People talk a lot about how E.T. or terrible ports of game killed the Atari 2600. But having lived back then and having been probably the perfect age for its birth and death I can tell you one reason 2600 died was simple - computers.
When I received my Atari 2600 on Dec 24th 1979 it was "the device" to buy. I was 10 and half years old, and it was the perfect device for ten year. Therefore, for the next four years I played my Atari 2600 and to be honest from age 10 to 14 thoese game that came out for it were pretty good. Sure my freinds and I saw the Colecovision come out and we wanted one, but for a lot of kids and teens we already had a "library of games" for our Atari. But, the HUGE force that was swirling around was a computer too.
In my family when 1984 rolled around the thought of another console was not where our minds were at for another purchase. In 1984 the IBM PC Jr and the Apple IIc were having huge marketing pushes, and the Commodore 64 was there as a cheap alternative. As a tween I has ZERO interest in another console, I wanted a computer and like many families my parents were far more motivated to buy a computer rather than another game console. Even when consoles came back and really caught on again in 1987 there were even better computers on teh market. As a high school teen I wanted an Amiga 2000, not a crumby console.
Having lived through that era I can tell you consoles didn't so much crash as much as computers surged up through the middle grabbing market/mind share. The computers was the productivity, gaming, and educational wonder of the mid-80s. Also, the vacuum the Nintendo saw in 1985 wasn't the death of the console - it was everyone who was in gaming moving to get in on computers. Atari, Tandy (Radio Shack), and Coleco wanted to sell computers and they abandoned the concept of the console. Consoles didn't die so much as they were abandoned in a "gold rush" to make the next step - an affordable computer. What killed Atari and Coleco was not an inability to make games or consoles...it was a lack of ability to make an affordable computer. They didn’t want make consoles, yet they didn't know the right recipe for making a family home computer. To be sure consoles got messy and the business model stank, but the reality was that the solution for the console makers was make a computer because the public was eager for that switch too.
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