Atari’s Lost Deal for the Nintendo NES
By Justin on September 1, 2004 | Retroist | Instagram
In 1983 Nintendo was in talks to license the NES to Atari for worldwide distribution outside of Japan. Agreements were being met, the deal was nearly signed, but history would happen differently. Had a few minor skirmishes been avoided and the resignation of Atari CEO Ray Kassar happened just a bit later, the gaming industry as we know it today may never have existed. Posted at the bottom of this page is a transcript of an Atari Interoffice Memo dated June 14, 1983. It’s an incredible piece of gaming history that documents the relationship between Atari and Nintendo during 1983. Nintendo was seeking Atari’s partnership in distributing the new Nintendo Famicom system, which would become known as the Nintendo Entertainment System outside of Japan. In 1983 Nintendo was still mostly unknown in North America, and it was Atari who was the household name synonymous with video games. Nintendo lacked the confidence to go it alone and was looking to leverage the Atari brand name to distribute Nintendo’s new game system throughout the world.
Nintendo Famicom (1983)
When Nintendo entered the U.S. arcade market with Radar Lock, one of their most popular games in Japanese arcades, they learned that popularity in Japan did not automatically translate into success in America. Radar Lock sold poorly in the U.S. and Nintendo approached the U.S. console market cautiously. Nintendo had little name recognition outside of Japan, and sought a partner with strong inroads in retail distribution channels to help sell the Famicom in the U.S. and worldwide. Curiously, even though Nintendo had a good relationship with Coleco who had enjoyed success with their own system on the strength of Nintendo’s Donkey Kong, it was Atari that Nintendo approached for a partnership.
“Mr. Yamauchi said, “Why don’t you contact the Atari people?” So I called Ray [Kassar], and the next thing we knew, we were going down in a corporate jet to Warner.”
– Howard Lincoln, chairman, Nintendo of America
Atari had top brand recognition and the clout that came with having built long-lasting relationships within the industry, and with being owned by a major media enterprise like Warner Communications. By this point the video game industry was beginning to collapse in America, but the depths of the crisis had yet to fully set in. Atari had already reported losses, Ray Kassar was involved in an insider trading controversy, and the 1982 holiday season had not lived up to projections. Yamauchi was aware of the issues but believed the Famicom was the best video game system ever made.
Nintendo maintained a level of hubris throughout the negotiations. Nintendo has become well known for making demands of exclusivity, but remember, this all happened pre-NES when Atari was king and Nintendo didn’t have a leg to stand on. Usually in deals like this one company (Nintendo) licenses their product to another company (Atari) with greater ability to produce and sell the product, paying the first company a royalty (percentage) for every item sold. The deal Nintendo was proposing was tilted dramatically in their favor, basically using Atari as a salesforce. Atari would purchase finished products from Nintendo that Nintendo would produce for Atari and generally retain control over, leaving Nintendo with most of the profit and Atari to sell the products worldwide as their own.
“I mean, it was a done deal. We spent a week putting this thing together, this elaborate agreement in Kyoto. Skip Paul was over there…. we had the whole thing put together. It was a deal.”
– Howard Lincoln, chairman, Nintendo of America
Nintendo was pushing Atari to move quickly as not to miss the 1983 Christmas season. Atari was running out the clock while they weighed their options with another Atari system that would eventually become the Atari 7800 already under development at General Computer Corporation. Atari found both systems compared favorably as a replacement for the 2600, and were superior in most ways to the 5200.
Nintendo’s Howard Lincoln
The deal almost went through. Nintendo had expected to sign the deal with Atari at the 1983 Summer Consumer Electronics Show in Chicago. Everything was on track. The same day, Coleco had debuted the Adam Computer playing a version of Donkey Kong, a game Nintendo had licensed to Coleco for use on game consoles which had been very popular as the pack-in title for ColecoVision. However, Atari had licensed the rights to Donkey Kong for use on home computers. When When Hiroshi Yamaguchi, Minoru Arakawa and Howard Lincoln of Nintendo went to meet with Atari expecting to finalize the deal, they were met with an angry letter from Ray Kassar claiming Coleco’s use of Donkey Kong on the Adam breached their licensing agreement with Nintendo for home computer rights to the game.
