Tengen: Atari Games vs. Nintendo | Gaming Historian

As you browse through NES

games

, you'll occasionally come across some that look...different. They are black, have a slightly different shape, and are all made by the same company known as Tengen. Sometimes you will even come across the same game on a gray cartridge as well as a black Tengen cartridge. So who was Tengen? And why did they make these strange looking video

games

? Everything revolves around a major legal battle between two giants of the video game industry. A case that would not only redefine the laws, but change the way third-party developers create video games on home consoles.

We'll see. In 1984, Atari was in trouble. The video game crash of 1983, brought on by an avalanche of poorly made consoles and games, devastated the once prolific company. At the end of the year, Atari had lost $539 million. Mass layoffs soon followed. Trade agreements were cancelled. Entire divisions were closed or consolidated. In May 1984 alone, 700 employees were laid off. Steve Ross, president of parent company Warner Communications, had seen enough. It was time to unplug and recoup whatever losses I could. He came up with a plan to break up the company and sell it for the highest possible price. Atari split into two: Atari Corporation and Atari Games.

Atari Corporation handled consumer products, such as its line of personal computers and video game consoles, while Atari Games had control of software and coin-operated arcade games. On July 2, 1984, the majority of Atari Corporation was sold to Jack Tramiel, the founder of the computer company Commodore. Although Tramiel could have bought Atari Games for practically nothing, he had little to no interest in video games. His experience was in computers. Warner continued to search for a buyer, as Atari Games was losing money and suffering more layoffs. The following year, Atari Games finally found a buyer. He was a Japanese man named Masaya Nakamura, owner of a company called...

Namco. On February 4, 1985, he purchased 60% of Atari Games through its American subsidiary, Namco America, for $10 million. For Nakamura, it was a long-time dream come true. Atari was once the dominant

gaming

company in the industry and now... it owned it. But his dream would be led by another man, the same man Nakamura sent to the United States to run Namco America. His name was Hideyuki Nakajima. In his book "Game Over", David Sheff described Nakajima as "unusually open." He was a spark plug in a world of serious and sober executives. In short: the perfect kind of man to turn Atari Games around.

Nakajima even had a history with the company. In 1973, Nolan Bushnell and Ted Dabney sought to internationalize the distribution of Atari products. This is how Atari Japan was born. Nakajima, a veteran of the Japan Art Paper Company, was named CEO. At first it was a disaster. Atari Japan had difficulty finding distributions for its arcade games. They turned to another company for help: Nakamura Amusement Machine Manufacturing COmpany, or... Namco, for short. Nakajima asked Masaya Nakamura to help him distribute the games in exchange for a share of the profits. Nakamura agreed. However, Atari Japan continued to lose money. Nakajima even had to use some of his personal savings to keep the operation going.

In the end, it was his own employees who stole the company's money. In a last-ditch effort, Nakajima flew to the United States to meet with Atari executives and begged them to allow him to continue. But Atari was losing too much money and decided to sell Atari Japan to the highest bidder. At first, it was Sega, for a measly $50,000. But Namco saw this as a great opportunity to get into video games and agreed to buy Atari Japan for $550,000 and the rights to distribute Atari games nationwide. Nakajima kept his job, and within a few years, Namco would use the resources gained from the transaction to become one of the largest video game companies in Japan.

They produced hits like Pac-Man, Galaga and Pole Position. In 1978, when business was going well, Nakajima convinced Nakamura to open a subsidiary in the United States. He agreed and Namco America was born. Its location? A few blocks from the former Atari offices in Sunnyvale, California. Namco America licensed its popular arcade games to American companies, and Midway scored two big hits: Galaga and Pac-Man. Nakajima also reached an agreement to market his games. Pac-Man memorabilia was everywhere across the country and Namco America made a ton of money. Now, in 1985, it was up to Nakajima to save the Atari Games.

He cut the salaries of vice presidents and directors, froze pay increases for a year and laid off 30 employees. Nakajima himself accepted a 20% pay cut. While he was able to get Atari Games out of financial trouble, he had disagreements with Masaya Nakamura over what direction to take the company. Nakamura was hesitant to invest more resources in the company, as he viewed them as a competitor to Namco. He also didn't like the fact that Warner still owned 40%. In 1987, Nakajima and Nakamura reached an agreement: Nakajima, along with several employees and Warner Communications, would purchase 20% of the company from Nakamura.

