Tesla (Competition) Deathwatch: The History of Atari

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I wasn’t planning on writing a second article in this series so quickly, but I was reading through the comment section of the first piece and felt compelled to write a response to cover some of those replies.

And basically, the biggest reply pushing back on my first articles seems to have been, “hey, Kodak is completely different than legacy automakers because the situations are different, so it will be much easier for them to change than Kodak.”

Instead of writing thousand-word responses in the comment section … I’m going to write a few thousand words in responding articles! To do this, I’m going to go through some of the replies that I see and give historical examples of disruption in other industries that I believe show how those examples may not be as safe as many readers seem to believe.

Ultimately, no one knows exactly what is going to happen. Amazon was a laughingstock of the internet 20 years ago because it was bleeding money and Wall Street couldn’t figure out any scenario where it would be worth its valuation, but Pets.com sure was awesome too, even getting its own Super Bowl ad … except Pets.com managed to go out of business the same year its Super Bowl ad ran.

One more thing I feel compelled to write here — I’m not writing any of this to call out any responses as being wrong. I actually love when co-workers, employees, and even friends push back on my ideas with ideas of their own. If I’m replying to something you wrote, know that it’s because I respect your argument and have thought about it, but feel that additional information may point to different results.

I also may not change your opinion at all — none of these examples are going to perfectly align with the auto industry because every industry is different, and if the auto industry had already undergone this disruption we’d already know what happened. We don’t, but looking at history often helps to understand what the future may hold.

With that, let’s get into the first reason some readers said the auto industry isn’t in trouble, and some examples of why they may be…

Moving from ICE to BEV is a Small Step

I feel like this is perhaps the most misunderstood part of the comparison. I do agree that in my prior example Kodak moving from film manufacturing and sale to digital cameras seems like a significant business shift, and don’t get me wrong — it was. But, we have seen many examples of industry leaders quickly becoming industry also-rans in the same market.

For this one, let’s look at Atari. When it was founded in 1972, there was basically no market for video games at all. Atari quickly created and dominated a marketplace for coin-operated video games, and then entered the home with the Atari Video Computer System (commonly known as the Atari 2600), releasing it in 1977. The company immediately started planning for the successor to the VCS, and released the Atari 5200 in 1982. While the 5200 wasn’t a great console — many would argue it wasn’t even good — Atari still dominated the video game industry with the 2600 (renamed officially from VCS by this point) and it was prepared to use everything it learned in a new, far more powerful Atari 7800 console slated for release in early 1984.

Before that happened, the video game industry suffered a crash in 1983, during which the Atari division of Time Warner lost around half a billion dollars. That same year, a small Japanese company named Nintendo set up a meeting with Atari’s executives to try to convince them to sell Nintendo’s newly developed Famicom game system under the Atari name because the Japanese startup was concerned about breaking into the market. Atari, which was both undergoing management changes and figured it had the Atari 7800 console ready to go, opted not to. Nintendo instead released the Nintendo Entertainment System (NES) itself.

Atari seemingly held all the cards — it had the best hardware manufacturers, a huge conglomerate behind it (although, Atari was sold in 1984 since Time Warner figured the video game market was dead), the biggest name in the industry, and products ready to go. It would have been an extremely small step, and one that was expected, for Atari to release and market the Atari 7800, crushing the competition. If Nintendo proved the market for home consoles still existed, Atari could come into it later and just dominate, right?

If you know much about video game history, then you know how this story ends. After selling more than 25 million Atari VCS / 2600 consoles, Atari only managed to sell around 1 million Atari 7800 consoles worldwide.  The NES? Nintendo managed to sell 61.91 million consoles worldwide. If you only consider the United States, since Atari’s 25 million VCS consoles were mainly sold there, the NES still managed to sell 34 million consoles.

What happened? Atari was positioned with all of the advantages that legacy automakers believe that they have right now. Atari had the manufacturing know-how, the relationships with retailers, solid in-house programing teams, and it owned and fully controlled many of the most well-known game properties. Moving from the 2600 to the 7800 should have been a small step. Forget the two years that Ford claims to have designed the Mustang Mach-E in, Atari literally had the design for this console sitting and awaiting production before the Nintendo NES was launched.

It seems that Atari had everything going for it, yet it never recovered, making one final home console with the Atari Jaguar — about 250,000 consoles — before going out of business and merging with other companies after that. Atari would “reverse merge” into a hard drive manufacturer named JTS in 1996, and then was sold to Hasbro Interactive for $5 million in 1998. What was just 20 years earlier the most exciting gaming company ever was sold for pennies.

