First of all, SEGA focussed too much on its hardware rather then its software. This is one reason why its launch kinda failed in Japan.
SEGA thought stratigicly they would sell alot if they released a console in the middle of the 5th game generation. Altough its failed launch in Japan, this worked in the US region. Thay surpassed the sales of the N64 in a instant. But what they didn't predict is that the 6th game generation was right around the corner.
Then Sony kicks in with the succesfull launch of PS2, as a result the sales for SEGA dropped dramaticly. But this was just the beggining.
Then a unknown console launched, yes sudden appearance of the XBOX. A few days later Gamecube also launches a new console in the US region.
EDIT: Did u guys know that the alot of accessories were based from the Dreamcast: Eyetoy, Microphone, Handhelds Linking to Console, Motion Control, Musical Instuments
Basically this is why in a nutshell:
Sega's Past Game Failures
Playstation 2's Looming Launch
Lack of Third-Party Support
Competition from Gamecube and Xbox
The failure of the Sega Dreamcast can be attributed to numerous things, and the above quotes appear to sum things up. Sega Dreamcast failed due to lack of healthy competition at the time. It was also released at an inopportune time period, when the release of sixth generation consoles was a looming threat, especially the then impending launch of the PS2. Consumers not only found the Sony system's built-in DVD player more appealing, but they also wanted more from Sony due to the success of the PlayStation. I'd also factor in the somewhat disappointment of the Sega Saturn. The whole debacle with said console embittered many of Sega's fanbase - many became skeptical, which in turn slowed Dreamcast sales considerably.
Another problem was its gaming library. It was an amazing line-up - one of the best in terms of the amount of good games released in such a short period of time. However, from a business perspective, this was not a good move, apparently; pacing is everything when it comes to releasing new titles. If only Sega had been aware that releasing such a large assortment of games all at once would lead to a drought in the long term. The Playstation 2's library was much stronger and its pacing was well-executed, which further boosted its sales over the Dreamcast. Sega is also believed to have failed to employ an effective marketing strategy to draw in consumers; the PlayStation 2's advertising at the time is believed to be far superior.
Consumers anticipated the new consoles, and all attention was directed to the impending release of the Gamecube and Xbox. The announcement of said consoles contributed to the Dreamcast's short life - a mere two years. Considering the life expectancy of the previous console gen - six years or so - this was devastating. The competition was growing ever fiercer and Sega had lost its momentum rather quickly. The company's revenue suffered a substantial blow due to this; most arguably the largest contribution to the failure of the console. Sega was apparently distraught over this realization and announced that it would end the console's life early and leave the console market for good.
Despite all this, the Sega Dreamcast has gained cult status among fans, and is still given credit for having introduced to gaming internet browsing, online play, and in-game voice chat, etc. It also released a great assortment of games, many of which are a rarity to this very day (though some are now available for download on PSN and such). Many of said games also appear to be popular with homebrew developers. It was a console far ahead of its time, and it serves as a testament to the fact that this can be both a boon and a curse.
but it certainly never went mainstream though the game did receive rather high praise from critics.
