Nolan Bushnell founded Atari on June 27, 1972 when he was inspired by a computer game called Spacewar. Bushnell then developed a prototype of a game called "Pong" and released it in a bar in Sunnyvale, California. The game was an instant success and began Atari's voyage to manufacturing video arcade games. Soon after the release of Pong, Magnavox, who already had a version of Pong on their home video game system the Odyssey, sued Atari. Bushnell was unable to convince the judge that he did not duplicate the game so Atari was required to pay royalties to Magnavox. Nevertheless, Atari was very successful in 1973 with Pong. Do to the success of Atari many other companies started to copy Pong and enter the market. This made Bushnell realize that if he wanted to stay on top he needed to come up with unique ideas and then copyright them to avoid competitors using his ideas. The next year Atari released a racing game, a football game, and their famous tank game (http://hmk.best.vwh.net/ahistory.htm).
By the end of 1974 Atari had developed a home version of Pong. It was less expensive then the Odyssey and had superior graphics and color. A buyer from Sears offered to buy all the Pong units Bushnell could build. On top of buying all the units, Sears offered to help with the financing and pay for the advertising of the game. Pong was the hottest thing around by Christmas of 1975. In 1976 a game system called Fairchild Channel F was released. The system had the ability to play different games by plugging in new cartridges. This system was a major threat to Atari, and they needed to act fast. They soon started to develop a video game system called Stella, but financial trouble prevented them from finishing it. Bushnell saw the need for more capital so in October of 1976 he sold Atari to Warner Communications for $28 million (http://hmk.best.vwh.net/ahistory.htm).
Warner wanted to make Atari the biggest name in video game entertainment and focused their efforts on Stella.