Lionel “Lon” Allan was Atari's first general counsel and later followed Nolan Bushnell and Joe Keenan to become the general counsel for Pizza Time Theatre, also known as Chuck E. Cheese. A general counsel (GC) is the head lawyer for a corporation. In large and medium-size corporations, the GC is typically an employee. Oftentimes, however, and especially with start-up companies, the GC can be an so-called outside general counsel, that is, an external lawyer who handles most legal affairs of the company, and has a much closer relationship with management than a typical external vendor. Lon Allan served in such capacity for both Atari and Chuck E. Cheese, where he also was an early investor.
A “product of the Free Speech Movement at Berkeley” and a graduate of Stanford Law School, Allan served as a captain in the Judge Advocate General’s Corps in the US Army Reserve during the Vietnam war, something he calls being “a weekend warrior.” He clerked with Chief Judge Robert F. Peckham, US District Court, San Francisco, before turning down and being released from a previously accepted offer from Wall Street powerhouse Simpson Thacher & Bartlett to instead join a start-up law firm in an agricultural region that was yet to be known as Silicon Valley. “I think the key thing of founders is that they just don’t perceive risks the way mortals do and it’s just second nature to them,” says Allan. “And I never thought of myself that way, but I guess when you turn down the august firm of Simpson Thacher to practice law with four guys in a town that the New Yorkers hadn’t heard about in 1969, there was something inside of me, which is I guess why I’ve been in the valley now fifty-five years.”
In 1972, “a tall drink of water wearing a butterfly bow tie by the name of Nolan Bushnell walked in” the office of Hopkins, Jordan, Mitchell & Sullivan (now known as Hopkins & Carley), looking for help incorporating a business venture already doing business as Syzygy. As the fifth man, and most junior attorney in the firm, Lon's “specialty was doing whatever the four senior attorneys didn’t want to do,” and that included helping Bushnell formally set up shop as Atari Inc. Allan would remain the outside general counsel for Atari until 1979, handling most things corporate and commercial, while also managing the legal matters for Chuck E. Cheese until its Chapter 11 reorganization in 1984.1 Allan subsequently had a storied career as an attorney, investor, and board member for technology companies such as Catalyst Semiconductor in the US and Marubun Corporation in Japan. Since retiring from the legal practice at age sixty, he has enjoyed being actively involved on nonprofit organization boards and in law teaching. He is a newly appointed commissioner on the Santa Clara County Juvenile Justice Commission.
I sat with Allan for four hours at the Palo Alto office of Wilson Sonsini Goodrich & Rosati, the sacrosanct Sistine Chapel of Silicon Valley law, on March 16, 2020. We subsequently conversed over video conferences and emails in May and June, 2020. The contents of these interviews have been merged and edited for clarity and style. A full transcript of the March 16, 2020, interview will be deposited in the Department of Special Collections, Stanford University Libraries.
Julien Mailland: Lon, thanks so much for taking the time to share your Atari, Pizza Time Theatre / Chuck E. Cheese, and Silicon Valley history with us.
Lionel “Lon” Allan: Well, I’m pleased to be here. I was graduated from the Stanford Law School in ’68, which was actually before the term Silicon Valley was coined. But, in many ways, it was the start of a modern Silicon Valley because 1968 was the year that Intel was incorporated. I always say that one of my law-school classmates was a little older and he wasn’t sure that he really wanted to work for a law firm. So he was the first inside lawyer at Intel in 1968. When we had our first five-year reunion in 1973, he was the first of our classmates to retire from law practice because he had all that founder stock in Intel. I’ve spent my whole career here in Silicon Valley. I’m now retired from the practice. I practiced for thirty-five years. Atari was my first Tiffany client. Like most things in life, it was fortuitous. Back then in the sixties and early seventies, everything in Silicon Valley was a start-up, so I was practicing law with a start-up law firm. When we incorporated Atari in 1972, I think we had five attorneys in the firm. I was the most junior. My specialty was doing whatever the four senior attorneys didn’t want to do.
JM: Before we dig deep into Atari and Pizza Time Theatres / Chuck E. Cheese, could you tell us where you’re from and how you got to Silicon Valley?
LA: I was raised in Detroit, Michigan. I graduated from the University of Michigan in May of 1965. I’d always thought with my father from New York, I’d go to Columbia, and I was admitted to Columbia. But, as my best friend from my high school and Michigan varsity debate teams was here at Stanford, I came out here in the summer of 1965. But I was just a visitor. I didn’t see myself as an immigrant, if you will, to California, so in 1967, my last year, I accepted a job offer with Simpson Thacher in New York. And, back then, there was no such thing as a national, much less international, law firm. Simpson Thacher, like all the Wall Street firms, had an office on Wall Street. Maybe they had one or two lawyers in DC. Maybe they had one or two lawyers in London, but that was it. When I graduated in June of 1968, I would have gone to New York City. But ’68 was the year of the Tet Offensive, so all of us went into the military. Fortunately, back in Vietnam as opposed to the Gulf Wars, they didn’t embed JAG [Judge Advocate General’s Corps] officers in units. They had JAG Reserve Units around the country, and I was assigned to the fifth JAG detachment at the Presidio of San Francisco. While I was doing that year of military service, a classmate was clerking for Chief Judge Robert Peckham in San Francisco, and I heard about it, so I checked with Simpson Thacher and asked if they could delay my thing if I got a judicial clerkship and they said yes. So when I came off of active duty, I spent a year clerking for Robert F. Peckham, who’s very well-known in the valley. The courthouse in San Jose is the Robert F. Peckham Courthouse. Three or four months into the clerkship, he introduced me to the fellows at Hopkins & Carley—in those days it was called Hopkins, Jordan, Mitchell & Sullivan because there were only four lawyers there. They had just founded the firm in ’68. So when he introduced me to them, that firm was just a year and a half old, and I started talking to those guys, and I took a job with this start-up law firm that had four lawyers.
