Chuck E Cheese vs ShowBiz Pizza | Broken Robots | 2

0:07June 1980, San Francisco. In the U.S. District Court, Chuck E. Cheese's attorney gingerly sips his scalding coffee and steals a glance at the Showbiz Pizza Place lawyers to his left. It's been six months since hotelier Robert Brock broke ranks with Chuck E. Cheese. Since then, he's started Showbiz Pizza Place, a rival chain with its own cast of animatronic entertainers, led by the bass-strumming bear Billy Bob. But now, Chuck E. Cheese's is out to persuade the court to stop Brock from opening any more showbiz restaurants. The court falls silent as the judge enters. Good morning. We're here for the case of Pizza Time Theater Incorporated versus Showbiz Pizza Place Incorporated.

0:53I understand the plaintiff wants a preliminary injunction ahead of the case being heard in full. Chuck E. Cheese's attorney stands. That's correct, Your Honor. Showbiz Pizza's actions threaten irreparable harm to the business of Chuck E. Cheese. Chuck E. Cheese? Who's Chuck E. Cheese? Sorry, Your Honor. Pizza Time Theater operates as Chuck E. Cheese's Pizza Time Theater, and is commonly known as Chuck E. Cheese. I see. Please continue. Showbiz Pizza is in breach of a franchise agreement that signed with my client last summer. As part of this agreement, Showbiz was given access to trade secrets, including floor plans, financial projections, and insights from years of expensive research into the animatronics, which are the main attraction for families to pizzerias of this nature.

1:41Chuck E. Cheese's attorney pauses to take a sip of water for dramatic effect. Your Honor, my client has sued for damages. But while we wait for the case to be heard, Showbiz is capitalizing on its bad faith actions. An injunction will protect my client from further damage from this shameless imitator. The judge turns to the showbiz legal team. Hmm, and I suppose you object? Yes, Your Honor, the plaintiff's claims of irreparable harm are overblown. My client is developing showbiz pizza in regions where there are no Chuck E. Cheese restaurants and therefore cannot damage its business. I also note the plaintiff's counsel has yet to present the court with evidence to support its allegations against us.

2:26The judge thinks for a moment and then renders a verdict. A preliminary injunction requires an immediate and proven threat to the offended party, and in this case, I am not convinced that is so. There is little direct competitive threat that cannot be remedied once the case has been heard in full. Therefore, I reject this request. As the court rises, Showbiz's attorney smiles. He's more than justified his fee today. Robert Brock is planning to spend millions expanding Showbiz Pizza fast, and this injunction request was the last roadblock to his plan. And now that there's nothing stopping Brock, Nolan Bushnell's Chuck E.

3:09Cheese is going to feel the heat.

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5:20From Wondery, I'm David Brown and this is Business Wars.

5:46On the last episode, Nolan Bushnell left Atari and started the Chuck E. Cheese's Pizza Time Theater chain. Its combo of pizza, arcade games, and animatronic entertainment proved so popular that hotel tycoon Robert Brock signed up to open hundreds of franchise locations. But then, Brock ripped up the deal and joined forces with inventor Aaron Fector to start a rival chain called Showbiz Pizza Place. His new venture has a friendly bear mascot called Billy Bob. Now, it's rat versus bear in a race to top this new segment of kids' entertainment. This is Episode 2, Broken Robots.

6:33It's April 1981, and in a ritzy office in downtown San Francisco, Nolan Bushnell pops a bottle of champagne. The sharp-suited investment brokers around him applaud as the foam bursts and Bushnell starts pouring glasses. One of the investment brokerage's partners raises his glass. Congratulations, Nolan. Chuck E. Cheese's Pizza Time Theater is now a public company. Bushnell raises his champagne glass. He spent months preparing to take Pizza Time Theater public, and it's gone better than even he imagined.

