I think it was really a demand issue. Here were some of the problems:
1. It wasn't a gaming system.
Everyone who wanted to play video games had a PlayStation, N64, or Dreamcast at the time. Nuon offered nothing new to this market except for a couple games, only two or three of them any good (Tempest 3000, Iron Soldier 2, and Merlin Racing).
2. Special DVD features were a waist.
The Monkey Bone DVD and a couple others had special Nuon-only features! Why wouldn't you want that? Because they were pointless and studios didn't want to sped extra dough developing Nuon-enhanced discs when only 1% of 1% of their purchasers would have benefited from them. Mass-merchants like movie studios wanted to sell discs to the highest number of people, meaning aiming their offerings at the lowest common denominator.
3. Little 3rd/2nd/1st party support.
I never once saw an ad for a Nuon on TV. The first time I saw one in a store was at Best Buy when they were on clearance. That's when I bought mine.
4. Pricing/Launch Issues
Already covered in other posts.
5. 99% of people just want a simple DVD player.
The best selling DVD player in the U.S. for the past several years has been the bottom-of-the-line Apex DVD player (now around $40.00 new). It costs nothing, has four buttons on its front (Play, Stop, Reject, Power), and my grandmother can use it. In fact, she does! It plays movies easier than a VCR (no re-winding), and they look great on your standard piece-of-crap television that everyone has. VERY few people have HDTV's and home theatre setups.
6. When DVD players were hot, PS2 and Xbox had them built in.
This kind of put the nails on the coffin. When PS2 and Xbox came out, game systems had DVD players built into them for almost free; there was no need to buy another DVD player, let alone one that's a gaming system too.
If VM Labs somehow inked deals with every DVD-distributor in the world to include the Nuon chipset in their players, the format may have had a slight chance. Instead, this never happened, and the Nuon failed miserably. Kudos to the VM Labs crew trying the nifty Trojan horse approach! Unfortunately, very few DVD makers let that horse into their kingdoms.