JM: What kind of law did you think you were going to practice?
LA: Back then, just sort of general commercial law because there were very few public companies in Santa Clara County then and the securities work was just beginning to be done by San Francisco firms like Pillsbury, Madison & Sutro because it was the late fifties, early sixties before even California law firms had done their first IPOs [initial public offerings]. Before that, one always engaged New York counsel. So it was just going to be general commercial law, small, little law practice because when I made that decision in ’69, the basic industry in Santa Clara County was agriculture. It wasn’t technology. But what happened was, in 1972, a tall drink of water wearing a butterfly bow tie by the name of Nolan Bushnell walked in, and the other four lawyers in the firm were ten years older than me. Nolan and I are the same age. So it made sense for me to get involved (especially in retrospect, when down the line, Nolan fired his original management team, who were all folks who were the age of the people I was practicing with. They were ten years older than us. It was John Wakefield, Dick Mobilio—I forget the name of the CFO, but Nolan fired all of them, and the lawyers I was practicing with said I should really focus on Atari because Nolan and I were the same age, and I think they felt that this was a bad sign Nolan firing all these people). Atari was close to bankruptcy, so I got involved. Eventually, Nolan brought in the new management team. He brought in Bill White from Arthur Young as chief financial officer. He brought in Joe Keenan to replace John Wakefield, and Bill and Joe and Nolan and I were all the same age. We were all a product of the Free Speech Movement at Berkeley, where the mantra of Mario Savio was you didn’t listen to anybody over age thirty. So Bushnell, Keenan, White, and me were all twenty-nine or thirty, and the original management team had been ten years older, and the other four lawyers in my firm were ten years older. So, we all just hung together. And we started to come up with Pong, which was exciting. It was coin-op. We didn’t yet have the game on TV, which is really the transition to the computer age. That wasn’t released until 1975, but in ’72–’73 we had the coin-op game that you put quarters in, but it was electronic, it wasn’t mechanical like a pinball machine. Don Valentine got interested and back in those years, there weren’t layers of VC [venture capital] firms here in the valley. There were just a handful, and the two biggest were Sequoia Capital and Mayfield. Don got close to Nolan Bushnell, and we did what was considered a big deal back in 1975. We had Sequoia Capital,2 we had Mayfield Fund, we had Time Life, and we had Boston Fidelity Ventures Associates. So, four major venture capital firms came up with 1.4 million dollars. Today, angels invest in as much individually, but back in 1975, that was a big deal. As the general counsel for Atari, I represented Atari in the negotiations and in the documentation. Don Valentine was the lead VC so he was the one who was going to take the board seat, and he did the negotiation for the consortium of VCs, and he hired John Wilson of Wilson Sonsini. And young lawyers today, in the computer age, talk about doing a cut-and-paste on a stock purchase agreement, and I’m not sure how many of them know the etymology of that term. Well, in 1975, without computers, when we did a cut-and-paste, it means we had scissors and Scotch tape, and the late John Wilson actually came to my home, and he and I sat on the floor with papers spread out and literally did a cut-and-paste on the stock purchase agreement for this—the one and only VC financing for Atari. It was a great learning experience for me because it was the first corporate financing I had ever done. And besides being a good lawyer, John Wilson was a true gentleman because obviously he was in the position where if he wanted to sort of outfox me in the documentation, he was in a position to do so, and he didn’t. And if I could make a snarky comment, that was my view then and even my view today about the difference between New York practice and Silicon Valley practice. Am I allowed to use a petite vulgarity?
LA: Okay. Because I had classmates who were practicing in New York, and as one of them said, the game in New York when you were negotiating financing deals was to see if you could fuck the other guys with the documents to stick something in there that they wouldn’t notice. That has never been the practice here in Silicon Valley. Jumping ahead a little bit, in ’76 when we sold Atari to Warner, lawyers from Paul Weiss—outside lawyers from Warner— came out, and when we’d go out at lunch to get a sandwich, they would lock their briefcases because the New York practice was if they didn’t, they were afraid people would come in and look at their deal notes. I never owned a briefcase with a lock on it because that wasn’t the practice here. Or I had friends who went to law school at Harvard where the exams were proctored and a proctor would go to the restroom with you. At Stanford Law School, the exams were on the honor system where you could take the exam and go to the student union or go back to your apartment and you were on your honor that you wouldn’t cheat. That went on to the law practice—as I said, I was a babe in the woods and John Wilson didn’t hide anything in the documents that I wasn’t sophisticated enough to see. So anyway, that financing was the real birth of Atari that allowed us to grow. Now, back then we did something that today many people think is not politically correct, which is we shipped all the jobs overseas, but, in the negotiations, Don Valentine made clear that if our business model was not to have all the production overseas—because what we’re doing is a lot of manual labor of stuffing printed circuit boards—if our business plan wasn’t to have that all done offshore, they wouldn’t fund us.