7:11When he first pitched Chuck E. Cheese's initial public offering to big-shot investors, he hoped to raise just over$8 million. But demand was so high, the companies now walked away with$12.5 million. But these investors aren't just buying into the restaurant's fat pizza profits. They're buying Bushnell. Ever since Space Invaders landed in the arcades in 1978, America's gone video game crazy. Galaxian, Asteroids, and Pac-Man are all the rage. And that makes Chuck E. Cheese's stock hotter than its pizzas. Because Bushnell's not just building a restaurant chain. He's building the biggest arcade chain in America, in the form of Chuck E.

7:55Cheese's. And once he's done that, he's going to funnel its profits into building a tech empire to rival the biggest tech giant, his old company Atari. He sees a future where Chuck E. Cheese serves more pizza than Pizza Hut, gives birth to new cartoon stars, creates video games, and even makes robots. But for his plan to work, he needs to keep Chuck E. Cheese ahead of Showbiz Pizza. Right now, there are 27 Chuck E. Cheese restaurants, but Showbiz is closing the gap fast. Robert Brock's opened 13 Showbiz Pizza restaurants in the brand's first year. and he's gunning to have 45 open by the end of 1981.

8:38So Bushnell's going to use the money from the IPO to step up the opening of new Chuck E. Cheese restaurants. He's also fighting back by making Chuck E. Cheese even more family-friendly. Unaccompanied teenagers are now barred, Chuck no longer smokes, and new animatronic characters are being introduced, including the king, a lion that impersonates Elvis Presley. You know, I want to thank Chuckie Cheese for inviting me down here to play. This is always my favorite place to play. Chuckie, this song's for you. But Bushnell's also hopeful that his legal team can deliver a knockout blow to showbiz.

9:25October 1981, Topeka, Kansas. In his office, Robert Brock listens as his company's legal counsel relays the bad news from San Francisco. This morning, Showbiz and Chuck E. Cheese went head-to-head in court again. But unlike last time, it's Showbiz that's taken a beating. The judge also ruled that several of our defenses are not permissible. It's not a total wipeout, but we'll have to review our strategy before the jury trial in the spring. Brock stews quietly. With this courtroom victory, Bushnell's got him on the ropes. Chuck E. Cheese is seeking damages of$150 million. That's a sum big enough to sink showbiz and Brock's hotel business.

10:11Brock fumbles for a sliver of hope. Okay, okay, so we've had a setback. It happens. But it's what the jury thinks that matters. What did the mock jury say? We've held four pretend trials so far, and the results are mixed. One found in favor of Pizza Time Theater and awarded 50 million in damages. Brock recoils slightly at the thought of paying such a staggering sum. Well, what about the other three? In those, just over half of jurors backed us, around a quarter sided with Pizza Time Theater. Brock sinks in his chair and closes his eyes. The path to victory in this court case is getting dangerously narrow.

10:53Brock contemplates the situation for a moment, and then opens his eyes. I don't like these odds. Not when the entire company's on the line. Do you think Pizza Time Theater will agree to a settlement that won't involve shutting down showbiz? Well, I suspect they'd want a pound of flesh, but yeah, I think so. This legal battle taints their appeal to investors, too. Good, good. Then let's open talks. If there's a way to mollify them without losing showbiz, we should take it. Our animatronics are superior, and we know food service better. I'd prefer to fight them in the marketplace than in the courthouse.

11:40A few days later, showbiz's attorneys meet with Chuck E. Cheese's legal team to start the process of trying to hammer out a deal both sides can live with. And while the lawyers haggle, Bushnell is pushing ahead with his plan to turn Chuck E. Cheese into the foundation of a new tech empire.

12:02April 1982, Hollister, California. In Chuck E. Cheese's new factory, Bushnell watches with pride as his company's first coin-operated game rolls off the production line. The game is a version of skee-ball called Chuck E. Cheese Roll, where players have to roll a ball up an incline and into holes to score points. And it's the first step in Bushnell's plans to get back into the games business. As part of his exit deal with Atari, Bushnell agreed not to re-enter the video game business until the fall of 1983. And now he's laying the groundwork for a speedy return to the booming industry he started.

