I think that more than anything, the problem was that you couldn't upgrade a PCE to a SGX with an add-on. That makes the SGX a separate and therefore competing system, and a ~$400 one at that. No wonder it failed.
That lack of upgrade path also explains why they didn't bother to include Supergrafx hardware in the Duo. It would have screwed everyone who bought a PCE and the CD-ROM add-on. Again, it basically would have made it a separate system.