Why wasn't (isn't) this more widely used? It was clearly more effective than a cdkey. I know there is cost associated with the hardware, but surely the costumer can cough 15 more dollars. The only reason I can think of is wanting as wide adoption before max revenue as possible. But then, this has never been too popular, not even for games!
More common for games was to use the media itself for copy protection, using a variety of tricks to make copy more difficult. Other techniques involve printing some keys you have to enter using colors that don't render well in photocopies, or have you look at words a certain page of a thick user manual, the idea being that it is more expensive to go through the effort of copying this material than to buy the software legally.
One of my favorite is from Microprose games, for which the manual was a pretty good reference book on the subject of the game, that alone is worth buying. And the copy protection is about asking you about information contained in the book, for example, it may be some detail about a particular plane in a flight simulator, which means that a way to bypass copy protection is simply to be knowledgeable about planes!
Dongles were common, but mostly for expensive enterprise software. Also, dongles don't make cracking harder compared to all the other techniques, so for popular consumer software like games, it is likely to be a lot of inconvenience and a waste of money for limited results.