In the fun and games empire of Warner Communications, there's no recession and no prospect of any, because the company owns the surest antidote to economic hard times: a money machine. Its name is Atari.
Not much is heard about unemployment or falling productivity at Warner's Rockefeller Center headquarters. Sure, record sales have declined and the film division took a bath on "Under the Rainbow," but Atari has taken off like one of the rocketships in its video games.
Three years after former textile executive Raymond E. Kassar was installed as chairman of Warner's Atari division, the computer games factory that began with Pong a decade ago is turning in spectacular earnings reports and gobbling up a growing share of the consumer electronics market.
Atari is the name that goes with the games that have captured the imagination of the younger generation: Asteroids, Centipede, Red Baron, Star Wars, Missile Command ("Defend Civilization! Fiendishly clever Krytolians are out to destroy your peace loving plant of Zardon . . . you're in command of ABMs, aiming and firing.")
With its game business dominant in both the home television and arcade coin-play markets, Atari is branching out into a new electronic commodity, the home computer. The long-range strategy is to be out in front of a new generation of young people raised and educated on the computer, and to create a compatible network of the instructional materials, games, and cable television programs that they will demand.
"When I came in," Kassar said in an interview, "the product was perceived as a fad, a Christmas item. What we did was try to convince the trade and the consumer it was an everyday product with a long life."
In January, he said, Atari will "introduce the ultimate game machine, but our future is not just in games. In another decade every child in America will be taking a high school computer course. It will be like a toaster, every home will have one."
As a recent entry into the crowded home computer field, Atari is not yet making money on its new line, but industry analysts say it soon will do so, probably in 1982. In the meantime, Atari is making so much money on games that it can afford the modest losses on its computers.
"This is it, a cultural revolution in this country, and we are the leader," said a senior Warner executive. "This new technology is not going to go away."
In the three-month period that ended Sept. 30, Warner's consumer electronics and toys division, which includes Atari and Knickerbocker Toys, reported operating income of $77.9 million, nearly four times the figure for the comparable period in 1980. Its operating income for 1981 is expected to approach $250 million, more than the entire Warner empire--including Atari, films, books and records--earned last year.
The inflow of cash is expected to increase Atari's advantage over its competitors, industry analysts say, because it allows Atari to spend heavily on the development of new games and products. Atari budgets a high 8 percent of its sales for research and development, but it has been making money so fast it cannot spend all it has budgeted.
"Our R and D expense is extraordinary," said Kassar, "but we can't spend it fast enough, especially because of the shortage of engineers." He said the engineers who dream up Atari games and design the machines at its Sunnyvale, Calif., headquarters "are like rock stars. We pay them well to keep them and they have a lot of fun."
Kassar, who dresses impeccably and expensively and has a reputation as a disciplinarian, is an unusual figure at Warner's, which prides itself on informality and loose organizational structure. Warner's hierarchy is heavy with self-made Brooklyn boys and the company frowns on staff meetings, territorial squabbles, written memos and MBA degrees. Kassar said the Atari division encourages the funky style of its engineers, but in other aspects of the business it is aggressive and tough.
"We vigorously defend our copyrights," Kassar said. "We maintain a strong legal presence all over the world." Atari designs and builds its own games, including the microprocessor chips that are at the heart of the programs, and its games are not compatible with any competitor's except those of a small company formed by former Atari employes.
"They stole our programs," Kassar said matter of factly. "We're suing them, of course."
Wall Street analysts who have studied Atari operations say its success is built on a solid, appealing product, a good distribution network and an expanding market. Any storeowner can buy a coin-operated game machine and install it, they said, which gives Atari the potential to develop the kind of ubiquitous presence nationwide that the slot machine has in Nevada.
Another major element of Atari's rise is relentless promotion--not just advertising, but giveaways to schools, hospitals and institutions to buy respectability for the games, and contests that draw players to the machines and get their families involved.
