Over a Barrel: Coleco v. Atari, Again

The complete computer package, with an announced $600 price-tag for the stand-alone version that’s far below any other comparable system cost up to that point, attracts a lot of buzz at the Chicago CES in 1983, with entertainment trade paper Variety calling it the “undisputed hit” of the show. On the show floor, Coleco demonstrates the added storage capabilities of the ADAM‘s Data Pack cassettes by running its version of Super Donkey Kong on the demo machine. A much-improved home version of Nintendo’s arcade game, featuring the intro with Kong climbing to the top of the structure as well as the 4th mud pie level previously missing in all other versions, the game quickly draws the ire of Atari execs attending the show. They are there to seal a deal with Nintendo to distribute the company’s hit Japanese game console, the Famicom, world-wide. More salient, Atari has also recently secured magnetic media rights from Nintendo to distribute Donkey Kong and Donkey Kong Jr. on computers. Atari head Ray Kassar complains to Nintendo that they are in breach of contract over Coleco’s version for the ADAM computer. Nintendo president Hiroshi Yamauchi subsequently rakes Coleco over the coals, and no assertions about ADAM being both a game console AND a computer assuage him. Coleco eventually pulls the game from the ADAM library, removing it as a pack-in game inside the ADAM box, to be replaced by a Super version of Buck Rogers Planet of Zoom.

Click to play Super Donkey Kong on the ADAM computer

The kerfuffle delays the Atari/Nintendo deal long enough to expose serious financial problems at Atari. In July of 1983, Ray Kassar suddenly steps down as Chairman and CEO, after his company posts a giant loss for the fiscal quarter, and with him embroiled in an insider trading scandal.  When John J. Morgan comes over from Philip Morris to replace him, the new CEO places a freeze on new projects and no deal is signed between the two companies. Nintendo eventually goes it alone, and the result is the famous NES console, released wide in North America in 1986.

Super Donkey Kong on the Coleco ADAM, with intro screen and mudpie level, 1983To further complicate matters, a day after the ADAM release date announcement, the consumer division of AT&T announces a developing joint venture with Coleco; an online interactive game service using existing phone lines. Instead of aping the existing telegaming services like Gameline for the Atari VCS or Playcable for the Intellivision, the system would feature unique two-player games created by Coleco but outside of the ColecoVision milieu. Purchasing a 300 baud modem projected to cost under $100, subscribers would call a 900 flat-rate phone number and be matched with a fellow gamester, playing strategy, arcade and “entertainment software” on either a video game console or a computer. High scores would go on record, and national tournaments a distinct possibility. Scheduled to begin operation in a few U.S. cities in 1984, the system never gets a dial tone.

The ADAM Home Computer Falls From Grace

On tap for Coleco ADAM users is third-party software support, including Sierra On-Line porting over several of their Hi-RES adventures like Ulysses and the Golden Fleece and Cranston Manor. The enthusiasm shown by the press for such a cheap, complete and well-supported  computer package has Coleco stock riding on a high, rising 14 points surrounding the ADAM introduction at Summer CES and priced at $65 per share by June of 1983. However, dealers have started grumbling about the price markup of the system; at $600 retail for the full system and $400 for the add-on, the wholesale price of around $560 for the standalone and $415 for the add-on leaves near non-existent wiggle room to make any money on ADAM. Slipping release dates also start causing nervous rumbles. The late August release timeline promised at CES turns into September, with a further announcement that In order to make way on the production line for ADAM, Coleco has paused manufacturing of the Colecovision in the US… adding the assurance that production of the popular console will resume in early 1984. The release date for ADAM then continues its slide to mid-October, but as that month progresses there is still no sign of the computer system on shelves. Not only has Coleco’s delays in submitting the printer software to the FCC for approval caused these sliding dates, but also a rash of problems discovered in the system’s design. The built-in SmartWriter word processor is severely lacking in standard editing functions and is painfully slow to move around in. Coleco further incenses potential buyers by stating that a utility pack will be offered later to unlock the advanced functions of the word processor, estimating the price of such an upgrade at around $30. The data drive accesses its cassettes with agonizing slowness when working at all, and the speed of the printer has to be stepped down from 40 CPS to 10, because the innards of the device fly apart at the higher speed. It is also supremely loud when printing. Further, concerning the printer, probably its most dramatic problem is the enormous magnetic pulse it emits when powering up, erasing any tapes left in the data drive.

