It wasn't so much that Atari hardware wasn't on par, it's that they made incredibly stupid decisions. The Atari 7800 was ready to market before the NES (at least in the U.S. and probably Europe) and in terms of hardware it could have competed just fine. The problem was that they decided to not release the system until they saw Nintendo release their's and how well they were doing. By then it was too late. NES had third party developers pretty much locked up with their strict licensing agreements. In addition, when Atari decided to develop their own games they were very cheap about it, strictly limiting development time and the amount of memory on the carts. There's more to the story but it wasn't the hardware that prevented Atari from succeeding.