They still had all those mediocre (as in long in the tooth) arcade games but also original games (full RPG and complex strategy) more like computer ports.
The dark horse contenders were the actual "general purpose" computers. That worked out well but took quite a bit longer to play out than the consoles in gaming popularity. Less accessible I suppose.
What really killed the 7800 I think is that it was cancelled and only later released after the NES revived the market. And it was released at a budget price point with a bunch of mediocre arcade ports. And this was after Super Mario Bros. had rocked the world! And the NES had better ports of most of the 7800 launch lineup!
I wonder what would have happened if the 7800 had not been cancelled originally. I think the NES would have still beaten it in sales, but maybe the NES would have looked primitive in '85 if 7800 devs had a year of learning how to get more out of the hardware.
I do think that had it not had a terrible launch, used better controllers, and invested more in software dev and on-cart tech(there were scrapped plans for better audio chips) it could have gotten a serious market share.
But the whole story of Atari is that it succeeded marvelously as a startup and then subsequently floundered as a large enterprise, and this is just one more example.