It was a complete disaster, 2 years to late, outdated hardware straight from the git go. Atari passed up the rights to distribute the NES as an Atari system to release the 7800, c'mon, it was a complete disaster from the start.
If a console maker announced they were going to release a new console with 2 year old technology and less than 70 games (there would be no new ones after that and no marketing to speak of) you would expect a disaster - I agree.
But the fact is the 7800 managed to sell well enough for Atari to continue to produce them for 4 years. It was never going to worry nintendo but it still sold respectably considering it was against the now established nes.
I can name several modern console makers who dream of having a
disaster like the 7800. (at least I could but they've gone bust...)