12:42it. This 35 ,000 square foot factory is the size of two hockey rinks, and it's got space to spare. And when Bushnell's non-compete deal with Atari expires, it'll use that space to start making arcade video games. Bushnell's even decided on the name for Chuck E. Cheese's new video game division, Sente. And like Atari, it's a Japanese word from the board game Go that means having the initiative. But Bushnell's also about to start a computer animation division, which he's calling Cadabra Scope. Its job will be to make cartoons starring the Chuck E. Cheese crew and help turn Bushnell's rat mascot into the new Mickey Mouse.

13:25Bushnell is also funding promising tech startups working on everything from satellite navigation systems to robot servants for the home. And with Chuck E. Cheese's annual revenues closing in on$100 million a year, It feels like his big game plan is coming to fruition. Brock might see showbiz as a chance to make big pizza profits, but for Bushnell, Chuck E. Cheese is way more. It's about building the world of tomorrow.

14:00June 1982, a law office in San Francisco. After months of negotiation, the lawyers of Pizza Time Theater and Showbiz Pizza Place are done talking. Billy Bob and Chuck E. Cheese are ready to make nice. Robert Brock reaches into his suit pocket and removes an expensive pen. He then looks to the opposite side of the table where Nolan Bushnell is sitting. I'm very glad we reached an agreement. I just hope you stick to this one. Brock ignores the slight and starts signing the contracts laid out in front of him. after two and a half years of legal warfare, he's just glad it's over. But to end the dispute, Showbiz is paying a high price.

14:47Under the terms of the settlement, Showbiz will have to pay$750 ,000 up front. It will also have to pay Chuck E. Cheese a cut from its gross sales for the next 14 years. In all, Brock expects this settlement to cost his company$50 million. But while Bushnell scored a victory today, Brock's not down. He's convinced that showbiz will prevail. And now that the company's no longer distracted by legal disputes, he's going to go all out to turn Billy Bob into a superstar.

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18:00September 1982, an airport, Dallas, Texas. Showbiz's animatronics guru Aaron Fector hurries out of the terminal and towards the waiting helicopter. He's dressed as a bear and wearing red and yellow striped overalls. Under his arm, he's carrying the head of Billy Bob. And that's because tonight, Fector will become Billy Bob, the animatronic rock star beloved by kids across the nation. Fector reaches the helicopter, clambers inside, and straps himself in. He puts on the headphones and hears the pilot's voice. Welcome aboard. We'll be at Showbiz in two minutes. The helicopter ascends and then banks right, zooming over the suburbs of Dallas.

18:44Vector cranes his neck to see the streets below. Closing in fast, he sees their destination, the 100th Showbiz Pizza Place Restaurant. Tonight is its grand opening celebration, and Billy Bob is the star attraction. Pilot comes over the radio. Get ready, we're about to land. The helicopter draws level, hovering right above the landing spot next to the Showbiz Pizza Place. Fector sees hordes of excited kids and their parents waiting below. He removes his headphones, picks up Billy Bob's head, and pulls it down over his own head.

19:23The helicopter touches down, and Fector jumps out and pretends to be shocked by the crowds. The crowd of pre-teen fans scream in delight at the arrival of Billy Bob. Fector then runs towards the nearby stage, pausing to shake hands and dance as he goes. Fector hurries onto the stage where other musicians from Showbiz's animatronic house band, the Rock-A-Fire Explosion, are waiting. Fector heads to the microphone, ready to play some good old rock and roll for the crowd. Inside his costume, Fector can't stop grinning. Billy Bob is now a star, an idol to millions of American kids. Soon, he imagines the lovable bear he created will be topping the music charts and starring in Hollywood movies.

