As Activision's future rose, Atari's faltered. Having cemented video games as a form of mass entertainment, Atari was sold to Warner Communications Inc. in 1976 and began to pile up big losses.

Warner, now part of Time Warner Inc., discontinued the Atari 2600 and fired Bushnell, says Stephen Jacobs, professor of interactive games and media at the Rochester Institute of Technology in Rochester, N.Y.

Meanwhile, several companies tried to capitalize on Atari's success, but flooded the market with terrible products. It was a gold rush, with little gold to be had.

Atari contributed to that decline in quality with "E.T. the Extra-Terrestrial," still considered one of the worst video games ever made -- and that's being generous.

"They tried to push something out in six weeks," Jacobs says. "They pushed out a million units of a horrible game that they were sure was just going to be the bomb. And it ended up tanking Atari."

That was the Christmas of 1982. What followed is now referred to as the "great video game crash of 1983." People stopped buying video games.

Companies began collapsing and Atari was soon sold to a man named Jack Tramiel. Over the next decade, Atari made computers, a game console called Jaguar and a handheld game machine called the Lynx. None were hits.

Atari was then passed to the toy company Hasbro, then to Infogrames Entertainment, a French company that owns it today.

Recognizing the promise of mobile devices and its best-known titles, Atari today makes such phone games as "Centipede: Origins" and "Breakout Boost," a take on the game Steve Jobs worked on back in the day.

"The legacy is that Atari is essentially where it all began," says Jim Wilson, the company's current CEO.

So is Atari living off its legacy?

"To a certain point almost all entertainment companies are doing a bunch of living on their legacy. That's why we have `sequel-itis' in triple-A games, movies, books," Jacobs says. "Why invest in new things when you can beat the old things to death and still make money out of them?"