Atari - Nintendo 1983 Deal

INTEROFFICE MEMO

TO: John De Santis cc. Dave Stubben, Jeff Heimbuck, and John Cavalier

FROM: Don Teiser

DATE: 6/14/83

SUBJECT: Nintendo

As we discussed with Dave Stubben yesterday, I am to remove myself from any further involvement with the Nintendo project ..... and Dave has indicated that you are the one to take it
over.

I have provided you with a copy of my file containing my previous memos on the subject (with corrections); the approach letter from Nintendo; all of the schematics and mechanical drawings of the Nintendo machine which we have received to date; and Ed Levy's mechanical drawings which attempt to fit the Nintendo machine into the 2100 plastic.

We spent the latter part of the afternoon yesterday discussing the history of this deal and what needs to be done next by both sides. Let me review those points here and expand upon them for your reference.

Mr. Henricks received a letter from Mr. Arakawa and Mr. Lincoln of Nintendo America on April 4, 1983. In that letter, Nintendo provided us with some preliminary specifications on their new home video game machine. A couple of days later they came to meet with Mr. Kassar to explore whether Atari had any interest in this product. In addition to Messers Arakawa, Lincoln, Henricks, and Kassar; Messers Groth, Malloy, Moone, Bruehl, Ruckert, and myself were invited to attend. Mr. Malloy and I framed some of the initial questions which needed to be answered about the capabilities of the machine; and Mr. Lincoln promised to get the answers to me within a few days. Those answers were sufficiently intriquing to Mr. Groth that Alan Henricks, Dave Remson, and I were asked to travel to Kyoto immediately to see their TTL emulator in action and get more details about the final product.

On the 11th of April, 1983, we met with Nintendo at their headquarters in Kyoto. By happenstance (fortunate or unfortunate), a large contingent of Atari executives were in the Far East for other reasons .... and they all decided to come to Kyoto to have a look, too. In attendance from Atari were Messers. Bruehl, Moone, Malloy, Lynch, Hennick, Mitoh, Henricks, Remson, and myself. Attending on Nintendo's behalf were Messers. Yamauchi (President), Takeda (Manager of R&D, Coin-Op), Arakawa (Pres. Nintendo America), Lincoln (internal attorney for Nintendo America), Uemura (Manager of R&D, Consumer Products), Todori (Export Manager), and two of their electrical engineers.

We were shown working (but not complete) versions of Donkey Kong Junior and Popeye running with only minor display glitches on their TTL emulator. A VHS video tape (without sound) of that demo is attached to this memo. Please keep in mind that the actual TV image is significantly better than could be captured on tape. In fact, there is a noticable difference when viewing the composite video output on a monitor as opposed to the RF output on a standard TV receiver.

At that time, Nintendo had only just received their 1st pass silicon (with some bugs) and were not able to show us a fully assembled and working prototype. My memo of 4/16/83 (with corrections) describes what we saw and were told in that meeting.

On 4/15/83, Messers Kassar, Groth, Moone, Bruehl, Paul, Henricks, Remson, and myself met in Mr. Groth's office to view the videotape and discuss what we had learned from the meeting on the 11th and what we knew to-date on the MARIA chip being developed by General Computer. As both systems were seen as being in the same price range with graphics capabilities superior to the 2600 and comparable (and in some features, superior) to the 5200, it was felt that we needed to see what could be done with both machines for an intermediate priced game machine .... the 3600.

I was asked to become as completely informed about the MARIA chip as possible so that a reasoned choice could be made between the two machines. To that end, I have spoken with the folks at General Computer several times by telephone and have made two trips to their offices in Cambridge, Mass. It appears to be a superior machine, but the MARIA chip is not yet finished. First silicon is not expected until mid-July (if there are no further schedule delays). Also, since this chip is a VTI device there is some question as to the manufacturability/testability/cost of the chip. In other words, it will not be until mid-July (mid-August if the first silicon is faulty) that we will be able to make a fully informed choice between the Nintendo and the MARIA machines. Therefore, it was decided by Executive Management that in any negotiations with Nintendo we would need to string out the signing until at least mid-July.

