When James Morgan took over Atari in September, 1983, he found a company in complete disarray. Atari was now composed of dozens of departments that seldom communicated with one another, housed in nearly fifty buildings spread throughout Silicon Valley. The departments’ animosity and political infighting were crippling the company. Alan Kay, the head of Atari’s research center, described the venomous brinkmanship to a Time reporter in terms that made the company’s executives sound like spoiled children playing on a small boat.
“For a while the company was playing ‘Ha, ha, your end of the boat is sinking.’”6 In the article, the reporter concluded with the statement that “it turned out that everybody was on the same boat.” Morgan’s first move was to cut the domestic payroll down from 9,800 employees to 3,500. Next he turned to foreign labor for manufacturing, sending 3,000 jobs to Hong Kong and Taiwan. He also sold off Atari’s excess buildings, condensing the company’s sprawling operations down from forty-nine buildings to four.
A few months into his new job, however, Morgan discovered that he could not turn to Warner Communications for help. When he submitted his 1984 budget in March, Warner executives vetoed it. According to Ross, Atari would have to find its own funding. Morgan revised his budget, trimming his operating expenses from $600 million to a mere $150 million. He cut an additional 550 jobs, and dumped 20 million old cartridges into the marketplace at $2 each to clear out old inventory.
Realizing that simply cutting expenses would not save Atari, Morgan pushed for new products. On May 21, Atari announced the development of a powerful new game console, the 7800 ProSystem, and a deal to create games with LucasFilm, the company that made the Star Wars and Indiana Jones movies.