The thing you have to keep in mind about gaming in the late seventies and early eighties was how much of a crap shoot it was. Games were just as, if not more expensive then they are today, and quite frankly the majority of them sucked. This is not to take away from the programmers, however, Atari in paticular was incredibly greedy and continued to push these programmers to make games far beyond the capability of the technology of the day.

Video games since the late seventies were incredibly popular, one thing to keep in mind was there was no way to know what the game was like. No internet reviews, no gaming publications, just a box with a popular character like spiderman or indiana Jones on it, now imagine paying 60$ to play it for five minutes due to it being so bad it is nearly unplayable. This was made even worse by over saturation of the market, The Atari 2600 may have been the most popular, but by 1980 there was also; intellivision, magna box, fairchild, to name a few, and that is not even counting the dozens of systems with built in games like pong. So you have alot of games and the majority of them were shitty, people just lost interest. It is widely beleived that E.T for the 2600 caused the video game crash, the truth is it was just the straw that broke the camels back. After getting the lisence to make a E.T game, atari made a game in less than 6 months and no one bought it. To make matters worse, atari had produced 4,000,000 copies and only ended up selling 1/4, they couldnt give the rest away and the loss combined with waining interest in the industry made them go under. With the king of video games gone by 1983, the bad taste from years of shitty games made it almost impossible to release a home console in North AmericA until the NES came out.

TLDR: too many crappy games, people lost interest and stopped buying, ET

Cut and paste from a comment I made elsewhere about the Atari version of ET, which is commonly held up as The Game That Killed The First Wave Of Consoles:

Realistically ET was far from the worst game ever made for the VCS, there was a whole bunch of absolute garbage made for that machine. But it was certainly the worst game anyone who was not deeply into the console heard of. And as one of the last hurrahs of a five-year-old console that was originally designed to be able to play variations on the theme of Pong and not much more, it looked like utter trash compared to the prettier stuff people were starting to see in the arcades.

ET was also heavily over-produced. Atari made so many copies of it that even if everyone who owned a VCS bought one, there would have been an asston left over. Even if it had been a good game there is no way retailers would have sold the immense amount of copies they were left holding. But it was pretty underwhelming, and it flopped; retailers were left holding the bag, and quite sensibly decided they really wanted nothing to do with "video games" ever again. Especially anything from Atari, who was then king of the US markets. There were other factors in the video game crash - lots and lots of much shittier games glutting the market, aging expensive consoles - but ET was the last nail in the coffin. Possibly multiple nails, applied with a nail gun.

Without all the overproduction and overselling, ET would have just been a mediocre movie tie-in. With it? It killed off home video game consoles as a market segment for multiple years, until Nintendo figured out how to get their successful-in-Japan Famicom past the "no video games ever again" attitude of US retailers in 1985.

A good documentary movie to get an overview is Atari: Game Over.

Ultimately, it can be summarized by saying that Atari made a series of bad business decisions. The blame has been mistakenly placed upon one game that failed mostly because it tried to accomplish more than the technology allowed.