JM: Why would Don Valentine not fund you unless you’d outsource, and why did you pick Taiwan?
LA: Because Taiwan had a labor force that could do this. Today when we talk about China, we think of mainland China. In the seventies, we still did not have access to mainland China, the only China we had access to was Taiwan, but it had martial law. Of all the places in the Far East in terms of stability, with martial law, it means you don’t have any labor problems—there was a full colonel assigned to us. So I went over there and we set up ATMC, Atari Taiwan Manufacturing Company. Obviously, in terms of setting up the subsidiary in Japan and in Taiwan and in France, in each case, I hired local counsel. So we set up a factory there. We bought the old TRW factory and renovated it, and that’s where I learned about feng shui, because we had to move the gate, we had to move the entrance to the general manager’s office—the doorway—because until the feng-shui man signed off, the workers wouldn’t come to work. And by 1975, we had 3,500 employees. They were employees of this wholly owned Atari subsidiary in Taiwan, whereas in terms of our corporate headquarters here in Silicon Valley, we had maybe two hundred employees. Now in today’s world, a lot of people would scream about outsourcing those jobs. But, in the early seventies, it was considered not only the smart thing to do, but, again, if you wanted to get professional money—VC money—it had to be in your plan. So we had, I think, at least six expatriate Americans living there, and their kids all in TAS, Taiwan American or Taipei American School. We had dormitories for our workers who were stuffing the printed circuit boards. And a group of us would go over at least once a quarter, sometimes more often, because that was the heart of our business. So, at least on a quarterly basis, certainly Bill White, the chief financial officer, and I, would go over, and I think we were really averaging six or seven times a year to really be hands-on, because remember, back then we didn’t have computers. Facsimile was still coming in. In Taiwan, to make a phone call back to California, it had to be operator assisted. So there was a real reason to get on the airplane and get over there to see what was going on because that was the life of Atari. And inside of two years, this company where we did a 1.4 million dollar VC financing, we were selling a billion dollars of video games out of Taiwan, when a billion dollars was a billion dollars. But it raised all sorts of questions, because international business back in the early, middle seventies was still getting off the ground. Again, Taiwan was under martial law. So the Taiwanese government assigned a full-bird colonel to be in charge of “employee relations.” This was back when in the city of Taipei, you had armed guards, because of the threat of Mao Zedong unleashing his forces on Taiwan. But it worked. The workforce—very smart, very dedicated. Compared to wages here, this was a great deal financially for Atari. And for the people in Taiwan, because there still weren’t that many American companies there, even though the young Democratic Socialists in this country today would say we were exploiting them, we were paying them … I mean, people were lining up for jobs with ATMC.
JM: So what was coming out of the factory? Were these the printed circuit boards for the coin-op machines?
LA: No, these were just the consumer products. Initially the ones that we sold through Sears Roebuck. It was Pong and then the next generation of games. Coin-op games, we manufactured here in the United States, but coin-op was becoming less and less a factor. Coin-op introduced video games. But then the thing came that you could play on your TV set ... Initially, it was just the home Pong, and then the VCS [video computer system] console with the various choices of games. The game designers were here in the valley, we weren’t designing games in Taiwan. ATMC, Atari Taiwan Manufacturing, was just the manufacturing, where back then, before robotics, we needed living people to stuff printed circuit boards and assemble the games, and then we just drop-shipped them to the ultimate customer from there. So games going to Europe or to Asia were just shipped directly from there. The only games that came back here were games for sale in the United States. And today, forty-five years later, it’s sort of “well, what’s the big deal?” But it was a big deal back then. As I say, when you went over there, it took thirty minutes to set up an operator-assisted phone call to go back here, and in the early days, I don’t think we even had facsimile. We had telex. When I talk about it now, it sounds that I was there in the 1870s, not the 1970s. But it was just explosive. I think the Atari expats had more kids at TAS than any other American company in Taiwan, and we were a major force in the Taiwan Chamber of Commerce, and it just worked out. The expats we had over there were very good. We had a fellow who ran it by the name of Rick Krieger. Unfortunately, Rick has since passed on. But he and his wife and two daughters moved there, and he probably lived there for six or seven years. And to be a general manager over there, you needed someone who really respected the culture and everything. He was not the quintessential ugly American, and he worked so well there. So all credit to the late Rick Krieger who just lived there all those years. The thing was a great success.
JM: Lon, let’s backtrack just a little bit for a second because here you are—late 1960s in Silicon Valley, which is not Silicon Valley yet. Since you’re a lawyer and not an engineer, you’ve probably never seen a computer back then or you’ve seen one from far away and you’re here thinking you’re going to practice commercial law in a rather agricultural area—and here comes this guy with his bow tie, Nolan Bushnell, who’s your first client, and he says, “Hey, we’re going to do video games.” What did you think when that happened? Can you tell us about that first interaction?