We were committed to respond quickly to Nintendo, however, as to whether we were interested or not. So, Alan Henricks did contact Nintendo with the word that we were interesting in continuing the discussions; and the next negotiating meeting was arranged for May 17th in Kyoto. Skip Paul and Alan Henricks were to represent Atari. Two or three days before that meeting, Nintendo informed Mr. Henricks that they would be having their senior engineering managers present in the negotiations, and Nintendo requested my attendance as well.

That negotiating session began with a statement from Mr. Yamauchi as to the terms and conditions which he demanded, namely:

1. that Atari would purchase the assembled and tested main pc board for the FCS from Nintendo, for sale outside of Japan. Nintendo would sell the FCS on its own in Japan.

2. after some minimum purchase of assembled and tested pc boards, we would be able to buy the 2 custom chips from Nintendo without having to have Nintendo assemble them into the final unit.

3. that Nintendo would only disclose the electrical specs for the PPU and CPU, the circuit diagram of the FCS system, the test programs, and the "cassette" specs (meaning the ROM cartridge and cartridge edge connector specs).

4. that there would be no disclosure to Atari of the programming specs for the PPU and the CPU.

5. that Nintendo would program titles of our choice for the FCS system and would sell us the assembled and tested, unlabeled ROM carts at 1,500 Yen each FOB Japan for retail sale by Atari. The minimum quantity required by Nintendo per title would be 100,000 units and at that level there would be no fee for non-recurring engineering/programming expenses.

6. that Atari would hereby obtain a "right of 1st refusal" on future Nintendo coin-op titles for use worldwide (outside of Japan) only for the Nintendo FCS system .... again, by programming and manufacturing those carts themselves for sale to us.

7. that the cost of the assembled and tested main pc board would be higher than the 5,300 Yen quoted earlier to cover the cost of FCC compatibility. Also, that the resulting new pc board would not fit into the plastic being used by Nintendo for this unit in Japan.

By the time we finished the negotiations on that trip (5/17 - 5/20), the deal was changed to be as follows:

A. Nintendo would disclose all items called for in my memo of 5/13/83 (to Henricks and Paul) except for item 13., namely, the LSI tapes for chip fabrication. This disclosure would take place upon signing of the deal. All items which are originally in Japanese are to be furnished to us both in Japanese and in English.

B. Upon signing the deal, Nintendo would reassure Atari about the source of supply of the 2 custom chips.

C. Any increases in the cost of the main pc board due to FCC compliance will be a straight cost pass through (no additional profit to Nintendo).

D. Atari and Nintendo would work together to attempt to legal protect the CPU and PPU designs.

E. Nintendo would receive $5. Mil upon signing as an advance against future payments.

F. Atari would have to commit to a minimum purchase of 2 million hardware units (some mixture of assembled and tested pc boards and CPU/PPU chip sets) over the term of the contract.

G. The term of the contract would be 4 years with a 4 year option to renew.

H. Nintendo would receive an additional $3.5 Mil in a line of credit as an advance upon future payments upon delivery of the 1st production-ready prototype of the PAL West Germany version of the FCS (no later than 1/1/84). Similarly, an additional advance of $1.5 Mil for SECAM.

I. The 2 million unit commitment would be broken-up into 1 million NTSC, 700,000 PAL, and 300,000 SECAM. If Atari goes over in one catagory, it would directly reduce our requirement in any other catagory of our choice. As Skip Paul likes to put it, "cross-collateralization is the key!"

J. Nintendo would commit to produce 100,000 units of the assembled and tested pc board by August 31st if the new pc design (to include FCC and to fit whatever plastic we choose) can be completed by Nintendo and approved by Atari by July 20th. In essence, unlimited quanities (in excess of 1 million/month) thereafter .... upon 3 months notice from Atari.

K. Atari will have the right to program for this system with the full assistance of Nintendo.

L. Nintendo will, in the interests of expediency for this Christmas season, program 4 Atari titles of our choice. Source and object code which meets our satisfaction (with respect to basic design, tuning, and bug-free) to be delivered to us no later than Sept. 1, 1983. The fee would be $100,000./title or no non-recurring engineering fees would be charged as long as we buy a minimum of 100,000 carts.

M. Carts would cost us 1,500 Yen/cart if in plastic but unlabeled or 1,350 Yen if not in plastic (F.O.B. Japan). Rate of production would be max. 5,000 units/week/title