Facing some financial losses from its musical division (partly due to Henley's album underperforming), Warner Bros. decides to be more cost-effective with Atari, and refuse to pay Howard Scott Warshaw $250,000 for him to design the upcoming E.T. video game. In protest, Warshaw defects to Activision, where he releases the successful Saboteur.

IOTL: Warshaw was reportedly offered US$200,000 and an all-expenses-paid vacation to Hawaii in compensation to work on E.T. by Atari CEO Ray Kassar. Saboteur was never released, being first rechristened The A-Team and then shelved in definite.

The job is assigned to the next-best remaining programmer, Carla Meninsky, who follows Steven Spielberg's suggestion to make the game a Pac-Man clone. E.T. for the Atari 2600 is well received and becomes the best-selling game of all time.

IOTL: Spielberg did suggest imitating Pac-Man for the E.T. movie, but Warshaw instead imagined an innovative adaptation of the film - whose gameplay was so frustrating and obtuse that after strong initial sales, it quickly became a commercial failure, and led Atari to bury unsold cartridges in a New Mexico landfill. E.T. is also deemed one of the worst games ever.

The Atari “5200 SuperSystem” is pulled from the home videogame market following slow sales. To fill the gap, Atari releases the Atari 2600 “E.T. Edition” for $99. The “E.T. Edition” is a cosmetic redesign of the venerable 2600 in black plastic, emblazoned with the movie’s trademark glowing fingers logo and signed by director Steven Spielberg. It comes with two paddles, two classic joysticks, and six game cartridges: Combat, Breakout, Real Sports Baseball, Raiders of the Lost Ark, the all-new Dig Dug, and, of course, E.T.

IOTL: The 5200 never had the success of the 2600, being troublesome, lacking backwards compatibility with the predecessor, and facing a market about to burst. “E.T.” edition is based on the Japan-only Atari 2800.

Atari gives up on releasing the almost finished 1200XL, and instead makes a “Commodore 64 killer”, the 800XLP. Steve Mayer, who had recently been assigned by Warner to oversee Atari’s ‎combined Computer and Video Game Hardware divisions, redesigns the 1200XL to incoporate many pieces of his prototypes, and power it with a copy of the Motorola 6502 that powers the C64, made by Western Design Center, whom Warner purchases. Released in 1983, the “Professional Computer” 800XLP would go on to sell 2 million units.

IOTL: The 1200XL didn't sell well and was discontinued in June 1983. Mayer was made CEO of ‎‎“WCI Labs,” a Warner subsidiary separate from the Atari chain of command and tasked with creating Atari’s next generation of computers. ‎Atari’s prototype 16-bit computers (codenamed ‎SIERRA and GAZA) were lost in 1984, as Jack Tramiel bought Atari, but not WCI Labs. WDC is still an independent company in 2016.

Atari supported Santa Clara-based Hi-Toro, later renamed Amiga Corporation with $1 million, and their prototypes along with Mayer's SIERRA prototypes the basis for Atari's PC-2 (whose working title was 1600XLP).

IOTL: Atari helped Amiga with $500,000, which were paid back by Commodore when they purchased the company in 1984. The Amiga was released in 1985, with moderate success in North America but great sales in Europe. The Atari's 16-bit computer was the Atari ST, a major competitor with the Amiga (even if both were surpassed by IBM PC clones).

Honeywell takes the PC-2 as an excuse to stop investing in videogames, saying the Atari 2600 (aka VCS) would be discontinued and the Atari 7800 would be the company's last. In protest, Carla Meninsky leaves Atari and forms Axiom Software.

IOTL: Atari still released two more consoles, the handheld Lynx and the home one Jaguar, before leaving the hardware market. Meninsky left Atari to join a start-up doing high-end computer graphics run by Martin Newell, and after starting a computer contracting business, decided to go to law school and now works as a lawyer.

Facing financial losses from the movie division and not wanting to shift their focus to electronics, Warner Communications announces Atari is for sale. Defense and electronics conglomerate Honeywell, Inc. for $6 billion in cash and Honeywell stock, along with $125 million in loan forgiveness for funds borrowed by Warner from Atari. Honeywell would fire Kassar and elevate Steve Mayer to CEO of the new Atari, but otherwise left most of Atari's core employees in place.

