Anything that sells in the millions is not a failure. Whether it could have done better with more compatibility and PIA is another issue. And I don't like the multi-button stuff. It's too confusing; it's better to keep interfaces simple for humans just like the mouse. It's better to have one or two button mouse than a 10 button mouse. Same for joysticks especially for action-based fast shoot-em-up type games. Only few exceptions where you need so many buttons and in those cases, it's better to use keyboard or separate keypad rather than carry the extra baggage for all games. Just like imagery, if you only use 10 colors or b&w images mostly, it's useless to keep saving as 24-bit BMPs-- it's slower in loading/saving and hogs up more space. Similarly, if most games are fine with one or two buttons, no use in having 10+ buttons to confuse things. And analog is inferior to digital as already discussed.
I think we're defining "failure" different ways. They sold a lot of 5200s...that was certainly a success. When I call the 5200 a failure, I am referring to two things: 1. the experimental features that didn't pan out, and 2. the fact that the console did not greatly assist Atari in continuing its prior market dominance.
Regarding the experimental features, I agree the keypad sucks. I loved that they tried adding more button options, but they did it in a very bad way. Too many buttons (14 total!), bad response and bad locations. A very confusing setup, but an idea that would later be refined into something like the PS2 controller, (10 buttons plus directional controls). Ditto with the analog, the thing was too floaty even if it didn't break all the time, but eventually analog control was better implemented in modern consoles. Anyway, I think we pretty much agree on this.
As for the financial success, kudos to Atari. But the 5200 didn't set them up well for what was coming. Granted, the folks at Atari weren't prophets, and can't be entirely blamed for their lack of foresight. But a different approach to the hardware and software would have likely deepened their market share before the crash, and quality exclusives that never materialized might have allowed them to weather that storm and emerge on the other side. Atari was synonymous with video games during the first and middle parts of the 2600 era, but the 5200 did little to either cement or expand this image and arguably contributed to erosion of the company's prestige. The 5200 is hardly alone in culpability for this...Pac Man, E.T. and rotten third party titles did their part, too. But at a time when Atari really needed a strong boost, the 5200 provided only a gentle shove.
By your definition of success in this issue, I agree with you. They sold a ton of 5200s. But they needed more at that hour than just sales...they needed branding power that could weather an industry shakeup. If the 5200 had been more cohesive, reliable and playable out of the box and received better original software support, the future of the company might have been very different indeed. We'll never know, of course, but ain't speculation grand?