim though since Atari had only purchased the floppy disk rights to the game, while the Adam version was cartridge-based.

[73] Kassar eventually resigned as CEO of Atari in July 1983 over mounting financial losses, and Warner replaced him with James J. Morgan, a vice president from Philip Morris Inc.[62] Stating "one company can't have seven presidents", Morgan stated a goal of more closely integrating the company's divisions to end "the fiefdoms and the politics and all the things that caused the problems".

[74] Morgan implemented processes to reduce operating costs at Atari, including laying off about 3,000 jobs and moving 4,000 more manufacturing positions to Asia.

Many of the new companies that had sprung up to take advantage of the rising growth of video games prior to 1983 shut down, liquidating their assets and further contributing to the excess unsold stock.

[80] In October 1983, Atari created its Atarisoft division, producing software from its own library to work on its rival systems including for computers from Commodore, Apple, Texas Instruments, and IBM, as well as console games for Colecovision.

[83] On July 3, 1984, in a surprise announcement, Warner announced that they had sold off the assets of the consumer electronics and home computer divisions of Atari, which included the console and computer production, game development, and Atarisoft divisions, to former Commodore International CEO Jack Tramiel in exchange for taking on roughly $240 million in debt held by Warner.

Namco later lost interest in operating Atari Games and sold 33% of its shares to a group of employees led by then-president Hideyuki Nakajima in 1986.