LA: Sure. Well, the introduction actually was easier because when I met Bushnell, we were talking about an electronic pinball game. When I first got involved, we weren’t talking about something that you would play on your TV set at home. We were talking about something that would be in a bar, where they had all the mechanical pinball machines. And the early games, not just Pong but my favorite was Breakout, were roughly the same size as a pinball machine. You put quarters in them and the only difference was that instead of having mechanical things that moved like a pinball machine, it was an electronic screen. But if you had a pinball machine next to one of our Atari games, they were the same size. They looked the same from a distance. You had to go up close to see that the Atari games didn’t have any things that mechanically moved. I’m not sure I had even heard of the word computer, but any college kid knew what pinball games were, so when Nolan came in, it seemed just like, if you will, an electronic rather than a mechanical pinball game. So for me the entry was very easy. The real genius of Atari was not a technical genius, it was innovation, in terms of entertainment, in terms of what young people wanted to do. That’s where Bushnell was a genius. He had grown up with summer jobs at carnivals. I think that’s why there was the split up with [Steve] Jobs and [Steve] Wozniak because Nolan wasn’t interested in computers. The motif that runs through the opera of Nolan Bushnell was games and entertainment, not computers. I think that’s why Jobs and Woz left to form Apple. By the way, most of the VCs who went into Atari went into Apple. So anyway, all the coin-op games were designed here by young kids who came to work with sandals and jeans and who were really part of that anti-Vietnam, anti–Richard Nixon kind of thing, which later proved, I think, to be Atari’s downfall when were acquired by Warner Communications—no disrespect, but they were New Yorkers who had a New York view of the world.
JM: Were you involved with that deal with Sears getting Pong into Sears department stores? In his Computer History Museum Oral History, Al Alcorn recalls that the negotiation took place between a guy named Tom Quinn, who was the sporting-goods buyer for Sears, and on the Atari side, it was Joe Keenan, Nolan Bushnell, and himself.3
LA: I was not involved at the genesis, but later on. At first, Nolan, Joe, and Al negotiated “without benefit of counsel.” Sears gave us a PO [purchase order] and Atari signed it. I was not involved at all. Atari was in no financial position to bargain. But I got involved when the game became a bit hit. We realized that if we were only “private labeling” for Sears, that we’d never be a truly successful company. Sears was taking 100 percent of our production, and private labeled it Tele-Games Pong. The definitive moment when we broke away from Sears, was, I think, after two seasons, when we realized that we had to create value in the Atari name, and as long as we were private labeled for Sears, as long as they were getting 100 percent of our production, they were controlling our fate. My recollection is that Sears insisted on being our exclusive customer. They were controlling the price. We needed to sell under the Atari name and make the profits that the market afforded rather than the purchase price in a PO from Sears. When someone’s 100 percent of your business, you have no bargaining position. One of the fun things about being general counsel, and I was more inside counsel than outside because, again, we were all the same age and I was basically spending all my time on Atari—is that you’re as much of a businessman as you are a lawyer. And given my entrepreneurial bent, that really appealed to me. I attended the senior staff meetings, I attended the board meetings, and even though I didn’t get a paycheck from Atari, I was basically a member of senior management. And after work, we’d all go to Khartoum [a bar near the Pruneyard Mall in Campbell, California] and drink together and we’d socialize, and these guys were my closest friends. And I’m sure the statute of limitations has run, so I can say that when you walked into our headquarters in Los Gatos, you had a happy smile on your face because the place was filled with secondary smoke and it wasn’t tobacco smoke. No one there could run for president because, unlike Bill Clinton, everybody did inhale.
JM: One thing that’s really interesting that you mention is that when you talk about Atari, you say “we,” and, as you said, you were outside counsel, but really you were inside.
LA: Emotionally, I was inside because basically I spent virtually all my time working on Atari because, you know what, as the Australians would say, we were all mates.
JM: What kind of fee arrangement did you have with Atari? Was it hourly?
LA: Yeah, but back in the seventies, it was probably forty bucks an hour, or when I started first working for them it was probably thirty bucks an hour. So it wasn’t a thousand or fifteen hundred bucks an hour. So Hopkins & Carley wasn’t one of the major vendors in terms of cash flow that Atari had to worry about. On the other hand, I suppose back in’72 when I started working for Atari, if they had offered me thirty-five grand a year, I would have jumped at it because it was a lot more—twenty-five grand a year, I would have jumped at it. The dollars were a lot different back then. I suppose if I’d thought about it or Nolan had thought about it, I probably would have left Hopkins & Carley and gone inside because it was exciting. On a personal note, not to be vulgar, I retired at age sixty not because of the salaries I made at Hopkins & Carley or the salaries I made as an inside lawyer. It’s because when I went inside, I always took a good chunk of my compensation in stock options. That’s why I was financially able to retire at age sixty, saying thirty-five years of law practice is enough. I’d rather, in my case, go into teaching and also do more as an outside director, as a professional director. And I had the option of doing that. People always talk about: what’s the secret sauce in Silicon Valley? And the secret sauce is: people actually will take risk. They will leave—in the old days, they will leave HP [Hewlett-Packard] or IBM, to go to Google or Facebook, and today, they will leave Google or Facebook to go to some start-up, where the chances are nine out of ten that it’s not going to make it and go out of business. I think it applies to young lawyers as much as young engineers or technical people. It’s in the atmosphere here. This is why when I retired from the practice we didn’t move to Hawaii, because he who is tired of Silicon Valley is tired of life.