IOTL: Atari's crippled reputation and financial losses lead to restructuring and eventual sale by Warner Communications. In July 1984, Warner sold the home computing and game console divisions of Atari to Jack Tramiel, the recently ousted founder of Commodore, under the name Atari Corporation for $240 million in stocks under the new company. Warner retained the arcade division, continuing it under the name Atari Games and eventually selling it to Namco in 1985. Warner also sold Ataritel to Mitsubishi. Kassar had been forced to resign from Atari one year prior, over mounting allegations of illegal insider trading activity. In December 1982, Kassar had sold 5,000 shares of stock in Warner Communications only 23 minutes before a much lower than expected fourth quarter earnings report would cause Warner stock to drop nearly 40% in value in the following days.

In July 1984, Tandy Corporation sells its Tandy home computer division to former Commodore CEO Jack Tramiel for $3 ‎million in cash and $80 million in stock in the new company, to be named “Tandy, Inc.” Under ‎the arrangement, Tandy Corp. will rename itself “Radio Shack Corporation,” and will retain ‎ownership over Tandy’s business-oriented IBM PC-compatible division. A computer they were developing, a one-board computer visually reminiscent of the ‎C-64 and other home computers at the time, was dropped during the split. Tandy, Inc. will ‎continue to sell existing TRS-80 and CoCo 2 inventory through Radio Shack retail stores, with ‎Radio Shack Corporation getting a percentage of profits from each sale. The deal calls for mutual three-year covenants not to compete; Tramiel’s Tandy, Inc. will not ‎produce a computer using any Intel microprocessor as its CPU, and Radio Shack Corp. will not ‎produce a computer using any Zilog or Motorola microprocessor as its CPU (like Tandy's old computers). The Intel 8088 is at ‎the heart of Radio Shack’s yet-to-be-released RSC 1000 IBM compatible home computer; the ‎Motorola 68000 was at the core of Tandy's next computer, the 520\1040ST.

IOTL: The Atari 520ST and 1040ST were 68000-based machines which Tramiel helped make. In 1984, Radioshack started selling all computers under the Tandy Brand, such as the Tandy 1000, a IBM PCjr-esque computer, and the Tandy 2000, based around the Intel 8088. Tandy Corporation remained strong until cheaper, more potent PCs emerged in the early 1990s, leading them to sell its computer manufacturing business to AST Computers. In 2000, the Tandy Corporation name was dropped and entity became the RadioShack Corporation.

Tramiel was also a partner in INTV Corp., a joint venture with former Mattel executive Terry Valeski who purchases the inventory of the Mattel Electronics division as well as all rights to any and all Intellivision properties. They eventually bring the Tandy Intellivision III to the market in 1985.

IOTL: Mattel planned to release the Intellivision III, a more powerful console with a price above $200, for Christmas 1983. The company canceled the console after the ColecoVision beat the Atari 5200 in the market for higher-performance consoles, and after home computers became as inexpensive as game consoles. Valeski still purchased the electronics arm that struggled following the 1983 crash, and the INTV System III was only a cosmetically changed Intellivision.

Texas Instruments, Timex-Sinclair, Coleco, Tandy-Radio Shack, and the IBM PCjr leave the personal computer market, in what is called the “Home Computer Market Crash of 1984.”

IOTL: Texas Instruments did abandon the PC market due to the price wars with Commodore. The PCjr was released in 1984, and cancelled the following year various design and implementation decisions led to commercial failure. The other companies remained strong through the 1980s. In contrast, the video game market which was flooded with similar consoles and games entered a crisis\recession, the Video Game crash of 1983, with many hardware and software makers folding or leaving the market. Console gaming only saw a resurgence by the hands of the Japanese, whose market was not very affected. The leading company was Nintendo…

Nintendo has its Famicom console distributed internationally as the Atari Nintendo, helped by the Americans owning some of manufacturers responsible for the Famicom's hardware. Nintendo's next console is also released by Atari in 1989, with the Go-inspired name Kosumi.

