An interesting read:
Television engineer Ralph Baer conceived the idea of an interactive television while building a television set from scratch for Loral in 1951 in the Bronx, New York. He explored these ideas further in 1966 when he was the Chief Engineer and manager of the Equipment Design Division at Sanders Associates. Baer created a simple two-player video game that could be displayed on a standard television set called Chase, where two dots chased each other around the screen. After a demonstration to the company's director of R&D Herbert Campman, some funding was allotted and the project was made "official". In 1967 Bill Harrison was brought on board, and a light gun was constructed from a toy rifle that was aimed at a target moved by another player.
Bill Rusch joined the project to speed up development and soon a third machine-controlled dot was used to create a ping-pong game. With more funding additional games were created, and Baer had the idea of selling the product to cable TV companies, who could transmit static images as game backgrounds. A prototype was demonstrated in February 1968 to TelePrompTer Vice President Hubert Schlafly, who signed an agreement with Sanders. The Cable TV industry was in a slump during the late '60s and early '70s and a lack of funding meant other avenues had to be pursued. Development continued on the hardware and games resulting in the final "Brown Box" prototype, which had two controllers, a light gun and sixteen switches on the console that selected the game to be played. Baer approached various U.S. Television manufacturers and an agreement was eventually signed with Magnavox in late 1969. Magnavox's main alterations to the Brown Box were to use plug-in circuits to change the games, and to remove the color graphics capabilities in favor of color overlays in order to reduce manufacturing costs. It was released in May 1972 as the Magnavox Odyssey.
The Odyssey was built using a combination of analog (for the output, game control) and digital circuitry. Many collectors confuse the use of discrete components to mean the system is analog. However, the games and logic itself are implemented in DTL, a common pre-TTL digital design component using discrete transistors and diodes. Likewise, Ralph Baer himself considers the system digital.
It was not a large success due to restrictive marketing, although other companies with similar products (including Atari) had to pay a licensing fee for some time. For a time it was Sanders' most profitable line, even though many in the company had been unsupportive of game development.
Many of the earliest games utilising digital electronics ran on university mainframe computers in the United States, developed by individual users who programmed them in their spare time. In 1961, a group of students at the Massachusetts Institute of Technology programmed a game called Spacewar! on a DEC PDP-1. In 1970 Nolan Bushnell saw Spacewar! for the first time at the University of Utah. Deciding there was commercial potential in an arcade version, he hand-wired a custom computer capable of playing it on a black and white television. The resulting game, Computer Space, did not fare well commercially and Bushnell started looking for new ideas. In 1971 he saw a demonstration of the Magnavox Odyssey, and hired Al Alcorn to produce an arcade version of the Odyssey's ping-pong game (using Transistor-transistor logic), called Pong.
Home video games achieved widespread popularity with the release of a home version of Pong in the Christmas of 1975. Its success sparked hundreds of clones, including the Coleco Telstar, which went on to be a success in its own right, with over a dozen models.
The first generation of video games did not feature a microprocessor, and were based on custom codeless state machine computers consisting of discrete logic circuits comprising each element of the game itself. Later consoles of this generation moved the bulk of the circuitry to custom "pong on a chip" IC's such as Atari's custom Pong chips and General Instruments' AY-3-8500 series.