SNAFU with Ed Helms
From Business History: How E.T. The Extra-Terresterial Destroyed Atari
03 Apr 2026
Transcript generated automatically by AI and may contain errors.
Chapter 1: What is the background story of Atari's rise in the gaming industry?
Hey, snafu fans. It's Ed. Today, I'm coming to you with an episode of a podcast I have been loving. It's called Business History. Hosts Jacob Goldstein and Robert Smith, former Planet Money guys, dig up the wildest, most, wait, what?
Stories about businesses big and small, like how Hitler's favorite car became the ultimate hippie vehicle or why Thomas Edison got mixed up in the invention of the electric chair. Every episode is a masterclass in how fascinating people built something incredible and either watched it soar or burn to the ground. Either way, it tells us something about how we run business today.
Today's tale is really wacky. Fueled by hot tubs, recreational drugs, and a love of games, Nolan Bushnell took computer games out of research labs and into bars, launching an industry. His arcade game, Pong, was a monster hit, so he set up Atari... to build a home games console, which became the must-have Christmas present of 1975.
Atari was the name on every kid's lips, but then the investors came, and the investors brought pressure. Bushnell and his engineers were pushed aside as Atari expanded, and in a desperate bid to cash in on Hollywood hype, The company concocted a wild plan for a game based on Steven Spielberg's mega-hit E.T. the Extraterrestrial. Developed in mere weeks, it tanked and brought Atari down with it.
Which is ironic because I remember the game E.T. on Atari when I was a little kid and I loved it. Anyway... Here's the episode. If you enjoy it, there's more tales of founders, business success, and spectacular failures on business history. Available on YouTube, Apple, Spotify, or wherever you get your podcasts.
Robert Smith, here is the big question for today's show. Yes. How did Atari essentially invent the video game industry in the hearts of millions of young people in the 1970s and then blow up entirely in the early 1980s, basically never to be heard from again? It's a great question. We are both of the age where we remember this personally.
Yeah, I remember my dad coming home with one of the first Atari sets. It was like magic. What was it? It was Pong, which was a ping pong game, you know, with little paddles and you'd send a little electronic ball across the screen. And it was transformative because it was the first time you could actually interact with a television set, which was sitting there in the center of your home.
And to be clear, I was not an early adopter. I was not cool at all. Everybody had the Atari set.
I'm a little younger than you, not to throw it in your face. But so for me, I don't remember Pong, but I remember the Atari 2600 came to be called the 2600, which was like the first video game system like we know it today, where you buy it and there's different cartridges. And this was, you know, the dominant video game in the early 80s. I loved it. I had Defender.
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Chapter 2: How did Nolan Bushnell's vision shape Atari's early success?
We started with Atari, and our next step is... An amusement park that I initially called The Lagoon in Utah. And you pointed out... It is called Lagoon. And you know this because? Because I grew up in Utah and went there once a year, and it was the best day of the year. It's an amusement park, right? You play games, there are rides, you eat a lot of fried salty foods. It was amazing.
Robert, I guess you would have been going to Lagoon in the 70s. A few years earlier, it was this college kid named Nolan Bushnell who worked summers there. On the Midway, like where there was games, like whatever, guess the weight of the guy and knock down the milk cans or whatever.
And just in case you have an image of someone who's a carny working the milk jug games, this was not Nolan Bushnell.
But he was a carny genius. He became king of the Midway, was running... Running all the games when he was like 20 years old because he was really good at getting people to spend their money on the games. Like one example he gave later that is dear to my heart is this. So there is that game where there's these like metal milk jugs, I guess, just like metal bottles. Yes.
And there's whatever, four of them or six of them, and they're stacked up. Yes. And you have like a softball or something. You throw it at it and try andā You're trying to win a stuffed animal. Yeah, maybe a giant stuffed animal or something. If you knock down all the milk bottles, right?
And it turns out, he talked about this later, that like half of the bottles are heavy and half of the bottles are light. And so if you put the light bottles on the bottom, it's really easy to knock them down, right? If you put the heavy bottles on the bottom, it's really hard to knock them down. Physics. and so he had this move he would make when, like, a bunch of high school students would come.
There'd be, like, you know, the captain of the football team and then, like, the water boy kind of trailing along behind. Okay, I was more the water boy?
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Chapter 3: What led to the creation of the E.T. video game by Atari?
Yes, you knew that, yeah. He'd get the water boy to play, and he'd set it up the easy way so that it's really easy to knock him down. The water boy knocks him down, gets the big prize. Everybody cheers, yeah. And then the captain of the football team's like... Oh, I'm definitely going to just kill at this.
But then Nolan Bushnell would set it up the hard way so that the football player throws and they don't fall down. He's like, OK, I'll try again. I'll try again. And he'd basically take all of the football player's money because he couldn't knock them down.