Nakajima would become president and would resign from his position at Namco America. For Nakajima, everything was back to square one. He once worked for Atari, struggling to make it a success in Japan, and was now running it in the United States. He soon turned his sights to the home console market, which had recently experienced a resurgence with the Nintendo Entertainment System. At the time, Sega wasn't licensing games for its Master System, and the Atari 7800, released by Jack Tramiel's Atari Corporation, barely did anything. The NES was the way to go. But there was a problem. Atari Games couldn't actually publish games under the Atari name, as Atari Corporation owns the rights to the consumer division.

To solve this, Atari Games formed a new subsidiary, known as Tengen. Nakajima came up with the name "Tengen" in a similar way to how Bushnell came up with Atari. Bushnell and Dabney named Atari after a term used in the Japanese game Go. The word "

atari

" is used the same way someone would say "check" while playing chess. Nakajima chose the word "

tengen

", which represents the center of a Go board, the origin of Heaven. Getting the official Nintendo license for your game meant following strict rules and regulations. Nintendo wasn't going to take any chances, not after the video game crash of 1983.

The market was plagued with poor games, and this was their version of quality control. To become a licensee, you first had to submit your games for approval. Nintendo had the right to make changes such as removing blood or religious symbols. Once approved, you had to buy your cartridges from Nintendo. The cost ranged from $9 to $14, with a minimum order of 10,000 cartridges. Companies were only allowed to create five games per year and they had to be exclusive to the NES for two years. Some companies formed subsidiaries in an effort to publish more games. Konami published several games under Ultra, while Acclaim used LJN.

However, Nintendo's most brilliant move was its chip lock technology, which prevented even unlicensed games from being played on the system. Both the console and the game cartridge contained a security chip that communicated with each other with a program called "10NES." If they could communicate successfully, the game would unfold. Nakajima was not a fan of the licensing deal, but he still met with Nintendo of America president Minoru Arakawa and vice president Howard Lincoln. There was mutual interest between the two companies. Nintendo saw Atari Games as a well-known brand, with a lot of great titles that they could bring to the NES.

Nakajima pushed hard for a better deal. This was Atari, who basically invented the video game industry. Arakawa and Lincoln did not give in. All licensees were to be treated equally. Although upset, Nakajima reluctantly agreed. On January 18, 1988, Tengen officially became a Nintendo licensee. Its first three games were announced that same year at the Consumer Electronics Show in June: Gauntlet, Pac-Man, and R.B.I. Baseball. After the agreement, Nakajima and Arakawa frequently met for dinner or a round of golf, a nice gesture between two business partners. However, Arakawa noted that Nakajima was quite talkative and asked many questions about Nintendo's business and its distribution strategy to retailers.

Not wanting to appear rude and having good faith in Nakajima, Arakawa shared information. He had no idea that, behind closed doors, at Atari Games, engineers were working to crack the NES lock chip. A year earlier, in 1986, Atari Games was aware of the strict demands of Nintendo's licensing program. Nakajima, along with other executives, were not fans. Nintendo was new to the world of video games and their demands seemed arrogant, trying to control the market. Chief Operating Officer Dan Van Elderin said, "The way Nintendo did business... ...was like Ford came out with a car that could only use Ford gasoline." Lawyers for Atari Games read the licensing agreement to see if there was a way to create games for the NES without going through Nintendo.

There was a way, but it all depended on being able to bypass the lock chip technology. The engineers were tasked with reverse engineering the chip. After many attempts, they were unsuccessful. One engineer, Pat McCarthey, wrote: It was clear that to reverse engineer the chips, they would need access to the "10NES" program. However, Nintendo had a copyright on the algorithm. Now, it is true that anyone can walk into the copyright office and request to see copyrighted material. But for certain materials like "10NES", you can't carry a copy with you, or even take notes... ...unless that material is the subject of litigation.

Atari Games came up with a plan. Lawyers for Atari filled out a form requesting a copy of the "10NES" program, falsely claiming they were defendants in a case involving the algorithm in the United States District Court of Northern California. Before long, Atari Games suddenly had a copy of the "10NES" program, obtained illegally. With access to the program, Atari engineers had no problem reverse engineering the locking chips. They created a similar chip containing their duplicate "10NES" program and tested it on a cartridge. It worked. They named their clone "Rabbit." Atari Games' plan to circumvent the strict NES licensing agreement was coming to fruition.

Tengen may have chosen the worst possible time to become a Nintendo licensee. In 1988, the entire electronics industry was experiencing a chip shortage, simply due to high demand. Nintendo was greatly affected. Because they manufactured all the games, they had to inform all of their licensees that they would receive fewer games than originally planned. Some companies were furious. Loss of sales would deeply reduce your profits. Dan Van Elderin, Tengen's COO, asked if they could find leftover chips themselves, without Nintendo. Nintendo agreed, but only if Tengen paid the difference in cost. The chips also had to exceed their standards.

