The process began in July 1982 and was completed before the end of the year. Total production costs were estimated to be US$125 million. Following the commercial success of the film in June 1982, Steve Ross, chief executive officer (CEO) of Atari's parent company Warner Communications, started negotiations with Steven Spielberg and Universal Pictures to acquire the license to produce a video game based on the film. In late July, Warner announced its exclusive worldwide rights to market coin-operated and console games based on the movie. Although the exact details of the transaction were not disclosed in the announcement, it was later reported that Atari had paid US$20–25 million for the rights, a high figure for video game licensing at the time. When asked by Ross what he thought about making an E.T.-based video game, Atari CEO Ray Kassar replied, "I think it's a dumb idea. We've never really made an action game out of a movie." An arcade game based on the E.T. property had also been planned, but this was deemed to be impossible given the short deadline.

After negotiations completed, Kassar called Howard Scott Warshaw on July 27, 1982 to commission him as developer of the video game. Kassar informed him that Spielberg asked for Warshaw specifically and that development needed to be completed by September 1 to meet a production schedule for the Christmas holiday. Though Warshaw had spent over a year working on consecutive development schedules for games (seven months working on Yars' Revenge and then six months on Raiders of the Lost Ark), he accepted the offer based on the challenge of completing a game in a short time frame and at Spielberg's request. Warshaw considered it an opportunity to develop an innovative Atari 2600 game based on a movie he enjoyed. Kassar reportedly offered Warshaw US$200,000 and an all-expenses-paid vacation to Hawaii in compensation. Kassar then told him to arrive at the San Jose Airport a few days later to have a meeting with Spielberg.

Warshaw used those days to design the structure of the game and segmented the concept into four ideas: world, objective, path to achieve the objective, and obstacles. He envisioned a three-dimensional cube world as the setting and adapted part of the film's plot, E.T. phoning home, as the goal. Warshaw then conceived that E.T. would need to assemble a special phone to call his ship and arrive at a special landing site to achieve this goal. He considered obstacles as an element that would determine the success of a game, and experienced difficulties when taking into account the time constraints and technical limitations of the console. Inspired by the movie, adults were implemented as antagonists that would chase the alien. Feeling more adversity was needed, Warshaw included a time limit for players to accomplish the goal. Pits were devised as an element to hide the pieces of the phone as well as expand the game's world.

Warshaw and other Atari executives presented this design to Spielberg, who did not express enthusiasm. Spielberg instead asked him to create a game similar to Namco's Pac-Man. Believing the concept too derivative of a common game design, Warshaw proceeded with his concept, which he felt would capture the sentimentality he saw in the original film. In retrospect, however, Warshaw stated that Spielberg's idea might have had merit. He spent the remaining time programming the game. Atari anticipated enormous sales based on the popularity of the film, as well as the stability the video game industry was experiencing in 1982. Due to time limitations, Atari decided to skip audience testing for the product. Emanual Gerard, co-chief operating officer of Warner at the time, later suggested that the company had fallen into a false sense of security by the success of its previous releases, particularly its console version of Pac-Man, which was commercially successful despite poor critical reaction.

Anticipation for E.T. was high in 1982, and it was a sought-after Christmas gift. Prior to the game's release, Newsweek called Atari's procurement of the intellectual property its "biggest coup". In early December 1982, the New York Times reported that video games based on successful movies, specifically E.T., would become "an increasingly profitable source" for video game development. At first, retailers ordered more supplies than what was expected to be sold, but Atari received an increasing number of order cancellations as new competitors entered the market, an event the company had not anticipated. John Hubner and William Kistner of InfoWorld attribute the cancellations to changes Atari initiated between its relationship between distributors. On November 1, 1982, Atari informed them that their contracts were canceled and that exclusive deals would be established with select distributors. Hubner and Kistner believed the action prompted retailers to cancel orders, which Atari had not properly tracked.

E.T. met with initial commercial success. It was among the top four on Billboard magazine's "Top 15 Video Games" sales list in December 1982 and January 1983. The game eventually sold 1.5 million units, becoming one of the best-selling Atari 2600 titles. However, between 2.5 and 3.5 million cartridges went unsold. Hubner and Kistner commented that the large number of produced cartridges would have resulted in excess inventory regardless of E.T.'s success. Though the game was a best seller during the holiday season, retailers stated that its sales figures did not meet expectations despite an increase in consumer interest in video games. Warner Communications also expressed disappointment at the number of sales. The poor sales and excess inventory prompted retailers to steadily discount the price. Former J. C. Penney employee Al Nielsen mentioned that his copy of the game was discounted five times from US$49.95 to less than a dollar. According to Ray Kassar, about 3.5 million of the 4 million produced were sent back to the company. Despite sales figures, the quantity of unsold merchandise, coupled with the expensive movie license and the large amount of returns, made E.T. a financial failure for Atari.Next Generation Magazine reported that Atari earned US$25 million in sales, but netted a loss of US$100 million. By 2004, the cartridges were still very common and priced at very low amounts.

