Excerpted from The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution by Walter Isaacson. Out now from Simon & Schuster.

Innovation requires having at least three things: a great idea, the engineering talent to execute it, and the business savvy (plus deal-making moxie) to turn it into a successful product. Nolan Bushnell scored a trifecta when he was 29, which is why he became the innovator who launched the video game industry.

Like many computer science students in the 1960s, Nolan Bushnell was a Spacewar fanatic. “The game was seminal to anyone who loved computers, and for me it was transforming,” he recalled. “Steve Russell was like a god to me.” What set Bushnell apart from other computer bums who got their kicks by maneuvering blips on a screen was that he was also enthralled by amusement parks. While studying at the University of Utah, he took a job on the midway at the Lagoon Amusement Park. “I learned all the various tricks for getting people to put up their quarters, and that sure served me well.” He was soon promoted to the pinball and game arcade, where animated driving games such as Speedway, made by Chicago Coin Machine Manufacturing Company, were the new rage.

He was fortunate as well in landing at the University of Utah. It had the best computer graphics program in the country, run by professors Ivan Sutherland and David Evans, and became one of the first four nodes on the ARPANET, the precursor to the Internet. (Other students included Jim Clark, who founded Netscape; John Warnock, who co-founded Adobe; and Ed Catmull, who co-founded Pixar.) The university had a PDP-1, complete with a Spacewar game, and Bushnell combined his love of the game with his understanding of the economics of arcades. “I realized you could make a whole lot of quarters if you could put a computer with a game in an arcade,” he said. “And then I did the division and realized that even a whole lot of quarters coming in every day would never add up to the million-dollar cost of a computer. You divide 25 cents into a million dollars and you give up.” And so he did, for the moment.

When he graduated in 1968 (“last in his class,” he often bragged), Bushnell went to work for Ampex, which made recording equipment. He and a colleague there, Ted Dabney, continued to concoct schemes for turning a computer into an arcade video game. They considered ways to adapt the Data General Nova, a $4,000 refrigerator-size minicomputer that came out in 1969. But no matter how they juggled the numbers, it was neither cheap enough nor powerful enough.

In his attempts to push the Nova to support Spacewar, Bushnell looked for elements of the game, such as the background of stars, that could be generated by the hardware circuits rather than by the processing power of the computer. “Then I had a great epiphany,” he recalled. “Why not do it all with hardware?” In other words, he could design circuits to perform each of the tasks that the program would have done. That made it cheaper. It also meant that the game had to be a lot simpler. So he turned Spacewar into a game that had only one user-controlled spaceship, which fought against two simple saucers generated by the hardware. Eliminated too were the sun’s gravity and the panic button to disappear into hyperspace. But it was still a fun game, and it could be built at a reasonable cost.

Bushnell sold the idea to Bill Nutting, who had formed a company to make an arcade game called Computer Quiz. In keeping with that name, they dubbed Bushnell’s game Computer Space. He and Nutting hit it off so well that Bushnell quit Ampex in 1971 to join Nutting Associates.

As they were working on the first Computer Space consoles, Bushnell heard that he had competition. A Stanford grad named Bill Pitts and his buddy Hugh Tuck from California Polytechnic had become addicted to Spacewar, and they decided to use a PDP-11 minicomputer to turn it into an arcade game. When Bushnell heard this, he invited Pitts and Tuck to visit. They were appalled at the sacrifices—indeed sacrileges—Bushnell was perpetrating in stripping down Spacewar so that it could be produced inexpensively. “Nolan’s thing was a totally bastardized version,” Pitts fumed. For his part, Bushnell was contemptuous of their plan to spend $20,000 on equipment, including a PDP-11 that would be in another room and connected by yards of cable to the console, and then charge 10 cents a game. “I was surprised at how clueless they were about the business model,” he said. “Surprised and relieved. As soon as I saw what they were doing, I knew they’d be no competition.”

Galaxy Game by Pitts and Tuck debuted at Stanford’s Tresidder student union coffeehouse in the fall of 1971. Students gathered around each night like cultists in front of a shrine. But no matter how many lined up their dimes to play, there was no way the machine could pay for itself, and the venture eventually folded.