Nintendo managed to capture the eyes and thumbs of gamers everywhere by bringing innovation and care to its products. Some of the ways Nintendo accomplished this would later lead to its own sort of downfall in the video game market — it controlled more than 75% of the worldwide video game market with the NES, but fell to about 45% in the next generation with its Super Nintendo and then about 22% when Sony took over the industry with Playstation, after originally trying to team up with Nintendo to release it and Nintendo turning Sony down.

The point is that it may seem like a small step for legacy auto to go from the internal combustion engine to a battery electric system, but it really isn’t. If making a good BEV vehicle was as simple as slapping any electric motor and big battery into a car, we would have seen someone challenge Tesla already with a better design. In many ways, the Ford Mustang Mach-E is the first vehicle that really feels designed from the ground up to challenge Tesla. The problem is, to do so, the design of the Mustang Mach E will need 25%+ more batteries to go as far as the Model Y.

Then, you run the risk of stranded assets. You can still find new games for the Atari Jaguar pretty easily. Atari is pretty well known for burying hundreds of thousands of cartridges in a New Mexico landfill in 1983 due to having so much unsold inventory.

Comparing to Legacy Auto

If internal combustion starts to contract at levels similar to the collapse of film, legacy automakers are looking at having hundreds of millions of dollars worth of vehicles on hand that will have extreme difficulty selling. To do so, the industry will need to offer extreme discounts, probably losing significant money on each of them.

At the same time, the industry will have to start shutting down and transferring its auto lines as quickly as possible. Even if we use Ford’s two year turnaround time for the Mustang Mach-E — a turnaround time that doesn’t seem to include the next year while Ford spools up production — two years of losing significant amounts of money from auto sales, redesigning new vehicles, and changing lines over would be nearly impossible for any legacy automaker to do with their current debt levels.

Finally, legacy auto has an issue with auto leases that will add to its problems, as they will be buying back cars that had assumed resale values that have been crushed by the next generation. Anyone who doesn’t think this will happen isn’t paying attention, as it already is — Capital One wrote about how the Tesla Model 3 is destroying the market for lightly used premium-class cars at a rate that is stunning. Capital One framed this article by saying this was great news if you were looking for a luxury vehicle at a slightly better price so long as it isn’t a Tesla, and that’s true, but this will manifest in real losses for legacy automakers.

Let’s use Mercedes as the example. Capital One noted that a 2016 Mercedes B-Class depreciated from a value of $18,500 to $13,200 in the first six months of 2019 alone. According to another article about new car depreciation from Capital One, the average depreciation for a $30,000 sedan after two years is to $20,700, and then after three years $17,400, so the average expected drop during this time is about 16%. The average depreciation after three years is 42%.

2019 Mercedes B-Class costs range from $43,100 to $56,900. Let’s give Mercedes some benefits here, and say that all of the cars it leases would be at the low end, and it was worried about the value when the cars came off lease and sold them with a 40% residual value. That would mean Mercedes would be on the hook for buying back those cars for $17,240. If the actual value is $13,200, Mercedes would be losing $4,000 for every vehicle sold back.

And the hurt doesn’t stop there. New leases for the same car will have to be drawn up with Mercedes expecting a 30% residual value for those cars, greatly increasing the price of the lease, leading to less demand. Additionally, new car buyers will have the choice between buying a new Mercedes B-Class for $43,100 or a recently used one for less than half that, which is only missing a semi-automated drive system.

It also impacts other automakers. Would you rather have a new Honda Accord for $23,720, or would you rather get a lightly used Mercedes B-Class for significantly less?

Conclusion

I can pretty easily argue that the collapse of Atari and the threat of disruption to the auto industry have a ton of differences. Console manufacturers often make little or nothing from the sale of each console, but make that up from licensing game manufacturing to others, while automakers rarely sell add-ons for their vehicles that are not bought at the same time as the purchase is. Console success is often directly tied to third-party developers more than if the console itself is well made. It’s totally not the same.

And I should also point out, I wasn’t attempting to tell the full story of Atari’s collapse in this article. If you want that, it’s worth reading about. Failure to innovate and anticipate market shifts, as well as massive overproduction of product causing price collapses were only part of what brought Atari down. But I do feel there are parallels. Especially because legacy auto is almost definitely going to be locked into a period where it has a significant amount of its inventory that is now worth less than it cost to produce, leased vehicles are coming back at values much lower than the companies need to sell them for, and automakers won’t have enough of what people actually want on hand to meet demand.