IOTL: Nintendo approached Atari given they were newcomers to the home console marketing, but the deal fell through once Atari saw other computers running Nintendo's Donkey Kong. The Japanese then went to the “Worlds of Wonder” toy company, founded in 1983 by Don Kingsborough, who left Atari’s consumer products division (but remains with the company for one more year ITTL). The Nintendo Entertainment System, carefully marketed to hide it was a video game - from calling the cartridges Game Paks to including the toy robot peripheral R.O.B. in the packaging - single-handedly revived the console market in North America and made Nintendo an international gaming behemoth, cemented by follow-up Super Famicom (1990)/Super NES (1991).

WDC founder Bill Mensch became one of the richest men in the country for two major contributions with Atari, striking a partnership with Texas-based Compaq, manufacturer of portable computers (who tried to follow its portable IBM PC compatible with an Atari-based one, and went on to create the Atari Transportables, who hit the market in December of 1985, and by conservative estimates, earned Atari a quarter of a billion dollars in sales and licensing fees), and suggesting the Atari Nintendo to have cartridges that enabled data to remain even after the console is turned off by equipping them with ferroelectric RAM,

IOTL: Mensch is not that famous, though he did help Nintendo by manufacturing the WDC 65816/65802 that powered the Super NES. In 1985, the Compaq Portable started a year that would generate a record $503.9 million in revenue, and would in the following years make more “luggage” portables as well as PC-compatible desktops, and became the leading manufacturer of PCs in the 1990s. Struggles at the end of that decade made them be accept a merger with Hewlett-Packard in 2002 (HP would retire the Compaq brand in 2013). Most NES cartridges resorted to passwords to bypass the lack of game files, until games such as The Legend of Zelda put a battery in the cartridge to enable them.

Commodore tried to follow Compaq's lead with the portable 64LCD, essentially a transportable C64 showcased at the 1985 Winter Consumer Electronics Show, and trying to display a company that had learned from releasing the buggy Commodore Plus/4 the year before. The following year, Commodore skips its first CES in two decades in the aftermath of its acquisition by German conglomerate BASF, best known in the United States as a manufacturer of 5.25” floppy diskettes. The Commodore VIC-20s and 64s are sold throughout Europe as BASF continues to carve up Commodore’s saleable assets and market them to the highest bidder - such as Commodore Semiconductor Group, sold to British-based Richard Branson of Virgin Records fame.

IOTL: The 1985 CES had Commodore, who had just purchased Amiga, showcase the C64-compatible Commodore 128. The Commodore LCD was also there, but as an afterthought, as it hardly worked and was eventually never released. Commodore skipped both the Fall ’85 Comdex show and the Winter ’86 CES, due to serious financial troubles. It was partly solved with the release of the Amiga, even if by 1994, when the company declared for bankrupcy, only its operations in Germany and the United Kingdom were still profitable. CSG was purchased following the 1994 bankrupcy by its former management, and rebranded GMT Microelectronics (which closed in 2000). This tapping of the European market through 8-bit computers also happened with Tramiel's Atari, who kept afloat selling them in Germany.

In 1986, Atari is preparing to spread its computer businesses worldwide, with the Atari PC-2 getting a variant in France with the Bull 1000, created in connection with France’s Groupe Bull…

IOTL: Bull was a Honeywell partner in their computer business, until the Americans started losing enough money to fully sell Honeywell Information Systems to the French in 1986.

…and Japan, the Nintendo Bizcom. One of the computer's first releases is the video game Metroid, which the company later ports to the Atari Nintendo and the PC-2, taking advantage of the FeRAM save files.

IOTL: Nintendo has been long adamant in keeping their series only in their consoles (before the smartphone boom led to Miitomo, Pokémon Go and Super Mario Run). Metroid was released for the Famicom Disk System, a peripheral adding a 112K disk drive to the console. Given the FDS was never released internationally, Metroid had the NES version on a cartridge depending on save codes.

Softwares showcased at the 1986 CES included various Atari PC-2 programs by Electronic Arts and Hippopotamus Software, a new UNIX-based operating system by Optimized Systems Software, and the arcade port Evander Holyfield’s Punch-Out!! for the Atari Nintendo, which was shown next to a 2600 port by Axiom.

IOTL: EA didn't release all their Atari ST programs, and neither did Hippopotamus - with the latter even having various vaporware as the company didn't last. OSS never received the Unix license IOTL, obviously, but they did write several Atari OSes, including OS/A+ and DOS XL, that were command-line driven. Punch-Out was only ported to the NES in 1987 as Mike Tyson's Punch-Out!!.