JM: So talking about taking risks and going back to the 1975 round of venture capital with Don Valentine, there’s a story going around that Bushnell and Valentine had a deal about the pricing of Atari. And that overnight, Bushnell decided he wanted double that amount. Is that true?
LA: The answer is yes. And the reason is, Nolan was not just a genius in terms of his concept of gaming or entertainment. Whether it’s Nolan Bushnell or Sergey [Brin] or Larry [Page], you are not a founder if you perceive risk the way that ordinary mortals do. Nolan never saw—it wasn’t that he was a good poker player, though he probably was a good poker player. It’s just that he didn’t perceive the risk. You or I might say: oh geez, Sequoia Capital. If I squeeze too hard, Valentine’s going to go away and, at that time, Sequoia Capital was, along with Mayfield, one of the most respected VC firms, which is geez, I should be honored. You or I—well I can’t speak for you—I would have said, “Oh geez, I…” See, I don’t think it occurred to Nolan that Don Valentine wouldn’t do the deal with him. What used to drive Tom Herbert at Flehr Hohbach crazy is, in some of these deals, Nolan would get impatient—he’d say to the other side, “Okay, I’m going to kick Flehr Hohbach out of the room. You kick your lawyers out of the room”—and Flehr Hohbach would go crazy. For example, the 1976 Magnavox settlement was handled by Atari’s IP [intellectual property] counsel, Tom Herbert, not me a corporate counsel. Nolan did kick the lawyers out of the room to negotiate the settlement. I heard that from Nolan himself. Indeed, he was proud of it. But, again, Tom Herbert was the age of the people I was practicing with, you know, ten years older. But yeah, I think if you said, “Well Nolan, that’s a hell of a risk,” I don’t think that computed for him. And I really think if you look at all these—whether it’s Larry Ellison or Steve Jobs or Bill Gates, they’re wired differently from the rest of us. Thank God—and if Bushnell were here, he would agree—that he had Joe Keenan because Nolan was a creative genius, but I always teased him and said, “Nolan, you couldn’t run a lemonade stand because you’re too impulsive and you do something and it’s going to trash quarterly earnings or guidance that the Street [Wall Street] has.” And for the same reason I think that Larry Page and Sergey Brin were smart when they brought in Eric Schmidt. But even Joe—I had this experience when Joe was brand-new and had just moved over from Kee Games to Atari. And we were talking about something just Joe and me, and he said, “Well I’m thinking of doing this or this or that,” and I said, “Joe, that’s not legal.” And I naively thought that when I said that, that was the end of the conversation. And Joe Keenan said, “Well what are the consequences?” In other words, he wanted to do a cost benefit analysis. Now, maybe it made sense, business sense. And I think that sort of is where the valley is. You don’t tell these people it’s—now, yes if it’s a moral thing about, yes, we’re going to kidnap or murder someone, but if it’s a violation of law, well what are the financial penalties for doing this or that? It’s practice here; you’re dealing with risk takers and you have to understand that, and it doesn’t mean that you compromise your standards, but you have to be able to explain in their frame of reference why you’re not only giving the advice that you’re giving, but why they should take the advice.
JM: You mentioned Joe Keenan. At some point, you guys set up a company called Kee Games in parallel to Atari. Can you talk about the story behind this?
LA: Very simple. Again, this was back before consumer games, when we were wanting to get our machines into bars. It gave us two entries. From a distribution point of view, a distributor would say, well, I want to get some Bally games and some Atari games and some Kee games, so it doubled our distribution channels. Very simple. It was as easy as that. We had young Steve Bristow over there at Kee Games, and Al Alcorn at Atari, and Joe Keenan started out—the Kee is from Keenan. He lived across the street from Nolan Bushnell. That’s how they got together. And Joe, who’s still a dear friend of mine, was selling for IBM, and he was tired of selling for them. Joe was and is a great salesperson. So this guy across the street had this crazy idea of a start-up. So Joe went to Kee Games and then when Nolan fired John—Dr. John Wakefield actually—Wakefield was an MD—when Nolan decided he didn’t like these people who were ten or fifteen years older, Joe Keenan then went over from Kee Games to become president of Atari. And by that time, we were moving away from the coin-operated games to the consumer games, and we folded Kee Games into Atari. It was as simple as that. When we were placing coin-operated machines, it gave us double exposure to the market. So, nothing to do with technology. It worked out for Joe because I think he traded his 50 percent interest in Kee Games to 5 percent of Atari, and it turned out that 5 percent of Atari was …
JM: A pretty good deal.
LA: Yeah. I mean, my friend, Bill White, who was pretty smart, didn’t have the bargaining position that Joe did. When he came over from Arthur Young, I think he got one-quarter of 1 percent of Atari. That was that story. So basically the main things were that creative work was here in Los Gatos, and then when we moved to Sunnyvale to Moffett Industrial Park; sales offices in France, in Japan; manufacturing in Taiwan, and that’s how things were when we were acquired by Warner Communications in 1976.
