In 1982, the Atari 2600 was the dominant game system. Amidst competition from both new consoles and game developers, a number of poor decisions from Atari management affected the company and the industry as a whole. The most public was an investment into licensed games for the 2600, including Pac-Man and E.T. the Extra-Terrestrial. Pac-Man became the system’s biggest selling game, but the substandard conversion contributed to a loss of consumer confidence in the console. E.T., rushed to market for the holiday shopping season, was critically panned and a commercial failure. Both games, and a glut of low quality third-party releases, are frequently cited as factors in ending Atari’s relevance in the console market. Atari’s downfall reverberated through the industry resulting in the video game crash of 1983.
Warner sold Atari’s home division to Commodore CEO Jack Tramiel in 1984. In 1986, the new Atari Corporation under Tramiel released a lower-cost version of the 2600 and the backward-compatible Atari 7800, but it was Nintendo that led the recovery of the industry with its 1985 launch of the Nintendo Entertainment System. Production of the Atari 2600 ended on January 1, 1992, with an estimated 30 million units sold across its lifetime.
In addition to third-party game development, Atari also received the first major threat to its hardware dominance from the Colecovision. Coleco had a license from Nintendo to develop a version of the smash hit arcade game Donkey Kong (1981), which was bundled with every Colecovision console. Coleco gained about 17% of the hardware market in 1982 compared to Atari’s 58%. With third parties competing for market share, Atari worked to maintain dominance in the market by acquiring licenses for popular arcade games and other properties to make games from. Pac-Man has numerous technical and aesthetic flaws, but nevertheless more than 10 million copies were sold. Heading into the 1982 holiday shopping season, Atari had placed high sales expectations on E.T. the Extra-Terrestrial, a game programmed in about six weeks, to capture the strong interest in the film. Atari produced an estimated four million cartridges, expecting the game to sell well. The game was poorly reviewed, leading to only about 1.5 million units sold.
Warner Communications reported weaker results than expected in December 1982 to its shareholders, having expected a 50% year-to-year growth but only obtaining 10–15% due to declining sales at Atari. Coupled with the oversaturated home game market, Atari’s weakened position led investors to start pulling funds out of video games, beginning a cascade of disastrous effects known as the video game crash of 1983. Many of the third-party developers formed prior to 1983 were closed, and Mattel and Coleco left the video game market by 1985.
In September 1983, Atari sent 14 truckloads of unsold Atari 2600 cartridges and other equipment to a landfill in the New Mexico desert, later labeled the Atari video game burial. Long considered an urban legend that claimed the burial contained millions of unsold cartridges, the site was excavated in 2014, confirming reports from former Atari executives that only about 700,000 cartridges had actually been buried. Atari reported a $536 million loss for 1983 as a whole, and continued to lose money into 1984, with a $425 million loss reported in the second quarter. By mid-1984, software development for the 2600 had essentially stopped except that of Atari and Activision.
Warner, wary of supporting its failing Atari division, started looking for buyers in 1984. Warner sold most of Atari to Jack Tramiel, the founder of Commodore International, in July 1984 for about $240 million, though Warner retained Atari’s arcade business. Tramiel was a proponent of personal computers, and de-prioritized further 2600 development following the sale.
The North American video game market did not recover until about 1986, after Nintendo’s 1985 launch of the Nintendo Entertainment System in North America. Atari Corporation released a redesigned model of the 2600 in 1986, supported by an ad campaign touting a price of “under 50 bucks”. With a large library of cartridges and a low price point, the 2600 continued to sell into the late 1980s. Atari released the last batch of games in 1989–90 including Secret Quest and Fatal Run. The final Atari-licensed release is the PAL-only version of the arcade game KLAX in 1990.
After more than 14 years on the market, the 2600 line was formally discontinued on January 1, 1992, along with the Atari 7800 and Atari 8-bit family of home computers.
The 1986 model has a smaller, cost-reduced form factor with an Atari 7800-like appearance. It was advertised as a budget gaming system (under US$49.99) with the ability to run a large collection of games. Released after the video game crash of 1983, and after the North American launch of the Nintendo Entertainment System, the 2600 was supported with new games and television commercials promoting “The fun is back!” Atari released several minor stylistic variations: the “large rainbow”, “short rainbow”, and an all-black version sold only in Ireland. Later European versions include a joypad.