"Why?" Ethan didn't understand. His intense expression made Nolan laugh. He stubbed out his cigarette and said,
"Okay, okay, Ethan—don't get so worked up."
He pressed his hands down to calm him and continued:
"To be honest, if it were possible, I'd also want the sales period to last as long as possible. But that's not realistic. Once you expand eastward, the cost of distribution will outweigh the profit from the product itself.
You know Ray Kroc, right? The father of McDonald's. He built standardized kitchens. He created a food supply chain system. And yet—even with all that—McDonald's still needed multiple suppliers across North America just to keep their restaurants consistent.
No matter what kind of company you are, if you want to do business nationwide, you need multiple factories across the country. A single factory in one region simply can't handle distribution everywhere."
Nolan paused, then pointed to the map behind him. "But Atari has only one factory. In fact, up to now, only two gaming companies—Sega and Magnavox—have multiple branches across the country."
"That's where the trouble begins. Take your old route as an example. From our base here in California to Houston and Austin, Texas—it's about 1,800 miles. A round trip takes a whole week.
Now, let's not even talk about gas costs. Two hundred gallons for a round trip is just a few hundred dollars. Food and lodging? Negligible. Even if each of us gets a $10 daily allowance, three people only spend about $200 a week.
But what I must calculate is the labor cost of our production staff."
Nolan Bushnell smiled at Ethan, pointing his thumb toward the factory outside his office.
"At Atari, we have over a hundred employees. Thanks to them, we can keep producing circuit boards. Their weekly wages total $12,000. So when you haul a batch of boards—worth maybe $100 or $200—down to Texas, the profit from that trip only offsets Atari's regular payroll expenses. Meanwhile, the real revenue comes from sales."
As for why there aren't other branches?
At this point, Nolan stopped. "Ethan, I don't think I even need to answer that, right? Everyone in the industry knows—arcade machines just aren't that profitable.
If we were truly making crazy money, enough to fully compensate Magnavox, then why would Professor Ralph Baer have agreed to the settlement? He knows, as does everyone, that arcades are more about reputation than real profit!
The ones who really make money in this industry are the merchants who buy the machines."
Nolan's blunt calculation stirred something in Ethan. In his past life, video games were globally recognized as cash cows. Whenever a financial crisis hit, video game companies were among the few industries that could always survive.
But making money from video games wasn't the same as making money from arcade machines.
The arcade business was a one-time deal: game companies sold machines to operators for a modest profit, while the operators made the real money from players feeding in coins.
If game companies wanted to tap players directly, then the whole industry could become as glamorous as it looked on the surface.
And how could that channel be opened? Professor Ralph Baer had already shown the answer to the world: Home consoles.
Only by putting video games directly into the hands of players could they become true cash cows.
But consoles well, personal computers had only just appeared.
Thinking this through, Ethan let go and laughed. "Nolan, I get it now—you're talking about the cost–benefit principle."
Then he asked, "But if we don't sell, does that mean we're giving up on the eastern market entirely? You know, people in New York, Chicago, Boston—they're rich! If we bring Snake there, we could make two million, easy!"
"Oh, Ethan~ that's exactly what I was about to tell you! In the past week, several game manufacturers from the central and eastern U.S. have reached out to me. They want to cooperate with Atari. I think it's feasible—but the details…"
Nolan trailed off, pulled a document from his drawer, and slid it across the desk to Ethan.
Ethan flipped it open. On the first page was a company name and their cooperation proposal.
A New York game company wanted the production license for Snake. In exchange, they were willing to pay Atari 8% of the net profit from each machine sold.
A Miami company, on the other hand, proposed licensing the Snake game motherboard. Their offer: a flat $10 per board sold.
Now, technically, since Ethan had already handed over the one-year license for Snake to Atari when signing the contract, Nolan wasn't obliged to show him any of this. No matter which partner Nolan chose, no matter what terms were agreed upon, Ethan's cut would always come through Atari's sales channels.
Even if another company resold the machines for $1,000, Atari's price to distributors would be $1,200—and Ethan's commission would be calculated from that.
But seeing these proposals made him realize one thing:
In this era, creativity was still cheap—and often despised.
"You want authorization with only an 8% profit commission per complete machine—and just ten dollars apiece for the motherboard?"
Ethan immediately tossed the document back onto the table.
"These people are stupid!"
"hahaaa" Nolan Bushnell burst out laughing. "What can I say? If Magnavox hadn't settled with us and then gone on to sue every other plagiarist in the market, these guys would still be copying without shame.
Yes, if Magnavox hadn't suddenly turned into Disney, vowing to smash every infringer with an iron fist, sales of Snake would never have gone this smoothly. Only when the hammer fell did the plagiarists finally learn what pain was.
But just because they were beaten doesn't mean they became sensible! After making easy money, who really wants to pay licensing fees?"