JM: And so what happened? You were representing Atari until ’79 if I’m correct?
LA: Yeah, so Warner fired Nolan in ’79 and brought in Ray Kassar. Ray was living in San Francisco and he brought in an inside lawyer from San Francisco who was his guy. Ray, like most new people, wanted to hire his own people. And I was Nolan’s guy. So when Nolan was out, I was out. And that was in ’79 when there was the parting of the ways between Nolan and Warner … So Nolan started Chuck E. Cheese and I was, again, the outside general counsel for Chuck E. Cheese.
JM: One cultural question. You talked quite a bit about Taiwan and what the culture was there, which was obviously very different from here, and then you talked about setting up a sales office in Japan and in France. How is it taking this kind of Silicon Valley culture with you in the early seventies and going to somewhere like France, which isn’t very Silicon Valley in spirit?
LA: When we set it up, it was coin-op. I think it was 1974 that I flew to Paris. It was the coin-operated business, so the people we met, our partners there, Jean-Jacques Gaillard and Serge Lievoux, were pinball distributors. Again, nothing to do with computers. And they courted Nolan. So when we went over there, you know, he’s a kid from Salt Lake City, I’m a kid from Detroit, and they’re taking us to La Tour d’Argent, to Taillevent.4 [laughter] We’re thirty years old. Not too hard to snow us and this is Paris, France. So we had this coin-op operation there. And, of course, we had quarterly board meetings, so Nolan and Bill White and Joe Keenan and I would go. And we were treated like royalty, especially for kids with that kind of background. So it got started with coin-op. And then, of course, it morphed into consumer games, but by that time, we had a relationship, and they were good businessmen. In fact, every time I’d have lunch with Jean-Jacques Gaillard, we’d go to a little restaurant for un aperitif, and he’d say “oh, vous n’avez pas un petit Bordeaux?” [oh, do you have a small Bordeaux?] So now when I go there, I always ask “oh, vous n’avez pas un petit Bordeaux?” That was absolutely Jean-Jacques Gaillard, and that’s where I learned about soft-boiled eggs with truffles. I mean, it was a real education. So it got launched with coin-op and the same thing with Atari Japan. It was Nakamura Manufacturing Company and they were in the coin-op business. That was our tie-in to the sale offices when it was still a coin-op, not a consumer business, and these were established coin-op people in those two countries. Then it went on when we got in the consumer business, and they worked out to be good partners for us. So that was all going on, and we were making money across the board. I think it was either late ’75 or early ’76, we started to contemplate whether we should do an IPO. We were looking at that before Warner came on. The problem was that in the mid-seventies, the IPO market was dead as a doornail.
JM: Can you explain what you mean by “the IPO market was dead as a doornail”?
LA: Today, you got billion-dollar IPOs. I think we were literally looking at a ten million dollars—now, again, after a 1.4 million dollar VC round in ’75, in ’76, you’re talking about ten million dollars! But the market didn’t look good, and we also realized that to scale the business, we needed a hell of a lot more than ten million. I’m not sure if Warner approached us or we approached them. I don’t think it was our VCs who hooked us up with Warner, but we were very prominent and Warner was Warner. I just can’t remember who approached whom, but we started talking to them, so we actually had parallel negotiations where we weren’t telling Warner about the fact that we were working on this IPO, and we didn’t tell the IPO people we were talking to Warner. And we started going down parallel tracks. I think the thing that sold us on Warner wasn’t what they paid for us, basically 14 million bucks and change. So it was ten times the 1975 VC round. But the selling point was that Warner agreed that there’d be an intercompany loan agreement where they would loan us 100 million dollars, which is what we needed to scale to the billion. I think that as much as for Don Valentine back then, hey, ten times was great, they put in 1.4 million and were selling for 14 million, and back then, that seemed like a lot of money—today it’s peanuts. But it was the 100 million dollar intercompany loan that got us off the ground because—and it’s true today as it was back then, if you don’t scale, you’ll lose market share. And scaling requires dinero. We were never going to raise that in equity. Plus, equity is the most expensive money you’re ever going to get. There weren’t 100 million dollar IPOs in the middle seventies. That sold the deal, and they paid us over time. They were seven-year debentures and paying on the debentures wasn’t Warner Communications, it was sort of new Atari. If the new Atari company wasn’t making money, those debentures would have been like confederate war bonds. I forget the down, but it was maybe 10 percent or 20 percent, and then basically we had to make money to pay off those debentures. The Warner guys were very smart. The key guy there—they had what they called the Office of the President. Steve Ross was the chairman, but then they had this office with four guys, and the one we had was a former investment banker by the name of Emmanuel Gerard, Manny Gerard, one very smart guy. And he was the one who was dealing with the California companies for Warner. So he dealt with the movie business, all those guys; and I remember once over drinks I said to him—because, you know, corralling Nolan Bushnell is sort of like trying to grab the greased pig at the county fair. And I once said, “Manny, how do you do it?” And he said, “Lon, I’m dealing with a dozen Nolans!” I just spoke to Manny a couple years ago. He’s still the quintessential New Yorker. I told you Rick Krieger had the personality to work with the Taiwanese. Manny had the personality to work with Nolan and Joe, not just being bright, but, it was fun being with Manny Gerard! And for someone like Nolan, that was really important. You’d have a meeting with Manny. You’d leave, and you’d look forward to more meetings with him.
