It's pretty safe to say Atari hasn't always made the best decisions when it comes to their game consoles. Sure, they had success with Pong and the VCS/2600 and their home computers were definitely popular. However, when it came to following up the 2600... they just never got it together. There was solid and not so solid attempts, but clearly someone was not connecting the dots. Admittedly the general ignorance about computers at the time didn't help. When Atari released the 5200, the 2600 was still pretty popular. What was the difference? Well, it's more powerful. Oh yeah? Yeah, here's the same games you already have for your 2600. See the disconnect?It doesn't help that the older generation (who were parents at the time) were generally stubborn to the oncoming computer age. Us from the working/middle class at the time are all too familiar with hearing 'Aw hell' before every gripe and complaint about the new advances. Hey dad, can I get a 5200? Aw hell, you already got an Atari. How could you sell dad on buying a more expensive machine? It's more powerful, and to prove it... the same games you already have...
The video game crash didn't happen because people didn't want games. It happened because to many people making games said 'aw hell' and just churned out too much of the same thing. Then, too many consumers said 'aw hell' and didn't keep buying the same thing. Pac-Man is an all time classic, however it takes time to be an all time classic. There's a few years of being something I've already done to get through before it starts to stand the test of time. Instead of doing something new, these companies kept saying 'Aw hell, make more of what sold'. So the crash happened, people just didn't want to keep buying the same thing over and over. Computers started making their way into more homes with actual new games and arcades churned out new types of experiences... because 'aw hell' people wanted something new. Nintendo and SEGA provided something new and it worked out for them and the crash ultimately was just a minor footnote. Atari had success with their home computers.
Around the time when Nintendo and SEGA were releasing the Famicom/NES and Master System in Japan, Atari had developed a comparable system. The 7800. They had a bunch of them all ready to ship with games just sitting on pallets in a warehouse when the crash happened. So they just sat there while stores didn't want to carry game consoles. Now that they did... Atari had a cool new system and games ready to go... unfortunately the initial rollout was made a few years prior. You know, aw hell.
For the record in the time leading up to this, Nintendo had actually approached Atari about manufacturing and selling the Famicom/NES in America... and aw hell, that didn't work out. A little later SEGA did the same with the Mega Drive/Genesis (Atari even came up with the Genesis name) and aw hell, that didn't work out. Years later Atari released the Lynx and Jaguar. Very impressive systems that for every great game released, we got an aw hell Missile Command again? Atari recently released a new system that's not working out. Can you guess why? Aw hell.
The 7800 though, was a good system and eventually got better games. Like I said, it was comparable to Nintendo and SEGA. It even lead to a budget version of the 2600. Atari seemingly had it together, someone upstairs connected some dots... but it was too late. That's a shame, because the system was good. Both versions of it's controllers were well designed despite lack on a pause button (it was on the console). It's games were pretty good, with more third party support... it could have been something great... but the key word here is could.