It’s reckoned by industry analysts that every month of delay could be costing Coleco sales of 100,000 units. In late 1983 Coleco finally receives approval from the FCC on the ADAM design. The company frantically begins mass production to meet the 500,000 units promised to retailers before the much-valued Christmas season. Units are air-shipped out to stores near the end of Oct. 1983, and Coleco has listened to retailers’ previous worries about the low markup on the machines. The retail price is now $100 higher than the previously announced price tag: $699 for the stand-alone and $499 for the ColecoVision add-on package. Dealers pay a wholesale price of around $575 per stand-alone unit, making room for a slightly increased markup. To add stress to an already stressful launch, in October Coleco is served with three lawsuits, instigated by investors accusing company brass, CEO Arnold Greenberg included, of dumping eight million dollars of their stock at its peak price while publicly promising huge sales for the ADAM system. At the same time of this promotion of the machine, “Coleco had not yet solved serious engineering problems which remained before ADAM could be sold as represented. Despite these difficulties, Coleco continued to deny or minimize these troubles publicly and to reaffirm the delivery deadlines”. A settlement for these charges is tended in August of 1985, with Coleco issuing 644,295 shares of stock valued at $6 million in August of 1987 as a final payment to resolve the case. A further distraction in 1983 comes in the form of another lawsuit from a company called Logical Business Machines. The charge is that Logical already has a business computer called ADAM, that costs $20,000 and introduced to the market in 1977. Their request is an injunction against Coleco selling their own computer under that name, as well as $500,000 to use in advertisements to dissuade the public of a connection between the two.

Coleco accompanies the ADAM  launch with a $15 million television ad campaign, but the company can only manage to get 95,000 ADAMs of their promised 400,000 out the door for the year. Due this disparity between the amount of units promised to be manufactured and the amount actually shipped, Coleco stock takes a nosedive at the end of 1983 down to $19.50 a share, a drastic drop from their high of $65 immediately after the June announcement of ADAM. Worst yet, no sooner have units gone out than complaints start pouring in, and ADAMs start piling up at Honeywell service centres, under contract to Coleco to service the system.

The Enormity of the Loss of the ADAM Computer

Nearly 60 percent of all ADAMs sold end up returned to stores as defective. The vaunted consumer advocacy magazine Consumer Reports delivers a devastating hit to the computer in January of 1984 by stating that the word-processor on their system started failing “within hours after we began using it.” Coleco stock takes it on the chin with this news, losing a fourth of its value on the day of the announcement.  Consumer Reports had already sent up a flare in late 1983, stating that they weren’t able to review the ADAM because four of the production models that they got ahold of wouldn’t work. Mass retailer JCPenney decides to get out of home computers altogether after their experience with ADAM; while they had ordered 5000-6000 computer systems from Coleco, after receiving only 500 units they cancel the rest of the order, citing the multiple flunking of ADAM during the retailer’s quality checks. Their public statement is that they are finding “inadequate profits” with home computers. On March 7, 1984, Coleco delivers the bad news: it lost $35 million in its fourth quarter. Upon making the announcement a company spokesman admits that even Coleco brass were surprised by the “enormity of the loss” taken by the ADAM. In the first quarter of 1984, Coleco reports earnings of $4.4 million on net sales of $186.1 million. This is a drop in earnings of over 70 percent from the same period the year before. At the Winter 1984 CES in Vegas, Coleco puts on a brave face and attempts a relaunch of ADAM, assuring show attendees that the numerous bugs in the computer have been dealt with, and that there have been 300 “improvements” made to the system. The problem is that the basic design of the ADAM remains unchanged. The only solution for the problem of tapes being erased when left in the data drive during power-up comes in the included documentation for the computer, with Coleco now adding helpful notices inside the manual and on a label atop the Memory Console, reminding users of this potentially devastating design flaw. A six-month warranty program is also announced to demonstrate faith in the system, along with The ADAM Family Computer Scholarship Program. Qualifying buyers of the ADAM or ColecoVision are eligible, if the system is purchased between September 1 and December 31, 1984. They must have kids enrolling into an accredited U.S. college or university before their 19th birthday and will get $125 from Coleco over four successful academic years, for a total of $500.