Nintendo scrambled to fix the situation with Coleco and keep Atari happy. Remember, in 1983 Donkey Kong was the biggest reason why anybody would have wanted to work with Nintendo. Other Nintendo games of the time were good but did not enjoy the immense popularity of Donkey Kong, and Super Mario Bros. had not come out yet. Howard Lincoln sought to smooth things over with Atari and called for a meeting with Coleco’s president, Arnold Greenberg. Nintendo was furious at Coleco for creating a new version of Donkey Kong without asking permission or even so much as notifying Nintendo of what they were doing, and Coleco’s shotgun approach had nearly cost Nintendo their deal with Atari. Nintendo’s president Hiroshi Yamauchi entered the room abruptly and without addressing anyone stood at the end of the table and began screaming in Japanese. Yamauchi swung his arm around in an arc, pointed directly at Greenberg and demanded that Coleco stop showing or selling Donkey Kong on the Adam computer.
The 1983 Atari-Nintendo deal would fall apart for a number of other reasons though. A few weeks after the Donkey Kong disaster was averted with Coleco, Atari’s CEO Ray Kassar was fired (publicly it was announced as a resignation) stemming from management issues and SEC allegations of Insider Trading. Ray Kassar had been a driving force behind the deal with Nintendo, and in the time it took to replace him the Nintendo deal had fallen between the cracks.
Most shocking of all was that Atari didn’t seriously consider distributing the Nintendo Famicom for very long. Atari found the MARIA (Atari 7800) technology developed by GCC to show more promise than the Nintendo Famicom, and given Nintendo’s one-sided deal in which Atari did most of the work and Nintendo retained control and profits, Atari didn’t have much interest in playing another man’s game and relegating Atari to little more than Nintendo’s sales arm.
That’s not to say Atari wasn’t going to sign the Nintendo deal though. By signing the deal with Nintendo, Atari would have be given exclusive worldwide distribution rights outside of Japan to the Nintendo Famicom, what was to become the Nintendo Entertainment System, and would lock Nintendo out of selling to the rest of the world – while Atari moved forward with the other game system and what they believed was a better deal.
The timing for Nintendo couldn’t have been better. Nintendo was preparing to launch their new system in the aftermath of Atari’s collapse. Atari had laid off thousands of skilled employees, many of them sales and marketing people who would come to work for Nintendo of America directly or indirectly. Others had already started their own successful companies such as Worlds Of Wonder, markers of Lazer Tag and Teddy Ruxpin that had started by a lot of former Atari employees and headed by Don Kingsborough, a former Atari vice president. Worlds Of Wonder hired many ex-Atari sales representatives who they knew would be aggressive, and worked with Nintendo to set up a solid distribution network. An incredible amount of ingenuity, creative thinking and hard work resulted in a successful test market launch of the Nintendo Entertainment System for Christmas, 1985.
Nintendo Advanced Video System (Prototype NES, 1984)
Nintendo AVS Wireless Controller (1984)
Nintendo AVS & Accessories (1984)
ATARI INTEROFFICE MEMO
TO: John De Santis
CC: Dave Stubben, Jeff Heimbuck, John Cavalier
FROM: Don Teiser
SUBJECT: The Nintendo Situation
As we discussed with Dave Stubben yesterday, I am to remove myself from any further involvement with the Nintendo project and Dave has indicated that you are the one to take it over.
I have provided you with a copy of my file containing my previous memos on the subject (with corrections); the approach letter from Nintendo; all of the schematics and mechanical drawings of the Nintendo [Famicom/NES] machine which we have received to date; and Ed Levy’s mechanical drawings which attempt to fit the Nintendo machine into the 2100 [Atari 2600 Jr.] plastic.
We spent the latter part of the afternoon yesterday discussing the history of this deal and what needs to be done next by both sides. Let me review those points here and expand upon them for your reference.
