One problem was also that the 2600, hardware-wise, had run its course. Some of the other contemporary consoles were a bit better, but most of them were well be

One problem was also that the 2600, hardware-wise, had run its course. Some of the other contemporary consoles were a bit better, but most of them were well below the arcade games of the day. Yes, there are some impressive things being made with the continuing efforts of hobbyists today, but under the resources and commercial pressures of the time, the 2600 wasn't going to produce a stream of new and exciting hits. There's a demake of Super Mario for the 2600, but it's clearly blockier and clunkier than the day-1 NES launch title, and it took decades of hobbyist effort to get even there. I wonder if Atari didn't really know how to deal with the idea of an upgrade. Most home goods don't require a sudden upgrade to play popular new content (colour TV was intentionally compatible with black-and-white sets, and even hi-fi had a long transition period where you could get new albums in LP/tape/8-track/CD), so even if the 5200 had not been awkward, it would have been difficult to get the right mix of manufacturing, new game development, and backporting to smoothly transition. The 7800 would probably have competed very well with the NES if they had launched at the same time-- backwards compatibility would have offered a placeholder as the 7800-native library was built out-- just give people a voucher for a stack of free bargain-bin games in the box.