Basic to Atari's marketing strategy is the attempt to attract adults, including women, to playing the games and to show that video games are not reprehensible diversions for idlers like pool or pinball. In the 1980s, Kassar said, the company plans to sponsor a network of computer summer camps, where the youngsters will learn the use and programming of Atari machines instead of tennis or woods lore.
"One of the secrets of the success of our games," another company official said, "is that the most gnomish kid can play and become a champion. You don't have to be a big athlete or a good dancer. And every kid knows he can beat his parents."
The company set up an "Atari Game Club" for players of its home video games. Not surprisingly, Atari marketing director Frank Ballouz then announced that "player response was so enthusiastic, we've decided to open the membership to coin-operated video game players as well."
Atari rewards the good players by handing out citations and prizes. Ballouz encourages arcade operators and individual players to report noteworthy feats on the Atari machines and the company takes formal notice of them. A news release last summer immortalized one David Jeanise who, at the Rainbow Roller Rink in Beaumont, Tex., "racked up 22,254,110 points playing an Atari Asteroids game for 36 hours and 29 minutes. Jeanise beat the previous record of 21,184,000 points, held by Rick Larson of West Palm Beach, Fla."
This weekend, Atari is bringing players from five U.S. cities and 10 foreign countries to Washington for a contest billed as "the final encounter in the cosmic war which has engaged youth worldwide." Cash prizes and scholarships will be handed out in the contest Saturday at the International Club.
According to Atari executives, those promotions help to spread Atari's message, which is that computer games are fun and computers are, too. Atari officials reject the idea that computer games help children overcome their inhibitions about computers because "children don't have any inhibitions about computers. Only grownups do."
In Kassar's words, "these kids take for granted what would intimidate the average adult." Atari's strategy assumes that children who learn at an early age from the home games how to relate to images on a television screen that they control will also relate to computerized information that they can program and eventually to cable television input that they select. Anyone who has a TV set can add to Atari's line of games and computers.
Industry analysts say the coin-operated video games are extremely appealing to shopkeepers, restaurateurs, bowling alleys and arcades because they offer a very high return on a small investment in a short time. Atari sells the machines, and the buyer keeps whatever the machines earn--Atari gets no percentage of the player's quarter.
An elaborate game machine costs up to $3,000, but Atari says average collections for an Atari machine are about $250 a week, so it takes less than four months to recoup the investment and start turning a profit.
In video games, its biggest business, Atari sales are reportedly more than three times those of its nearest competitor, Midway Manufacturing, a subsidiary of Bally, with Mattel and others lagging. Atari and Midway expect to share a bonanza from a new game called Pac-Man, which Midway developed and Atari is manufacturing under license.
In computers, Atari is offering free trials to schools, along with programs for instruction in algebra and other subjects, on the assumption that the children will want more of the same in home and classroom. The formula appears to be working, according to analysts who have watched Atari's rise from the modest Pong game invented by Nolan Bushnell, who sold Atari to Warner's in 1976.
"They should have revenues of $1.4 billion next year," said Richard Simon of Goldman, Sachs & Co. "They are making so much money it gives them a significant advantage over the competition in developing new products." He said the personal computer business "should be profitable by 1982, and it's a key to the future growth of the company, which will continue."
Robert L. Renck Jr. of Oppenheimer & Co. said Atari is in the happy position where "they have a big profit margin on their product and they can't satisfy all the demand." He said Atari's dominant market share will grow, and that the spread of Atari machines increases the demand for Atari game and computer programs, much as camera sales increase long-term demand for film.
In the computer business, he said, the Atari price of just under $400 for its smallest model makes it appealing to beginning customers. "For that money I can buy a home computer that will allow me to do a lot of functions, access somebody else's data base, teach my kids and let them play games on it," he said. "It has tremendous software and marketing possibilities."
Kassar said that Atari's small computer is different from its competitors because it is not intended for business use. It is intended for individuals to use in the home, and the programs that go with it stress entertainment and education, not inventory control.
Among the educational programs, for which the suggested retail price is $30 each, are Basic Sociology, Basic Algebra, Effective Writing and Counseling Procedures. Language courses in German, Spanish, French and Italian are $59.95.