Over 100 new hardware and software items are announced at the show. Productivity software such as the SimpleCalc spreadsheet program, SmartFiler database creator and SmartMoney Manager. Previously promised hardware peripherals are also trotted out, like the AdamLink 300-baud modem, the 64K Memory Expander, and an add-on digital data drive that can store 512K of data on two data packs. One jaw-dropping pronouncement is that the ADAM will be getting a module that will allow it to run IBM-PC compatible software, although the only timeline given is “during 1984” for a release of this golden goose. Coleco also touts that there are 100 of their own software titles in the planning stages or available for the ADAM, and flout a laundry list of powerhouse third-party suppliers for their computer, including Activision, Broderbund, EA, Synapse, Epyx, Sierra On-Line and Sirius Software. A new medium is also introduced for the ADAM: a 5 1/4″ floppy drive accepting single-sided, double density disks with a capacity of 160K.

These incentives and peripherals do help pick up sales figures, but not enough to save the system or its reputation. The pipeline of new games for the ColecoVision dries up, with highly anticipated products, some announced back when the console itself was released, remaining MIA. Such lost potential is probably most typified in Tunnels & Trolls, a game based on a popular paper-and-dice RPG from Flying Buffalo in the vein of TSR’s Dungeons & Dragons. A video game of astoundingly advanced graphics, and of such complexity that its various commands would be supported by the Super Action Controllers. Alas, only the awesome title sequence for the ADAM version to this treasure is ever unearthed.

Click to check out the intro to Tunnels & Trolls on the ColecoVision

Click to play a tech demo of Tunnels & Trolls on the ColecoVision

Through 1984, additional promotions are rolled out to try and increase interest in the ADAM: the wholesale price to dealers is steadily slashed down to $475, which is selling the computer below cost. Coleco also attempts to create some synergy between its electronic wares and their hot-selling Cabbage Patch Kids dolls with the offer of a free doll with every purchase of a ColecoVision and game cartridge. There is also the giveaway of 32 BASIC programs on four Data Packs for purchasers of ADAM. Coleco also announces that development of software for the ColecoVision and ADAM computer is now open-sourced, with technical support and documentation freely provided to software developers, along with the promise of distribution by the company. This theoretically will spur the creation of more product for the systems.

Despite these incentives, the computers stubbornly remain on store shelves and ColecoVision console inventory piles up. By the end of 1984, ADAM has managed a meagre installed user base of around 250,000 units, or about half of what Coleco had expected to sell upon its launch in 1983. With the home videogame market hemorrhaging badly, the consumer electronics division of Coleco loses over 258 million dollars.