JM: Can the same be said for Ray Kassar?
LA: Ray Kassar, I think, was from the fabric business—linens, cottons. But, worse than that, he was a quintessential Midtown Manhattan person. When he came down here, number one, he lived in San Francisco, wouldn’t live down in the valley. Number two, came to work with his Brioni suits and white shirts, brought out a secretary from New York City because he wanted a New York secretary. His door was closed. You had to make an appointment. And people like Alcorn, Bristow, or me, who walked around like this [points to his casual outfit]—he couldn’t listen to people who didn’t dress, much less who didn’t behave, like New Yorkers, in terms of hierarchy and who would make an appointment and walk in his office and stand up until we were asked to seat. I mean, that just wasn’t the culture here. Ray Kassar I’m sure would have been great running a public company in New York City, but was an absolute disaster here because he didn’t respect people who came to work in blue jeans and didn’t call him “Mr. Kassar.” And it was just that they were from different ecosystems. That was the beginning of the end. Then the creative people started leaving because they weren’t respected. Ray didn’t listen to them. And I think after Ray was there, I’m not sure that we had any great, new, creative games because that wasn’t the environment. It just unraveled. Everybody in the start-up business likes to talk about the hockey-stick growth. After 1972, our business went up in a hockey-stick curve. That’s how you go to a billion. I think someone said, and I never researched it, that we went from zero to a billion dollars of sales faster than any company had previously done in the United States. Now, I don’t know if that’s true or apocryphal, but it was talked about a lot at the time and no one ever challenged it. So, again, it may be apocryphal that we went from zero to a billion dollars faster than any company ever before, but I think after Kassar we went from a billion down to going out where Warner sold the business because the mojo was gone. The mojo was gone and in a creative business, if you lose that, you know …
JM: Sometime around the late ʼ70s, Nolan Bushnell has this idea for a family-friendly arcade, called Pizza Time Theatre, which would become Chuck E. Cheese. Can you talk a little bit about your experience with setting this up?
LA: Sure. I incorporated Chuck E. Cheese in ’79, which was the year that both Bushnell and I left Atari as we talked about earlier. And, again, Nolan’s forte is games and entertainment. Chuck E. Cheese was going to have all these coin-operated video games. It goes back to where Atari started before the consumer products, with just coin-operated video games. It was going to be a pizza parlor for young children for birthday parties, this and that. There was a show in the fifties called Howdy Doody, where there was Clarabell the clown, which was a man dressed in a clown outfit. Well, Nolan had the idea of this character called Chuck E. Cheese and every Chuck E. Cheese outlet had an employee with this costume of Chuck E. Cheese and would go around to the children. And the moneymaker—even though this was a restaurant and they even sold beer to the parents—the money was not going to be made off of the pizza. The money was going to be made off of these kids when they wanted to play the games. The parents would buy tokens, so actually you didn’t put quarters in the machines, but mom and dad, when you had this party, would buy a jillion dollars’ worth of tokens and give them to the kids and they shove them. And that’s where the money was going to be made. I had young kids then, so when we opened our first one here, I took my kids there, and I said to Nolan: “You know, Nolan, with respect, this is really lousy pizza.” And he said, and this is almost a direct quote: “Lon, I don’t want the pizza to be good. I don’t want kids there eating. I want them putting tokens into the coin-operated machines.” So the fact is that he didn’t want kids going there to eat. He wanted kids going there and stuffing these coin-operated machines with the tokens because that’s how we were going to make money. That’s vintage Nolan Bushnell. We overuse the expression “left-handed thinker,” but whoever heard of a restaurant chain where you didn’t really want good food because you don’t really want people eating there!? But it was the draw for parties, and very successful. We took it public and we had company-owned stores. We also had franchises. We had a guy I was very close with, Don Marks, who was the head of franchises and, unfortunately, Jesus, we lost Don to some horrible disease early on when he was in his thirties. So we had a lot of franchise stores and a lot of company stores. I think the franchises proved more effective because we had a guy, whose name I forget, who was in charge of setting up company-owned stores, and we had a compensation system where he was paid by the number of stores he opened up. As a result, we had some stores that were opened up in really not good locations. We weren’t sophisticated enough to tie the compensation into stores that made money. This guy setting up the company-owned stores for Chuck E. Cheese was just being paid on opening stores. So he was motivated just to open up a jillion stores and they had to be in locations where there were the people with the wherewithal to go buy a lot of money in tokens. And we needed favorable leases because we weren’t buying the real estate. But a lot of the leases turned out to be on financial terms that weren’t good. But it was the same team. It was Joe Keenan and Nolan. Like with Atari, they had adjoining offices, the same set-up. Gene Lipkin, the sales guy, went over there. But, again, it wasn’t really a technology company at all because we weren’t creating games. We were just a place for the coin-operated machines. We may have had a little sort of a puppet show or a little robotic show, but the main money was made by kids putting these tokens. And the idea of the tokens was that because parents don’t have enough quarters, they’d go in and they’d buy the tokens with paper money or credit cards, and they’d buy a ton and then the kids would come back for