Mr. Henricks received a letter from Mr. Arakawa and Mr. Lincoln of Nintendo of America on April 4, 1983. In that letter, Nintendo provided us with some preliminary specifications on their new home video game machine. A couple of days later they came to meet with Mr. Kassar to explore whether Atari had any interest in this product. In addition to Messers Arakawa, Lincoln, Henricks, and Kassar; Messers Groth, Malloy, Moone, Bruehl, Ruckert, and myself were invited to attend. Mr. Malloy and I framed some of the initial questions which needed to be answered about the capabilities of the machine; and Mr. Lincoln promised to get the answers to me within a few days. Those answers were sufficiently intriquing to Mr. Groth that Alan Henricks, Dave Remson, and I were asked to travel to Kyoto immediately to see their TTL emulator in action and get more details about the final product.
On the 11th of April, 1983, we met with Nintendo at their headquarters in Kyoto. By happenstance (fortunate or unfortunate), a large contingent of Atari executives were in the Far East for other reasons, and they all decided to come to Kyoto to have a look, too. In attendance from Atari were Messers. Bruehl, Moone, Malloy, Lynch, Hennick, Mitoh, Henricks, Remson, and myself. Attending on Nintendo’s behalf were Messers. Yamauchi (President), Takeda (Manager of R&D, Coin-Op), Arakawa (President, Nintendo of America), Lincoln (Internal Attorney for Nintendo of America) [Later served as President], Uemura (Manager of R&D, Consumer Products), Todori (Export Manager), and two of their electrical engineers.
We were shown working (but not complete) versions of Donkey Kong Junior and Popeye running with only minor display glitches on their TTL emulator. A VHS video tape (without sound) of that demo is attached to this memo. Please keep in mind that the actual TV image is significantly better than could be captured on tape. In fact, there is a noticable difference when viewing the composite video output on a monitor as opposed to the RF output on a standard TV receiver.
At that time, Nintendo had only just received their 1st pass silicon (with some bugs) and were not able to show us a fully assembled and working prototype. My memo of 4/16/1983 (with corrections) describes what we saw and were told in that meeting.
On 4/15/1983, Messers Kassar, Groth, Moone, Bruehl, Paul, Henricks, Remson, and myself met in Mr. Groth’s office to view the videotape and discuss what we had learned from the meeting on the 11th and what we knew to-date on the MARIA chip being developed by General Computer Corporation [what would become the Atari 7800]. As both systems were seen as being in the same price range with graphics capabilities superior to the 2600 and comparable (and in some features, superior) to the 5200, it was felt that we needed to see what could be done with both machines for an intermediate priced game machine … the 3600.
I was asked to become as completely informed about the MARIA chip  as possible so that a reasoned choice could be made between the two machines. To that end, I have spoken with the folks at General Computer Corporation several times by telephone and have made two trips to their offices in Cambridge, Massachusetts. It appears to be a superior machine, but the MARIA chip is not yet finished. First silicon is not expected until mid-July (if there are no further schedule delays). Also, since this chip is a VTI device there is some question as to the manufacturability/ testability/cost of the chip. In other words, it will not be until mid-July (mid-August if the first silicon is faulty) that we will be able to make a fully informed choice between the Nintendo [Famicom/NES] and the MARIA [Atari 7800] machines. Therefore, it was decided by Executive Management that in any negotiations with Nintendo we would need to string out the signing until at least mid-July.
We were committed to respond quickly to Nintendo, however, as to whether we were interested or not. So, Alan Henricks did contact Nintendo with the word that we were interested in continuing the discussions; and the next negotiating meeting was arranged for May 17th in Kyoto. Skip, Paul and Alan Henricks were to represent Atari. Two or three days before that meeting, Nintendo informed Mr. Henricks that they would be having their senior engineering managers present in the negotiations, and Nintendo requested my attendance as well.
That negotiating session began with a statement from Mr. Yamauchi as to the terms and conditions which he demanded, namely:
1. that Atari would purchase the assembled and tested main pc board for the FCS [Famicom/NES] from Nintendo, for sale outside of Japan. Nintendo would sell the FCS on its own in Japan.
