Atari, Inc. was founded by Nolan Bushnell and Ted Dabney in 1972. Its first major product was Pong, released in 1972, the first successful coin-operated video game. While Atari continued to develop new arcade games in following years, Pong gave rise to a number of competitors to the growing arcade game market. The competition along with other missteps by Atari led to financial problems in 1974, though recovering by the end of the year. By 1975, Atari had released a Pong home console, competing against Magnavox, the only other major producer of home consoles at the time. Atari engineers recognized, however, the limitation of custom logic integrated onto the circuit board, permanently confining the whole console to only one game. The increasing competition increased the risk, as Atari had found with past arcade games and again with dedicated home consoles. Both platforms are built from integrating discrete electro-mechanical components into circuits, rather than programmed as on a mainframe computer. Therefore, development of a console had cost at least $100,000 (equivalent to about $504,000 in 2021) plus time to complete, but the final product only had about a three-month shelf life until becoming outdated by competition.
By 1974, Atari had acquired Cyan Engineering, a Grass Valley electronics company founded by Steve Mayer and Larry Emmons, both former colleagues of Bushnell and Dabney from Ampex, who helped to develop new ideas for Atari's arcade games. Even prior to the release of the home version of Pong, Cyan's engineers, led by Mayer and Ron Milner, had envisioned a home console powered by new programmable microprocessors capable of playing Atari's current arcade offerings. The programmable microprocessors would make a console's design significantly simpler and more powerful than any dedicated single-game unit. However, the cost $100–300 of such chips was far outside the range that their market would tolerate. Atari had opened negotiations to use Motorola's new 6800 in future systems.