In terms of cost, the three major systems (Atari 7800, NES, Sega) are all pretty similar. The Atari, by virtue of its 2600 compatibility, has the largest library of available software, but its 7800 catalog is still rather light on titles. The NES has plenty of available software. Nintendo alone will produce thirty-six titles this year, while third-party developers--like Activision, Konami, CapCom, Data East and Absolute Entertainment--will produce another thirty-six. Sega, meanwhile, is still the new kid on the block, with only twenty-four cartridges available, but more promised.
-- The Game Doctor, Q&A, ANALOG Computing May 1988
After the videogame crash of 1984, Atari was reluctant to release its Atari 7800 Prosystem and instead let its stock of the consoles sit in a warehouse. Meanwhile, the Nintendo Entertainment System (NES), a huge hit in Japan as the Famicom, was released in 1985. Seeing the success of the NES, Atari started pushing the 7800, but a new generation of gamers was in place--a generation hooked on Super Mario Brothers, not Pole Position.
Soon afterward, Sega released its Master System (SMS) into the resurging videogame market. All three systems are 8-bit systems with similar capabilties, though technically, the SMS and 7800 had some advantages over the NES. Why, then, did the NES hold approximately 90% of the 8-bit market? The 7800 and SMS lacked one key component to success: a monopolistic third-party policy like Nintendo had. Once Nintendo lured the hit licenses to its system, they didn't make it to the other systems. And what happened to all of those arcade licenses Atari had? Those went to Atari Games, the arcade division, which became a separate company from Atari Corp. after the Tramiels took over. Ironically, Tengen (the home game division of Atari Games) was the first third-party company to break Nintendo's lock-out code and went on to produce some pretty good versions of Atari's arcade games for the NES. The SMS and 7800 had to be content with mostly first-party games and a few conversions of arcade hits by Activision. Even with conversions of many Sega arcade games, the SMS didn't fare well (but was extremely popular in Europe!).
In 1987, Atari started pushing its systems (at this point, the 2600jr, the 7800, and the XE Game System) with a decent TV campaign. But the new, leaner Atari had to support three different systems, two of which were made of ten-year-old technology (the XE Game System is an Atari 8-Bit computer in a pretty new case, and the 2600jr is--you guessed it--the venerable VCS in a smaller package). They just couldn't compete with "The Big N."