Critical response

While reviews of the movie version of E.T. were highly positive, the game was negatively received by critics, with common complaints focused on the plot, gameplay, and visuals. New York magazine's Nicholas Pileggi described it as a loser when compared to other games Atari could have released like Donkey Kong and Frogger. Kevin Bowen of GameSpy's Classic Gaming called the gameplay "convoluted and insane", also criticizing its story for departing from the serious tone of the film. Author Steven Kent described the game as "infamous" within the industry, citing "primitive" graphics, "dull" gameplay, and a "disappointing story". An editor for The Miami Herald described it as a difficult game to learn to play, but felt it was worth dedicating the time.

Critics bemoaned the repetitive gameplay involved with falling down holes. Emru Townsend of PC World discussed the game with a group, and found a universal dislike for the pits that E.T. falls into, describing it as "monotonous". Writer Sean "Seanbaby" Reiley also criticized the pits, claiming that they are "time-consuming" and "difficult to leave without falling back in". Trent Ward, a former Next Generation Magazine reviewer, commented that this element prompted him to immediately return the game for a refund after purchasing it in his youth. Classic Gaming commented that despite the negative reception, the game can be enjoyable after the player has learned to navigate the pits.

In published materials written over a decade after its initial release, E.T. has been universally panned by critics and is frequently listed as the worst video game ever. Reiley ranked it number one in a list of the 20 worst games of all time in Electronic Gaming Monthly's 150th issue. Michael Dolan, deputy editor of FHM magazine, has also listed the game as his pick for the worst video game of all time. Townsend placed E.T. at the top of his list of worst video games, noting that, "about a third of the people I quizzed came up with this title almost instantly, and it's not hard to see why."GameTrailers ranked the game the second worst on their "Top Ten Best and Worst Games of All Time" list.

Critics often attribute the poor quality to the short development time. Townsend commented that the rushed development was very apparent after playing the game. Warshaw's contributions to the game have been met with mixed responses. Classic Gaming called the game poorly designed, while IGN's Levi Buchanan stated the "impossibly tight schedule" given to Warshaw absolves him of blame. Warshaw does not express regret for his part in E.T., and feels he created a good game given the time available to him.

E.T. is one of the earliest video games based on a movie.GamePro, GameTrailers, and Bowen cite the game as the first poor quality film–video game tie-in. Patrick O'Luanaigh of SCi Games called it the most famous disaster story among film-inspired video games as well as within the industry. Describing it as one of the "games that changed the world", GamePro stated that E.T. established a standard of subpar quality video games based on movies. They further commented that other publishers adopted similar marketing and production practices with licensed movie properties. The publication listed the game as the second "worst movie game ever", citing it as an example of how poor gameplay can bring negative reception to strong licenses.

Effect on the industry

The game is often cited as one of the most important titles in the industry's history.Billboard magazine's Earl Paige reported that the large number of unsold E.T. games along with an increase in competition prompted retailers to demand official return programs from video game manufacturers. The game is also considered to be one of the causes of the video game industry crisis of 1983. By the end of 1982, Atari had begun to lose dominance as more competitors entered the market. Poor critical reception and lack of a profitable marketing strategy made this game one of many cited decisions that led Atari to report a $536 million loss in 1983 and led to the company being divided and sold in 1984. GameSpy's Classic Gaming called E.T. Atari's biggest mistake, as well as the largest financial failure in the industry. Reiley commented that the game's poor quality was responsible for ending the product life of the Atari 2600. Occurring soon after Pac-Man's negative critical response on the Atari 2600, E.T.'s poor reception was attributed by Kent to a negative impact on Atari's reputation and profitability. Authors Nick Montfort and Ian Bogost echoed similar comments about Pac-Man and E.T.'s combined effect on the company's reputation and the industry's reaction. Buchanan also cited the game as a factor to Atari and the industry's crash. He stated that the large amount of unsold merchandise was a financial burden to Atari, which pushed the company into debt.

On December 7, 1982, Kassar announced that Atari's revenue forecasts for 1982 were cut from a 50 percent increase over 1981 to a 15 percent increase. Immediately following the announcement, Warner Communications' stock value dropped by around 35 percent—from US$54 to US$35—resulting in the company losing US$1.3 billion in market valuation. Kassar sold five thousand of his Warner shares a half hour before the announcement. This prompted an investigation for insider trading against him by U.S. Securities and Exchange Commission. Atari attempted to regain their market share by licensing popular arcade games for the Atari consoles. The games, however, did not reverse Atari's decline and they went further into debt. In 1983, the company had decreased its workforce by 30 percent and lost US$356 million. Other companies—Activision, Bally Manufacturing, and Mattel—experienced similar results as the industry declined.

Atari video game burial

In September 1983, the Alamogordo Daily News of Alamogordo, New Mexico reported in a series of articles that between ten and twentysemi-trailer truckloads of Atari boxes, cartridges, and systems from an Atari storehouse in El Paso, Texas were crushed and buried at the landfill within the city. It was Atari's first dealings with the landfill, which was chosen because no scavenging was allowed and its garbage was crushed and buried nightly. Atari officials and others gave differing reports of what was buried, but it has been speculated that most unsold copies of E.T. are buried in this landfill, crushed and encased in cement. The story of the buried cartridges is regarded by some as an urban legend, with skeptics—including Warshaw—disregarding the official accounts.

• E.T. the Extra-Terrestrial in video games
• List of commercial failures in video gaming
• List of video games notable for negative reception