The ColecoVision Add-On That Started All The Trouble
In 1982, the aging Atari 2600 was still king. The competing ColecoVision boasted the best graphics of the era, but their game library was nowhere near as large as Atari's. From the day that ColecoVision hit the market, they'd hyped their console's expandability. The imaginatively named "Expansion Module #1" gave Coleco owners access to the entire 2600 library.
Atari was furious. There was even a spot to plug in the original atari controllers if you didn't want to play with Coleco's squat mushroom-shaped ones.
Drat! Now Atari was losing console sales too? Atari had already cheesed off a bunch of their top programmers who then went off to start the first third party video game development companies. Atari sued their former programmers and lost, kicking off a new world of development for their Atari 2600 system. They didn't make a dime off of those third party games, but at least they had sales of the console itself to keep them going.
They sued Coleco over Expansion Module #1, and again lost. The 2600 could be recreated with off the shelf technology (though the main video chip was reverse engineered from Atari's TIA chip). Atari's decision to use mostly standard components to save money also contributed to the downfall of their exclusivity. In reality, Expansion Module #1 was an entire Atari 2600 system inside - there was no software emulation here. The unit only needed the ColecoVision for power and video output, so the next step after the court victory was for Coleco to release it's own stand-alone atari clone system.
It's important to note that both Radio Shack and Sears sold store branded Atari systems, but those were still made by Atari themselves. Coleco's system was made entirely without Atari's participation (and without having to license any tech from Atari). They called their system "Gemini" (cheeky!), and it was quite a bit less expensive (and quite a bit more ugly!) than the original Atari 2600. After that came other clones, especially outside the USA.
When the video game industry recovered from the big crash of 1983, manufacturers were much more proprietary about their hardware and software. Third party development was still important, but sanctioned through the original console manufacturer. In fact, most of those companies required third parties to manufacture software through them. No wonder all Nintendo games look the same! They claimed it was for quality control, but really it was an important revenue source for console makers. So even today, the video game industry is still benefiting from one of the lessons they learned from Expansion Module #1.