more. And it was easier for the parents to give the kids tokens than to give them cash money. Like I said, Nolan, an absolute genius. He really had a sense of how to make something like that work. But our company stores—a lot were in bad locations, a lot had unfavorable leases. So at the end of the day, what happened was that Pizza Time Theatre had to go into a reorganization 11. There are liquidation 11s and reorganization 11s. This was a reorganization 11, and the entity that bought us out of that reorganization 11 was T, I, M, Topeka Inn Management. And looking back, I think if we had just had the franchise, I think our franchise agreements were good and we were making money on the franchisees, but we had a lot of unfavorable leases from the company-owned stores. At least that is my recollection of why. And we were, at that point, a public company with the scrutiny. When we sold Atari to Warner, we were still a private company, not getting that scrutiny. But here we were a public company and we started having a problem with the leases on the company-owned stores, which led to the reorganization 11. And I think it was painful for all of us because selling Atari was a great success and even when we all left Atari, it was still making money, right? It was before the E.T. thing. So we left at a high point, and I think for Bushnell and Keenan and me, this was the first time we had failed at something. And now we’re at that point ten years older because this is ʼ82 or something. We had been together for about ten years. And we thought we were invincible. We were not, of course. So that was a very painful experience. When you go through a Chapter 11, you know what your Pizza Time Theatre stock is worth. We were all shareholders, and it was a very tough experience. But, again, it had nothing to do with technology and nothing to do with the concept. It had to do with bad real-estate leases. And that had to do with the fact that we weren’t sophisticated enough to set up a compensation program that would keep someone from getting us into bad locations and just unfavorable financial leases.
JM: That was also at a time where there was a bit of a moral panic surrounding arcades and coin-op video games. Did that impact Chuck E. Cheese?
LA: I don’t think so. I was hosting birthday parties for my kids there, not that I ever played these games, except for Breakout. I had one in my office, the big coin-op cabinet. It didn’t require any coins, so my office was a very popular place. I don’t remember my wife Mary ever saying to me gee, I think that there’s a concern about the violence in that. Again, all we had were coin-operated games in the Chuck E. Cheeses. There weren’t PCs [personal computers] then, so kids weren’t bringing in their laptops or their iPhones to play games then. I don’t recall that Mary or any of her pals who were all taking their kids there for birthday parties ever commented on the games being too violent. And I know it was a hot topic with my wife because she didn’t like the kids watching cartoons on television because she felt cartoons were and are too violent. In fact, when we moved into a new home in ’79 and for six or seven years, we got away with telling kids that there wasn’t cable in our neighborhood so we didn’t have a television set for six or seven years because Mary didn’t want it. So I think up through the Chapter 11 on Pizza Time, from ’79 to ’83–’84, if there had been a concern about the games there being too violent, I think my wife would have told me. This is not science, but just cobbling that together, I think I would have heard about it.
JM: Going back to Silicon Valley and legal issues and how the law impacts the industry, one thing that’s very important in California is that noncompetes are not enforceable. How did that play out with Atari and the sale to Warner?
LA: Well, they are unenforceable unless they are part of the sale of a business—an integral part. So, for example, when we sold to Warner in ’76, there were noncompetes and, as a noncompete that is integral to the sale of the business as long as it is “reasonable,” in terms of scope and duration, it is perfectly enforceable. So the noncompetes that Joe Keenan and Nolan Bushnell and everybody else—and Alcorn and Bristow—worked perfectly because, again, Warner’s outside lawyers were and probably still are Paul Weiss out of New York City. And their inside lawyer then was Marty Payson, a good friend of mine, who had been at Paul Weiss but by ’76 had gone inside. And then as long as Steve Ross was there—until Steve Ross passed—he was a general counsel for Warner Communications. These were very sharp lawyers. So these were enforceable noncompetition agreements. That is the exception to the general rule. But, in this case, it was a meaningful part because, again, it was the creativity that they were buying. They were buying these creative geniuses. So the noncompetition agreements were absolutely critical. Nolan negotiated a deal when he wanted to go away, but it was negotiated. I don’t remember anybody going to court and successfully—I’m not aware that any of the Atari people who’ve ever signed a noncompete with Warner went to court to challenge the legality or scope of the noncompete.
JM: Lon, is there anything else that we’ve forgotten that you would want to add?
LA: Well, an old lawyer said to me fifty years ago, “If you have to make a living, there’s really no better way than being a lawyer.” I believed that fifty years ago. I believe it today. And if you are willing to not just talk about risk over a couple glasses of wine, but really take it, I don’t think there’s any place better in the world to practice law than in Silicon Valley.
JM: Great. Well, thanks a lot, Lon. This was fantastic.
1. ^ Intellectual property matters for Atari were then handled by Tom Herbert of the specialized patent firm Flehr, Hohbach, Test, Albritton, and Herbert in San Francisco.
2. ^ Founded in 1972 by Don Valentine.
3. ^ Henry Lowood, Oral History of Al Alcorn, Computer History Museum, catalog number 102658257, CHM Ref: X4596.2008, April 26, 2008, 23–24, https://www.computerhistory.org/collections/catalog/102658257.
4. ^ These are two emblematic—and very pricey—Parisian restaurants.