Bushnell was able to produce his game, Computer Space, for only $1,000. It made its debut a few weeks after Galaxy Game at the Dutch Goose bar in Menlo Park near Palo Alto and went on to sell a respectable 1,500 units. Bushnell was the consummate entrepreneur: inventive, good at engineering, and savvy about business and consumer demand. He also was a great salesman. One reporter remembered running into him at a Chicago trade show: “Bushnell was about the most excited person I’ve ever seen over the age of 6 when it came to describing a new game.”

Computer Space turned out to be less popular in beer halls than it was in student hangouts, so it was not as successful as most pinball games. But it did acquire a cult following. More important, it launched an industry. Arcade games, once the domain of pinball companies based in Chicago, would soon be transformed by engineers based in Silicon Valley.

Bushnell decided to form his own company for his next video game. He decided to name the new company Syzygy, a barely pronounceable term for when three celestial bodies are in a line. Fortunately, that name was not available because a hippie candle-making commune had registered it. So Bushnell decided to call his new venture Atari, adopting a term from the Japanese board game Go.

On the day that Atari was incorporated, June 27, 1972, Nolan Bushnell hired his first engineer. Al Alcorn was a high school football player from a rough neighborhood of San Francisco who taught himself television repair through an RCA correspondence course. At Berkeley he participated in a work-study program that brought him to Ampex, where he worked under Bushnell. He graduated just as Bushnell was forming Atari.

Many of the key partnerships in the digital age paired people with different skills and personalities, such as John Mauchly and Presper Eckert, John Bardeen and Walter Brattain, Steve Jobs and Steve Wozniak. But occasionally the partnerships worked because the personalities and enthusiasms were similar, as was the case of Bushnell and Alcorn. Both were burly and fun-loving and irreverent. “Al is one of my favorite people in the world,” Bushnell asserted more than 40 years later. “He was the perfect engineer and funny, so he was well-suited to video games.”

At the time, Bushnell had a contract to make a new video game for the Chicago firm Bally Midway. The plan was to do a car racing game, which seemed likely to be more appealing than spaceship navigation to beer drinkers in workingmen’s bars. But before tossing the task to Alcorn, Bushnell decided to give him a warm-up exercise.

At a trade show, Bushnell had checked out the Magnavox Odyssey, a primitive console for playing games on home television sets. One of the offerings was a version of ping-pong. “I thought it was kind of crappy,” Bushnell said years later, after he had been sued for stealing its idea. “It had no sound, no score, and the balls were square. But I noticed some people were having some fun with it.” When he arrived back at Atari’s little rented office in Santa Clara, he described the game to Alcorn, sketched out some circuits, and asked him to build an arcade version of it. He told Alcorn he had signed a contract with GE to make the game, which was untrue. Like many entrepreneurs, Bushnell had no shame about distorting reality in order to motivate people. “I thought it would be a great training program for Al.”

Alcorn got a prototype wired up in a few weeks, completing it at the beginning of September 1972. With his childlike sense of fun, he came up with enhancements that turned the monotonous blip bouncing between paddles into something amusing. The lines he created had eight regions so that when the ball hit smack in the center of a paddle it bounced back straight, but as it hit closer to the paddle’s edges it would fly off at angles. That made the game more challenging and tactical. He also created a scoreboard. And in a stroke of simple genius, he added just the right “thonk” sound from the sync generator to sweeten the experience. Using a $75 Hitachi black-and-white TV set, Alcorn hard-wired the components together inside a four-foot-tall wooden cabinet. Like Computer Space, the game did not use a microprocessor or run a line of computer code; it was all done in hardware with the type of digital logic design used by television engineers. Then he slapped on a coin box taken from an old pinball machine, and a star was born. Bushnell dubbed it Pong.

One of Pong’s most ingenious features was its simplicity. Computer Space had required complex instructions; there were enough directives on its opening screen (among them, for example, “There is no gravity in space; rocket speed can only be changed by engine thrust”) to baffle a computer engineer. Pong, by contrast, was simple enough that a beer-sloshed barfly or stoned sophomore could figure it out after midnight. There was only one instruction: “Avoid missing ball for high score.” Consciously or not, Atari had hit upon one of the most important engineering challenges of the computer age: creating user interfaces that were radically simple and intuitive.