After finding a supplier in the United States, Tengen sent the chip to Nintendo for review. It was denied. A spokesperson for Tengen stated that due to chip shortages and Nintendo's policies, they were only able to meet less than 10% of their demand. Nakajima saw this as the last straw. Nintendo's licensing policies were hurting their business and they had finally found a way around the lock chip. It was the perfect time to attack. In December 1988, Atari Games sued Nintendo for antitrust violations and unfair competition to the tune of $100 million. At the same time, they shipped their new games containing the "Rabbit" chip to retail stores - the first unlicensed games for the Nintendo Entertainment System.

Tengen games are similar in size and weight to a standard NES cartridge. They have a curved end and two tabs to help you get the game out of the system. Each set has the "Tengen Quality Seal" and comes in a box with its own dust cover. Tengen only created three officially licensed games, but they also made unlicensed versions of them. Tengen Library was noted for its R.B.I. Baseball series, considered the best NES baseball game, as well as some good arcade games like Gauntlet and Rolling Thunder. They even published some Sega titles like After Burner.

Sega on the Nintendo Entertainment System, who would have thought? There was also the close relationship with Namco, which resulted in ports of Pac-Man, Ms. Pac-Man, and Pac-Mania. Tengen even made their own version of Tetris for a while before a court ordered them to stop distributing the game due to licensing issues. But we'll save that story for another time. After the 1988 Christmas party inNintendo, Minoru Arakawa and Howard Lincoln received news that Atari Games was suing them. They were completely surprised. They quickly contacted Nintendo of Japan. President Hiroshi Yamauchi was clear: Atari Games and its unlicensed cartridges must be stopped.

Nakajima met with Arakawa to discuss the lawsuit. He told her that he never wanted it to come to this, but due to Nintendo's strict rules, he felt that he had no choice. Nakajima offered to drop the lawsuit. "Let's do our own manufacturing," he said. Arakawa said "No." The lawsuit would continue. Atari Games went to the media and accused Nintendo of creating a chip shortage to keep prices high. Nintendo strongly denied the claim, calling it "absolute nonsense." For Nintendo Vice President Howard Lincoln, it was a complete betrayal of his initial licensing agreement with Tengen. He said: "I thought to myself: you have no idea what you've faced.

A tiger... that will skin you... piece by piece." Nintendo quickly responded in February 1989, claiming that Tengen had entered Nintendo's licensing program fraudulently, obtaining technical support and detailed information on retailers for the sole purpose of creating its unlicensed games. They also sued Tengen for unauthorized and unsupported sales of the NES, as well as patent infringement on its security lock system. Later that year, in November, they amended their lawsuit and added that Atari Games illegally obtained its copyrighted "10NES" program from the US Copyright Office. All of the allegations and lawsuits would be condensed into one case only. It was just the beginning of a long and endless battle between the two giants.

The media took his side: the majority supported Tengen. "Who should the average consumer support? Clearly, Atari Games. If it wins, there will certainly be more cartridges and a wider variety of games available to users. If Nintendo wins, the negative consequences for the rest of the computer industry could be Amazing. If hardware manufacturers had veto power over what software is made, consumers would suffer from fewer programs available and they would certainly cost more. Atari Games' lawsuit is an effort to open up the market. – Dennis Lynch, Chicago Nintendo Tribune. employed a strategy of intimidation outside of court, threatening retailers with legal action or cutting off their supply if they sold Tengen products.

Nintendo products sold consistently throughout the year for retailers, sometimes accounting for 50% of sales. For some, it was simply too risky to sell unlicensed games. Retailers such as Toys "R" Us, Wal-Mart, Target and Circus World stopped selling Tengen games. Atari Games filed an injunction to prevent Nintendo from threatening its customers. Judge Fern Smith, who would oversee the entire case, ruled that Atari and Nintendo could not mutually interfere with their customers. Both companies appealed and the court order was lifted. Nintendo continued to contact retailers. Despite legal battles and threats from retailers, Tengen was seeing good returns on its unlicensed games.

Sales increased by 40%. In March 1991, in the Northern District Court of California, Judge Fern Smith would decide whether or not Tengen had the legal right to sell its games without a license. It all came down to the "Rabbit" chip included in each Tengen cartridge. Did you use an exact copy of the "10NES" program to authenticate with the chip inside the NES? Atari Games argued that they took the documents from the copyright office because it was ridiculous to think that someone could reverse engineer a chip just by looking at the papers. They felt they had the right to, quote, "self-help." They also claimed that the documents were not important anyway, since they had already cracked the "10NES" program.