Ethan "So you don't even want to discuss this with me, right? Honestly, after seeing those conditions,
Yeah~ brother~ I feel the same way. These guys are ridiculous!" Nolan complained. Then change his tune. "But—among all those companies, there are two that actually seem sincere."
"Which two?" Ethan asked.
"Midway Games and Chicago Coin."
Nolan picked up the documents Ethan had tossed aside, flipped through them briefly, and slid the information from those two companies back in front of him.
With just a glance, Ethan understood. Midway Games was founded in 1958, and Chicago Coin in 1932. Both had roots in traditional coin-operated arcade machines, strong market channels, and experience in electronic arcade production.
And how did Atari know they had experience? Simple—both companies had already made Pong clones. And now, both of them being sued by Magnavox!
With Magnavox's endorsement, everyone knew they had made money.
Perhaps because both companies were based in Chicago and already had connections, they submitted a joint cooperation proposal. They wanted exclusive rights to publish Snake in thirty-two states across the central and eastern United States—territory Atari didn't want to handle directly.
For that right, they offered Atari:
A 10% commission on the selling price of each complete arcade machine, andA fixed $30 fee for every Snake motherboard sold.
If that was all, Nolan wouldn't have called them sincere.
What really caught Ethan off guard was this: the companies had even spelled out the calculation standards for commissions and fees in detail.
They explained that, since the Snake arcade machine did not involve gambling and didn't overlap with their traditional businesses, their existing customers would treat it differently than the products of those "new electronics upstarts."
In order to seize the market, when they released their copycat version of Pong, they priced each arcade machine at $800, slightly below Atari's $1,000. The difference wasn't much, and their margins were razor thin. If they tried to improve the machine, even eighty dollars of profit per unit would be their upper limit. Any further improvements, and they wouldn't even be able to pay their workers' wages.
The same was true for the game motherboards. They wanted the rights to Snake because they hoped to capture market share from other arcade manufacturers. Their replacement motherboard sold for $240. Out of that, the material cost was $150, assembly was another $30, leaving a gross profit of only $60. If Atari took $30 in licensing fees, they would be left with just $30 to cover their operating expenses.
So, they knew their offer might not meet Atari's expectations, but they still hoped to secure the license.
To be honest, Ethan didn't really believe their story. Since when do capitalists pursue razor-thin margins? Are they running a charity now?
And yet—the level of detail in their proposal made him strangely comfortable.
How to put it? It was like someone sincerely saying: I know your product is excellent. If possible, please let me work with it.
The desire hidden between the lines made Ethan pleased.
Of course, once he felt that satisfaction, he didn't show it on his face.
Tossing the document back again, he smiled. "Nolan, Atari is yours. As a partner in just one project, I'll simply fulfill my contractual obligations. How could I interfere with how you run your business? You know I'm only interested in one thing right now…"
Ethan lifted his right hand, rubbing his thumb, index, and middle fingers together.
"Okay! Okay!" Ethan's blunt hint made Nolan burst out laughing.
"Alright, I get it! Give me two weeks, and I'll transfer your share from the first phase."
"And what about the reward for cutting down the board components?" Ethan asked with a grin.
At that, Nolan chuckled, shaking his head. He pulled out the company's checkbook from his drawer and wrote a check for $5,124.
Note:
① The world's first commercial home game console, the Odyssey, had no CPU—it was purely the magic of photoelectric reactions. I still don't know how Ralph Baer managed to simulate the feedback for more than a dozen games on a single machine the size of a briefcase. The U.S. Patent and Copyright Office has his original patent drawings. I can't fully understand them, but they left me astonished.
② Midway Games is a very powerful company. Later, they became known worldwide as the creators of Mortal Kombat.
③ Within the video game industry, the arcade sector is widely regarded as the least profitable.
The most famous example is Nintendo. At one point, Nintendo's then-president Hiroshi Yamauchi considered producing, selling, and publishing arcade machines himself.
But after just two years, he abandoned the idea. Why? Because arcade machines were essentially tied to real estate—the real customers were businesses running entertainment venues, not the players themselves. Game companies couldn't make money directly from players.
Once Yamauchi realized this, he immediately gave up on direct involvement in the arcade market. Instead, Nintendo licensed production to others, avoided the burden of manufacturing, and shifted its R&D toward home consoles.
Not only Nintendo—both Sega and Atari also tried to dominate the arcade field. In the end, though, they remained in the background, using arcades mainly as marketing platforms. The simple reason was that arcades weren't sustainable—no company wanted to hand over most of the profits to middlemen.
This is also why Ralph Baer (not "Bell") earned so much respect in the gaming community. From the very beginning, he could have focused on arcade machines, but he didn't. He recognized early on that the arcade business model wasn't sustainable, and instead he paved the way for home consoles.