Bushnell was so pleased by Alcorn’s creation that he decided it should be more than a training exercise: “My mind changed the minute it got really fun, when we found ourselves playing it for an hour or two after work every night.” He flew to Chicago to persuade Bally Midway to accept Pong as a fulfillment of their contract rather than push for a car racing game. But the company declined to take it. It was wary of games that required two players.

This turned out to be a lucky break. To test out Pong, Bushnell and Alcorn installed the prototype at Andy Capp’s, a beer bar in the working-class town of Sunnyvale that had peanut shells on the floor and guys playing pinball in the back. After a day or so, Alcorn got a call from the bar’s manager complaining that the machine had stopped working. He should come fix it right away, because it had been surprisingly popular. So Alcorn hurried over to try to fix the machine. As soon as he opened it up, he discovered the problem: the coin box was so filled with quarters that it was jammed. The money gushed out onto the floor.

Bushnell and Alcorn knew they had a hit on their hands. An average machine made $10 a day; Pong was taking in $40. Suddenly Bally’s decision to decline it seemed like a blessing. The true entrepreneur in Bushnell came out: he decided that Atari would manufacture the game on its own, even though it had no financing or equipment.

He took the gamble of deciding to bootstrap the whole operation; he would fund as much as possible from the cash flow he made on sales. He looked at how much money he had in the bank, divided it by the $280 cost of making each machine, and figured that he could build 13 of them initially. “But that was an unlucky number,” he recalled, “so we decided to build 12.”

Bushnell made a small model of the console shell he desired out of clay, then took it to a boat manufacturer who began producing them in fiberglass. It took just a week to build each complete game and another few days to sell it for $900, so with the $620 profit he had a positive cash flow to keep things going. Some of the early proceeds were spent on a sales brochure, which featured a beautiful young woman in a slinky sheer nightgown draping her arm over the game machine. “We hired her from the topless bar down the street,” Bushnell recounted forty years later to an audience of earnest high school students, who seemed somewhat baffled by the tale and unsure what a topless bar was.

Venture capital, a realm that had just begun in Silicon Valley with Arthur Rock’s financing of Intel, was not available for a company proposing to make video games, which were not yet a known product and were associated with the mobbed-up pinball industry. Banks demurred as well when Bushnell ambled in for a loan. Only Wells Fargo came through, providing a credit line of $50,000, which was far less than Bushnell had requested.

With the money, Bushnell was able to open up a production facility in an abandoned roller-skating rink a few blocks from Atari’s Santa Clara office. The Pong games were put together not on an assembly line but in the middle of the floor, with young workers ambling up to stick in the various components. Workers were dragooned from unemployment centers nearby. After weeding out the hires that were heroin addicts or stole the television monitors, the operation scaled up rapidly. At first they were making 10 units a day, but within two months they could make almost 100. The economics were improved as well; the cost of each game was held to just over $300, but the sales price was raised to $1,200.

The atmosphere was what you might expect from the fun-loving Bushnell and Alcorn, both still in their 20s, and it took to the next level the casual style of Silicon Valley startups. Every Friday there would be a beer bash and pot-smoking party, sometimes capped by skinny-dipping, especially if that week’s numbers had been made. “We found out our employees would respond to having a party for hitting quotas as much as having a bonus,” Bushnell said.

Bushnell bought himself a nice house in the hills of nearby Los Gatos, where he sometimes held board meetings or staff parties in his hot tub. When he built a new engineering facility, he decreed that it should have its own hot tub. “It was a recruiting tool,” he insisted. “We found out that our lifestyle and the parties were hugely good for attracting workers. If we were trying to hire somebody, we’d invite him to one of our parties.”

In addition to being a recruiting tool, the culture at Atari was a natural outgrowth of Bushnell’s personality. But it was not simply self-indulgent. It was based on a philosophy that drew from the hippie movement and would help define Silicon Valley. At its core were certain principles: authority should be questioned, hierarchies should be circumvented, nonconformity should be admired, and creativity should be nurtured.

From The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution by Walter Isaacson. Copyright © 2014 by Walter Isaacson. Printed by permission of Simon & Schuster, Inc.