But the evidence suggests otherwise. The copyright for the "10NES" program dates back to 1985. However, in 1987, Nintendo made some modifications to the program, removing some unnecessary code. The "Rabbit" chip contained the deleted code. "10NES" also had a few other functions, beyond simply unlocking the console. The program "Rabbit" also contained them. It was clear to Judge Fern Smith that the program contained within Tengen's "Rabbit" chip was a direct copy of the "10NES" program. He ordered Atari Games to immediately stop producing, distributing and selling its unlicensed games, as well as to remove all products currently in stores. Smith also harshly criticized the company for its actions. "If Atari didn't need copyrighted information to achieve its goal, then it shouldn't have tricked the copyright office into returning the "10NES" code to the lab.

Atari decided to make its cartridges functionally indistinguishable from its own. Nintendo games. It is true that we copied more than necessary for a game to work on the NES console. "A preliminary injunction is appropriate." – Judge Fern Smith. Atari Games would appeal, claiming that the decision would force them to close Tengen, laying off 39 employees, which would be a huge financial hit. Judge Fern Smith agreed and stayed her decision. Tengen games would remain in stores... for now. On September 10, 1992, a case reached the United States Court of Appeals in Washington, D.C. As a defense for its copyright infringement, Atari Games argued that Nintendo had misused its blocking program copyright, giving them control of games developed by third-party companies.

They stated that Nintendo's misuse of copyright should bar copyright enforcement. They also argued that reverse engineering the chip should be considered fair use. The court disagreed with the copyright misuse, stating: However, it ruled that reverse engineering was fair use, stating: Ultimately, the court agreed with Judge Fern Smith's original decision : Atari Games had stolen the "10NES" program code and ordered them to stop manufacturing and selling their unauthorized Tengen game cartridges for the NES. After 4 years of litigation, the battle was over. Tengen stopped producing NES games and shifted its focus to other systems, primarily the Sega Genesis, which was gaining market share.

Atari Games' allegation that Nintendo violated antitrust laws would be resolved out of court. Although Nintendo won the battle, Atari Games' lawsuit ultimately led to sweeping changes. The case helped establish the legality of reverse engineering. It also reformed the way the copyright office gave access to copyrighted material. Its antitrust lawsuit also caught the attention of other companies. Jack Tramiel's Atari Corporation also sued Nintendo for $250 million for violation of antitrust laws in 1989. Tramiel claimed that Nintendo's practice of console exclusivity for two years prevented Atari from obtaining good games. The case would ultimately be dismissed. In December 1989, Representative Dennis Eckhardt of Ohio urged the Justice Department's antitrust division to investigate Nintendo, citing: "Unreasonable tactics to restrain competitors." This led to an investigation by the Federal Trade Commission.

A year later, in October 1990, Nintendo announced that it had decided to ease its licensing restrictions, which included the two-year exclusivity rule. In 1991, the Federal Trade Commission and Nintendo settled the case. Nintendo was ordered to send $5 coupons to anyone who had purchased an NES game between June 1988 and December 1990. Nintendo distributors could now sell games, cartridges, and accessories at any price they chose. The case even reached the Japanese video game market. In 1989, Namco had to renew their initial licensing agreement with Nintendo, which originally gave them special provisions for being one of the first licensees. Nakajima's former boss, Masaya Nakamura, met with Nintendo president Hiroshi Yamauchi to discuss the new terms.

Yamauchi refused to give Nakamura the special treatment he once had. Nakamura was furious and spoke publicly against Nintendo's monopolistic practices. He also stated that Namco would begin developing games for Sega's latest console: the Mega Drive. Hideyuki Nakajima would direct Atari Games until the 90s. In 1994, Time Warner decided to incorporate Atari Games and Tengen into its new company: Time Warner Interactive. Around the same time, Nakajima announced that he would be changing his role within the company. But friends, family and co-workers knew the truth. He was battling lung cancer and simply couldn't take on the responsibilities of running the company.

On July 11, 1994, Hideyuki Nakajima died in Tokyo. Under Nakajima's leadership, Atari Games aggressively attacked Nintendo's business practices. This eventually led Nintendo to change its strict policies, allowing developers to create their games on other consoles. This helped systems like the Sega Genesis gain a stronger position in market share, creating a more open market. Without the battle between Nintendo and Atari Games, the video game industry would not be what it is today. That's it for this episode of Gaming Historian. Thanks for watching.