I don't know why they stopped doing this? I know that cost was a big factor, and the size of the joystick too... but, I loved overlays.
Intellivision overlays were necessary for some games, but bright and colorful, if not a little thin and cheap.
Vectrex also had cool overlays. Simulated color. Nice and thick plastic. Playing Vectrex games without the overlays just isn't the same.
The Colecovision had overlays for some games, and actually had two types, for the regular games and then the super-action controlllers. I hated when they went to those super-action controllers because you couldn't use your old overlays with them.
Can't forget the old Arcadia 2k1 too.
Atari even had their attempts, rather unimaginatively with the 5200 and a better attempt with the Jaguar.
I loved the feel using the overlays when I was a kid, it was like customizing your system for each game. I didn't have to look at the manual every time. I also loved it when they used different ones for the two-players. Anyone else, love ' em or hate 'em?