As far back as October 1984, Coleco had firmly denied rumours of the ADAM’s demise. Said company executive vice president Morton E. Handel at the time, “We are definitely not getting out of the Adam business. We are here to stay.” However, a year-end letter to stockholders issued by Arnold and Leonard Greenberg describes the trouble impacting the profitability of ADAM as “an unusually volatile business environment” for the computer industry, specifically citing price cutting, accelerated technological developments, changing public preferences and oversaturation as culprits. So it comes to be that on Jan 2, 1985, just days before the January CES, Coleco announces that the ADAM line has been discontinued by the company some 14 months after it showed up on store shelves. When the stock market closes on the day, Coleco stock has risen slightly from its low of $14.37 a share on the news of the Adam’s demise. This announcement catches the people with the unenviable task of manning Coleco’s booth at the CES flat-footed, who find out about the ADAM cancellation while setting up for the show. They then have to paste death-rictus smiles on their faces while curious showgoers peruse the remains of ADAM, peripherals and programs proudly on display for their once heavily hyped and now-defunct computer system. Anyone needing a reason for the abandonment of the ADAM need only look to a fourth-quarter loss of somewhere between $64 – $80 million for Coleco. All remaining inventory is sold off to the familiar dead-tech vultures at NYC-based Odd Lot Trading, Inc., while Coleco stock tanks at $13 dollars a share. The ADAMs are expected to be unloaded to buyers for somewhere south of $300. While Coleco assures that production of the ColecoVision game console will continue, it eventually succumbs to the evaporating video game market later in the year.

Last Life: Coleco Bankruptcy

While Coleco might have lost the Colecovision and ADAM, they’ll always have the Cabbage Patch Kid doll line, right? After being introduced in 1983, the same year as the fateful ADAM, for three years the wildly popular, ugly little dolls, accessorized with adoption papers sent to kids upon registration with Coleco, fill the company’s coffers to the tune of $1.2 billion in revenues. Hitting a high of $600 million in sales in 1985, the fad shows definite signs of cooling when the doll line only pulls in under half that the next year, or $250 million. This accounts for a drop in total revenues to only $776 million for 1986. Meanwhile, what profits are made are gobbled up in a series of acquisitions and licensing deals trying to find the next big thing.  The Cabbage Patch Kid craze comes and goes, and Coleco fails to catch lightning in a bottle with the Couch Potato doll, an equally ugly, spud-shaped plushie advertised as “the complete vegetable”, that lazily refuses to budge off toy store shelves in 1987.

Click to play Cabbage Patch Kids Adventures in the Park on the ColecoVision

Coleco hoped to replicate the success of the Cabbage Patch Kids with Couch Potato, 1987 ad

Their nine lives finally exhausted, Coleco defaults on $335 million in interest payments to its debt holders in 1988. Coleco shares have gone from a high of $22.25 in 1984 to $2.50 in March of 1988 – and they would go lower still. Coleco announces the layoff of 475 employees and the departure of its chairman. On July 11, 1988, Coleco, the 6th largest toy manufacturer in the United States, files for Chapter 11 bankruptcy.

Most of Coleco’s assets, licenses and rights wind up purchased by Hasbro in 1989, but at the time of the bankruptcy a company out of Texas called Telegames almost immediately buys up the rights to the ColecoVision IP and remaining stock. They sell the machines through mail-order, and work to finish original games, as well as licensed ports to other systems like the 2600, that were left hanging when Coleco went under. They begin selling the $40 Personal Arcade aka Dina through mail-order, a redesigned system using the ColecoVision hardware. The machine is small, featuring low-rent versions of Nintendo’s NES controllers. The original’s membrane keypads have been reduced in number to one, mounted on the cabinet and incompatible with game overlays. Space shooter Meteoric Shower is included as a built-in game for the system.

Click to play Meteoric Shower on the Dina Personal Arcade

Another interesting aspect of the machine is a second cartridge port, right behind the ColecoVision slot. This extra slot accepts Sega SG-1000 cartridges, a Japanese precursor to the Sega Master System. The Ultimate Critic eventually weighs in with His review of the Dina, when a tornado wipes out all remaining Personal Arcade stock in 1994. The Coleco brand itself eventually resurfaces in 2005 via a Chicago-based company, releasing new lines of handheld games and virtual TV plug-and-play devices.

With over six million ColecoVision units sold in the space of just two years and approximately 190 cartridges released in total, it makes you wonder whether Coleco could have established itself as an enduring force in the video game market if the big crash, coming just one year after the ColecoVision’s introduction, hadn’t cut the legs out from under their system.