Nintendo Outmaneuvered Atari's Game Lineup, Resulting in Its Downfall
In July 2024, Tengen Games, a newly-established company and successor to Atari Games, released their debut title, "Zed and Zee," for the Nintendo Entertainment System (NES). Remarkably, this occurred three decades after Atari Games disbanded following legal disputes with Nintendo for producing unauthorized NES cartridges, much like their current endeavor.
This tale serves as an illustration of how the gaming industry, like many creative sectors, is as much defined by legal decisions and business strategies as by artistic vision. Over time, significant shifts in the industry are often the result of a delicate balance between engineers, lawyers, and business leaders, with this dynamic usually hidden from public view.
Let's revisit the history of Atari and Nintendo to better understand this dynamic. Fast-forward to 1979. Atari, at the pinnacle of its commercial success, found itself grappling with a decline in innovation, as its freewheeling culture gave way to a more corporate ethos under new owner Warner. At the time, the gaming industry adhered to a bundled console-plus-cartridge business model, where console manufacturers, such as Atari with the VCS/2600, sold consoles at a loss, cross-subsidizing them with the revenue from the sale of overpriced cartridges.
However, the game designers received a flat salary, unalike the rock stars in Warner's portfolio who were paid royalties. In late 1979, four defecting Atari designers and a music industry executive disrupted the status quo by aligning the video game console business model with the recording industry's, where hardware would now be treated as hardware, and content would come from third-party content providers. Activision was born, with business and legal guidance from the prestigious Silicon Valley law firm, Wilson Sonsini Goodrich & Rosati.
Atari, led by Warner, sued Activision on numerous legal grounds, but none of their arguments stuck. Activision's business plan and legal team ultimately proved victorious, paving the way for the floodgates of third-party game production to open. The market, however, soon became oversaturated, hindering the growth of many developers and leading to lower production quality, customer dissatisfaction, a market crash, and the downfall of both Atari and Activision.
In 1985, Nintendo launched the NES in North America, followed by Sega's Genesis in 1988. Both companies took proactive steps to prevent unauthorized third-party games from being released, shifting from legal to engineering strategies. Nintendo and Sega implemented proprietary lock-out chips in their consoles, designed to recognize only approved third-party game cartridges.
However, this move was met with resistance from some publishers, who felt these restrictions imposed unfair business terms upon developers. In particular, Nintendo gained a reputation for being a bully, leading to anti-trust investigations by the U.S. government. But as the old adage goes, every lock can be unlocked—and in this case, that time came in 1989.
Atari Games, once a division of the original Atari, dared to challenge Nintendo's proprietary lock-out chip, the "10NES," by replacing it with their own, the "Rabbit." Atari Games' Rabbit code functioned similarly to the 10NES but with key differences at the binary level. This innovation allowed rogue Tengen cartridges to operate smoothly on the NES.
The controversy soon moved from engineering to legal arenas, with Nintendo and Sega accusing Atari Games and third-party publisher Accolade of copyright infringement for their reverse-engineering activities. The cases, Atari Games v. Nintendo and Sega v. Accolade, were respectively tried in different courts, but both were decided at approximately the same time period and referenced one another.
The legal question at the heart of both cases was whether intermediate copying of software code (the lock-out chip code) for the purpose of reverse-engineering it was permissible under the fair use doctrine, as it was temporarily copied before being discarded. The federal appeals court judges, recognizing the complexity of the underlying legal sub-questions, ruled in favor of the defendants, establishing that intermediate copying for reverse-engineering purposes is generally permissible under U.S. copyright law.
This pair of rulings not only had an impact on the wider industry, but it continues to be felt today. They paved the way for software-based hardware emulators, such as the Connectix Virtual Game Station, and enabled countless retro-gaming devices that allow players to experience games from their past on modern systems without requiring the original hardware or game cartridges. Additionally, they opened the door for the development and distribution of a plethora of new games for these legacy consoles by companies like the new Tengen Games.
While the cases are often recalled as marking a victory for Atari over Nintendo, the reality was more nuanced. While the courts recognized the fundamental right to reverse-engineer, Atari Games was barred from manufacturing games for the NES due to the unscrupulous behavior of their lawyers. As a result, Nintendo managed to financially weaken, and ultimately drive into bankruptcy, the Tengen brand.
In conclusion, a closer examination of the relationship between engineers, lawyers, and business leaders in the gaming industry reveals that the so-called "great inventor" may not be the sole architect of significant inflection points. More often, it is the legal battles and sometimes the lawyers themselves who create the critical forks in the road.
Julien Mailland, a technology industry attorney and Associate Professor of Media Management, Law & Policy at the Indiana University Media School and Adjunct Associate Professor of Informatics at the Indiana University Luddy School of Informatics, Computing, and Engineering, presents a detailed account of these historical events in his book "The Game That Never Ends: How Lawyers Shape the Videogame Industry." An open-access edition of the book is available for download at this link.
- The legal question at the heart of the Atari Games v. Nintendo and Sega v. Accolade cases was whether intermediate copying of software code for the purpose of reverse-engineering it was permissible under the fair use doctrine.
- The pair of rulings in these cases, in favor of the defendants, not only had an impact on the wider industry but also paved the way for software-based hardware emulators and enabled countless retro-gaming devices, as well as the development and distribution of new games for legacy consoles by companies like the new Tengen Games.