20:10Chuck E. Cheese might have twice as many restaurants, but the animatronic pizza craze is only just getting going. Kmart, Sega, and even Atari owner Warner Communications are leaping on the bandwagon and opening their own kids' entertainment pizzerias. As far as Fector's concerned, the sky's the limit, and everything's going swell. And Chuck E. Cheese agrees. By November 1982, Chuck E. Cheese is riding high. It's talking up the idea that it'll be selling more pizza than Pizza Hut in a few years, and expanding into Canada, Australia, Hong Kong, and France. And it's also just launched a first major TV ad campaign, backed with a new slogan, Smile America.

21:21You can smile America with Chuck E.T.

21:28But in December 1982, just weeks after the Smile America slogan debuts, shocking news hits. After years of supersonic growth, Atari has fallen short of Wall Street's earnings and growth expectations. The video game market is now oversaturated, and kids are growing bored of the aging Atari 2600 console. And with Atari struggling, investors rush to pull their money out of video games. Banks call in the loans of over-leveraged game startups. Within weeks, the video game industry is withering fast and dragging down every business connected to it. And thanks to the large video game arcades inside every restaurant, that includes Chuck E.

22:18Cheese and Showbiz.

22:26It's July 1983, and Nolan Bushnell's on the deck of a race yacht that's speeding across the Pacific Ocean. Up ahead, he can see the shoreline of Hawaii coming into focus. He maneuvers his baseball cap to shield his eyes from the midday sun and spots the white tower of the Diamond Head Lighthouse. A smile breaks across his bearded face. That's the finish line, and there are no other boats in sight. He and his crew are about to win the Trans-Pacific Yacht Race. He yells to his crewmates. Land ho! Bushnell glances up at the sail billowing above him. On it is the winking face of Chuck E. Cheese, the rat that made this victory possible.

23:12Because below deck, this yacht packs a satellite navigation system that Bushnell's funded with his Games and Pizza fortune, a fortune now estimated to be$200 million. At the harbor, a large crowd greets Bushnell and his crew. Women in grass skirts drape leis around their necks. Well-wishers move in to shake their hands and slap their backs. And as they do, Bushnell notices a man in a suit pushing through the crowd and waving an envelope. Mr. Bushnell! Mr. Bushnell! But before the man can reach him, two of his crew rush him. One grabs him by the feet, the other under his arms. They carry him to the water's edge and start swinging him back and forth.

23:58One, two, three. On the count of three, they hurled Bushnell into the water. By the time Bushnell drags himself out of the water, the man in the suit is waiting for him and holding out the envelope. Mr. Bushnell, I have an urgent telegram for you. Bushnell opens the envelope. Inside is a one-line message from Chuck E. Cheese headquarters. It reads, Bad news in the second quarter. Bushnell's heart skips a beat. For the past few months, he's been focused on the company's new ventures and left the operations at his pizza chain to his executive team. As far as he knew, Chuck E. Cheese's second quarter results were going to serve up more good news for investors.

24:46But if the restaurant business is now in trouble, then so is Bushnell. Because without those big pizza profits bankrolling everything, the new tech empire he's building will be toast.

25:04The following day, Chuck E. Cheese headquarters, Sunnyvale, California. In the boardroom, Nolan Bushnell leans back into his chair, smoking his pipe as the company's president walks him through the company's now shaky finances. In the second quarter, the company lost more than$3 million and watched its revenues dive 17%. It's a perfect storm of problems, Nolan. The rapid decline in the video game markets hit us hard. Kids just aren't into games like they used to be. Also, we expanded too fast. We're now in direct competition with showbiz in many places, and there are now too many places where there's more than one kids' entertainment restaurant within 10 miles.

25:46When there's more than one of us within a 10-mile radius, there's just not enough customers to go around. The finance cheat cuts in. High inflation's another factor. Our pizza's expensive and families are economizing right now. It's also pushing up our food and labor costs. Bushnell looks at his executive team. Well, what should we do? We need to scale back, shut unprofitable locations, slow expansion, rework the pizza recipe to control costs. Bushnell stops puffing his pipe. I thought we had kept ingredients costs pretty low. The company's president looks uneasy. We decided to improve the pizza, use whole milk mozzarella as parents were complaining the food was lousy.