Atari having a lot of competition on the console market. Especially the Coleco Colecovision was the biggest competitor. It had better graphics and therefor, games looked much better and closer to the original arcade version.
The successor of the famous Atari VCS or Atari 2600 was the 5200. However, Atari made a mistake by not being backwards compatible so all games were useless unless you bought an extra cartridge.
The Atari 7800 was the answer. Developed by General Computer Corporation (GCC) and had a much improved graphics chip. The very late development due a payment issue and the success of the Sega Megadrive and Nintendo NES both made sure the machines wasn't sold well. Also the fact that Nintendo was the only one who allowed other game developers on their platform, was the final nail on the coffin for the Atari 7800.