2. after some minimum purchase of assembled and tested pc boards, we would be able to buy the 2 custom chips from Nintendo without having to have Nintendo assemble them into the final unit.
3. that Nintendo would only disclose the electrical specs for the PPU and CPU, the circuit diagram of the FCS system, the test programs, and the “cassette” specs (meaning the ROM cartridge and cartridge edge connector specs).
4. that there would be no disclosure to Atari of the programming specs for the PPU and the CPU.
5. that Nintendo would program titles of our choice for the FCS system and would sell us the assembled and tested, unlabeled ROM cartridges at 1,500 Yen each FOB Japan for retail sale by Atari. The minimum quantity required by Nintendo per title would be 100,000 units and at that level there would be no fee for non-recurring engineering/programming expenses.
6. that Atari would hereby obtain a “right of 1st refusal” on future Nintendo coin-op titles for use worldwide (outside of Japan) only for the Nintendo FCS [Famicom/NES] system … again, by programming and manufacturing those cartridges themselves for sale to us.
7. that the cost of the assembled and tested main pc board would be higher than the 5,300 Yen quoted earlier to cover the cost of FCC compatibility. Also, that the resulting new pc board would not fit into the plastic being used by Nintendo for this unit in Japan.
By the time we finished the negotiations on that trip (5/17/1983 – 5/20/1983), the deal was changed to be as follows:
A. Nintendo would disclose all items called for in my memo of 5//13/1983 (to Henricks and Paul) except for item 13., namely, the LSI tapes for chip fabrication. This disclosure would take place upon signing of the deal. All items which are originally in Japanese are to be furnished to us both in Japanese and in English.
B. Upon signing the deal, Nintendo would reassure Atari about the source of supply of the 2 custom chips.
C. Any increases in the cost of the main pc board due to FCC compliance will be a straight cost pass through (no additional profit to Nintendo).
D. Atari and Nintendo would work together to attempt to legal protect the CPU and PPU designs.
E. Nintendo would receive $5. Mil upon signing as an advance against future payments.
F. Atari would have to commit to a minimum purchase of 2 million hardware units (some mixture of assembled and tested pc boards and CPU/PPU chip sets) over the term of the contract.
G. The term of the contract would be 4 years with a 4 year option to renew.
H. Nintendo would receive an additional $3.5 Mil in a line of credit as an advance upon future payments upon delivery of the 1st production-ready prototype of the PAL West Germany version of the FCS (no later than 1.1.84). Similarly, an additional advance of $1.5 Mil for SECAM.
I. The 2 million unit commitment would be broken-up into 1 million NTSC, 700,000 PAL, and 300,000 SECAM. If Atari goes over in one catagory, it would directly reduce our requirement in any other catagory of our choice. As Skip Paul likes to put it, “cross-collateralization is the key!”
J. Nintendo would commit to produce 100,000 units of the assembled and tested pc board by August 31st if the new pc design (to include FCC and to fit whatever plastic we choose) can be completed by Nintendo and approved by Atari by July 20th. In essence, unlimited quanities (in excess of 1 million/month) thereafter, upon 3 months notice from Atari.
K. Atari will have the right to program for this system with the full assistance of Nintendo.
L. Nintendo will, in the interests of expediency for this Christmas season, program 4 Atari titles of our choice. Source and object code which meets our satisfaction (with respect to basic design, tuning, and bug-free) to be delivered to us no later than Sept. 1, 1983. The fee would be $100,000 / title or no non-recurring engineering fees would be charged as long as we buy a minimum of 100,000 cartridges.
M. cartridges would cost us 1,500 Yen/cart [about $28 in today’s US Dollar] if in plastic but unlabeled or 1,350 Yen if not in plastic (F.O.B. Japan). Rate of production would be max. 5,000 units / week / title.
Justin is a Technology Entrepreneur, Futurist and Raconteur, and avid Atari aficionado behind the creation of Atari I/O. He is also a contributing writer at The Retroist under the name Atari I/O. You can follow him at his website http://www.atari.io