You realize that games are psychology. Yeah. You know, it's storytelling and psychology. And this would, of course, come in useful.
Yeah. And he had a real sense of fun, right? Like this was fun for the water boy, not fun for the football player.
Chapter 4: Why did the E.T. game fail so spectacularly?
But like he he loved to party, took a lot of drugs. He was studying electrical engineering in school, but it took him like seven years to graduate. Eventually, he moves to Silicon Valley, not called Silicon Valley yet, but it's becoming that right. This is right where we were at the end of last week's show. And he's going to invent the video game industry, but he doesn't know it yet.
So at the time, he works for a company called Ampex, famous for those of us in the radio business as the makers of magnetic tape. Did you use Ampex tape in your career? Of course. My closet's filled with it still, right? Is it true? It is, actually. I can't get rid of them.
But Ampex was notable not just because it was an electronics company in the Bay Area, but because it had this policy that allowed their employees to basically take stuff home and tinker with it, you know, to come up with new ideas based on the equipment. And so Bushnell starts taking stuff home, thinking about Ampex.
And in particular, he's thinking about video games. Or really, video game. Because at this point in history, there's essentially one video game. And it was created by these guys at MIT, of course, MIT, in the early 60s, to be run on, you know, a computer, which at that time was a big machine that you had at a university that cost hundreds of thousands of dollars. The game was called Space War!
Great name for a game. And... It was fun if you understood, like, Newtonian gravity, right? You, like, have a spaceship, and there's a star, and it's like... You have to go around the sun to get velocities. I guess the gravity goes into the square of the distance, whatever. So he's thinking about space war, exclamation mark.
And, you know, when he first played it in college, he played it at the university on this extremely expensive computer where it obviously wouldn't work... Anywhere else, it wouldn't work as a business because the computer was too expensive. You just did it at night for fun.
But by the time he's in Silicon Valley in the early 70s, you know, Moore's Law, like we talked about last time, is cranking along. Computers are getting cheaper and cheaper and cheaper and faster and faster and faster. And he's like, oh, maybe now that technology has got to a place where I could make Space War...
On a machine that I could build cheaply enough to put it in a bar next to a pinball machine and get people to put quarters in it.
That's Bushnell's law, which is basically if people have coins in a place of amusement, they will spend all the coins they have on something that's new and fun. Yes.
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Chapter 5: What were the consequences of Atari's failure with E.T.?
Yes. You know, Nolan Bushnell and his colleagues have built a machine that people just cannot help themselves but put money into. We're going to need a bigger coin box. We're going to need a bigger box.
People love to put quarters into a new thing. Well, to see the new technology and to tell everyone about it, right? That's one of the first insights of the technology. And then it's got to be worth playing a second time, which is what he also had. He had the two pieces. It's super fun.
It's a new thing, and it's super fun. Now he's got a scale. Very classic startup problem. You have a thing. People want it. But remember, he essentially stole the idea from Magnavox. By the way, lawsuit, they settle out of court, whatever. Lots of people now, you know, it's Silicon Valley. People are coming by Andy Capp's tavern who are engineers who are like, we can do this.
And so he's got to get video games out into the world fast. Going to need money. Yeah. He's going to need money. Nobody's going to give him money yet, right? He's just some stoner with one video game in a bar. Yes. So he makes a move that has already come up a few times on our young show. Your favorite? Negative cash conversion cycle. The negative cash conversion cycle.
He's able to sell games before he has to pay for the parts. So the parts to make a game cost Atari like $300. But crucially, they don't have to pay for those parts on delivery, right? They have like a month. So the parts come in. Atari doesn't have to pay anything. They put them together and sell the machine for $900. And then a few months later, they have to pay $300.
But meanwhile, they got the money from that machine. They're growing. They're off and running. Now, other problem, classic scale problem, hiring. And then one day, this like 19-year-old hippie kid walks in and he says he won't leave until they give him a job. And the receptionist calls the head engineer and she goes, yeah, we got a hippie kid in the lobby. Says he won't leave until we hire him.
Should we call the cops or let him in?
And the engineer says, bring him on in. It's the 1970s in Silicon Valley. And this guy wanders in and he is, whenever you tell a story like this, you know who it is. It's Steve Jobs. It's Steve Jobs. So fun.
It's so delightful. And perfectly, Steve Jobs is very good at his job. Yes. And very unpleasant to work with. Classic. Completely unsurprising. He tells Bushnell that, like, everybody's soldering wrong, right? They're actually putting together the hardware, soldering the hardware. He's probably right. And Bushnell's like, yeah, he was right. Yeah. He keeps calling his manager a dumb shit.
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