The home video game market was weak in 1978 due to the amount of Pong clones that had been made obsolete by the newer and more powerful systems. Both the Channel F and Atari VCS found themselves in the midst of a vicious round of price-cutting due to this as Pong clones were sold off to discounters for very low prices. Many clone companies were going out of business due to the saturation of the market and both Fairchild and Atari found themselves selling to a market that was completely burnt out on Pong. Atari managed to sell only 550,000 units of the 800,000 that were manufactured in 1978 leading to further financial support needed from Warner Communications to cover their losses. The merger of Atari with Warner Communications led to Nolan Bushnell having less say within Atari and disagreements on development of projects and the direction the company was headed; this ultimately led to Nolan Bushnell leaving the company in November of 1978.

When Atari first merged with Warner Communications Bushnell signed a non-competitive agreement which he did not think much of at the time as the thought of leaving Atari was not something that ever crossed his mind. The non-competitive agreement that he signed would ban him from working in the industry that he helped build and pioneer. Unable to work in the industry Bushnell had to shift his focus elsewhere. Nolan Bushnell founded Chuck E. Cheese’s Pizza Time Theatre while at Atari in 1977. Bushnell’s experience in the amusement park industry and love for entertainment influenced the concept of Pizza Time Theatre. The first location opened in San Jose, California in 1977 as an entertainment restaurant and indoor arcade. When Bushnell parted ways with Atari he purchased the Pizza Time Theatre concept from Warner Communications. Bushnell over the next several years focused on Chuck E. Cheese before moving his focus to developing new innovative products.

The public started to realize that the new generation of systems were able to offer a much more in-depth experience than the first generation of systems and programmers learned how to push the new hardware capabilities. The Atari VCS started to gain in popularity at the beginning of 1979 and by this point Fairchild had given up thinking video games were a passing fad. This move handed the entire quick growing market over to Atari and by the end of 1979 the VCS became the best-selling Christmas gift and console, selling approximately 1 million units.

By the end of 1979 Atari released 26 additional games since its launch, 14 released in 1978 and 12 released in 1979. Atari began 1980 with 35 video games in its library containing exclusives hit arcade games that could be played at home, hits such as Atari’s Football, Breakout and Space War. Atari was able to obtain licensing rights to the smash arcade hit Space Invaders by Taito which greatly increased the systems popularity when it released in January 1980 resulting in doubling the systems sales to over 2 million units. Atari would go on to gross over $2 billion in 1980 mainly due to the success of the Atari VCS and its cartridge sales. Sales would continue to double for the next two years and by 1982 Atari sold more than 10 million Atari VCS consoles with its best-selling game Pac-Man selling 7 million copies.

In 1982 a revised version of the VCS was released with the wood grain removed, the systems were nicknamed “Darth Vader” consoles due to their all black appearance. These systems were the first VCS consoles to be officially called the “Atari 2600” after the unit’s part number CX2600 as the “Atari 5200” was release later that same year.

In 1982 Atari invested heavily in two licensed games, Pac-Man and E.T. the Extra-Terrestrial.  Even though Pac-Man became the best-selling game for the Atari 2600 the drastic difference in quality between the port and the arcade version contributed to a loss of consumer confidence in the console.   E.T. was rushed to market to make the 1982 holiday season and became a commercial failure frequently cited as a major factor in the video game crash of 1983.