The true reasons for the Dreamcast's demise are the subject of debate, however on January 30, 2001, Sega announced an end date for the hardware - March 31st, timed as such so that the company's losses on the console could be tied in to the 2000/2001 financial year.
In the mid-1990s, riding off the success of the Sega Mega Drive and their mascot, Sonic the Hedgehog, Sega had embarked on overly ambitious plans - to be the largest and most dominant video game force on the market, and a world leader in entertainment - a Japanese equivalent to Disney. But struggles with the Saturn and other pressures came back to bite the firm - by the late 1990s Sega were making heavy losses, causing the empire to be put on hold.
May 2000 saw Isao Okawa replace Shoichiro Irimajiri as president of Sega (Irimajiri taking a lesser role, before leaving the company at the end of January 2001). Hayao Nakayama, who had also been in the chair during Sega's rise to fame was also out the door, and Okawa (who had invested heavily in Sega - having loaned the firm $500 million USD in 1999) lacked the faith of these two men. Even as early as 1999, Okawa was claiming the Dreamcast would be Sega's last console, and his vision of a third-party online-centric software developer was soon shared by many of the big Sega names in America, including Peter Moore, Charles Bellfield and former Sega grandee David Rosen (who had reportedly held this position for seven years - after the decline of the Mega Drive).
In the last few months of 2000 Sega began issuing statements about their desire to work on non-Sega platforms, at this stage being hand-held PDAs, mobiles, Bandai's WonderSwan and the Game Boy Advance. There were also plans to license a "DC chip" - Dreamcast technology which could then be used in set-top boxes or DVD players, though none of these projects ever materialised. Acclaim Entertainment also let slip details of PlayStation 2 ports of Crazy Taxi, 18 Wheeler: American Pro Trucker and Zombie Revenge two of which they would end up publishing for the platform.
Incidentally rumours of PlayStation 2 ports of Crazy Taxi and Seaman date back to Okawa's promotion, and were initially denied by Sega of America at E3 2000, with Charles Bellfield clarifying that Sega had no plans to support other video game platforms.
Sega made a last ditch attempt at recruiting developers by offering new a development solution - the $5,000 USD "Independent Development Toolkit" (IDT), designed to circumvent the reported $15,000-$20,000 dedicated development kits Sega had been distributing since the Katana days (said to be an equivalent price to far more powerful Xbox dev kits at the time). This would have consisted solely as a cable and some software, designed to work on any standard PC and off-the-shelf Dreamcast console. While the IDT would not have granted access to the entirety of the Dreamcast system, it would have allowed for less intensive, often online focused games that could be built cheaply, Sega Swirl being cited as an example. It is not known how many of these kits were sold (if indeed any were).
Despite initial reluctance, Sega of Japan finally pulled the plug on the Dreamcast project roughly three weeks after Christmas.
It is widely considered that Sega were unable to compete with Sony's PlayStation 2 and Microsoft's new Xbox console when it came to marketing. The Xbox advertising campaign eclipsed anything Sega could put together, and was cited as a reason not to continue. However, it is known many in Sega were sympathetic to Microsoft's cause - Bernie Stolar for example (now in charge of Mattel), advocated a deal which saw Microsoft buying Sega and working on a joint platform. Others were wary that the big names of Electronic Arts and Square Enix, third-party leaders in the US and Japan, respectively, were still not on board the Dreamcast project, and others such as Eidos and Infogrames had already severed ties with the system.
Note also that the Dreamcast was never put in a position where it had to compete against the GameCube or Xbox, both consoles launching in September and November 2001, respectively. Indeed, Sega contributed games to both console launches.
Sega's money issues would become a serious problem in the years that followed. A failed merger with Bandai and reported talks with Namco came to nothing (reports of a Nintendo-Sega takeover were also suggested, but denied by both companies), and having resisted a buy-out from Sammy, the two companies merged in 2004, creating Sega Sammy Holdings which would drastically streamline the organisation (there were also short talks with Sony and Microsoft who were interested in buying-out Sega too). Nearly one-third of the Tokyo workforce was laid off in 2001, and the company didn't make a profit until 2003, after five years of consecutive losses.
It is difficult to determine whether the Dreamcast struggled significantly in the marketplace. Sega of America claimed to have difficulty attracting consumers outside of the "core" demographic but more Dreamcasts were sold in the US in two years than the Saturn had in three. More than likely, the markups on hardware and software were not sufficient to counteract other financial pressures in the company, some of which stemmed from the Western Saturn's struggles, but also the declining arcade market, and multi-million dollar projects such as Shenmue.
Decisions to drop the Dreamcast and leave the hardware market were the more likely the result of an internal arguement, where it was decided that building games for a range of systems would increase potential profits. David Rosen for example suggested Sega could become one of the largest video game publishers in as little as two years.
On April 14th, 2001, Sega attended GameJam, fresh off the back of Yuji Naka winning numerous awards from CESA for the then-Dreamcast exclusive game Phantasy Star Online. As a tribute to the console, and to promote the remaining Dreamcast games set for release across 2001 (36 mentioned at the show), Naka was joined by Yu Suzuki and Noriyoshi Oba to an audience of potentially thousands as the Dreamcast was effectively signed off.
Ironically the event, taking place at the Tokyo Zepp in Obadia, was housed below one of the two recently closed NeoGeo World arcades, a stark reminder of the fall of another former console manufacturer.
Despite a long list of critically acclaimed software, the Dreamcast was unable to capture the hearts and minds of the general public. The consolation prize being that despite selling far fewer units in the short-term, the Dreamcast's launch was still more successful than the subsequent GameCube and Xbox launches in 2001.
With the Sega Saturn, video game projects were being dropped as early as 1997 on the grounds that supporting the hardware was unprofitable. While the Dreamcast suffered from many drop-outs in late 2000, significant amounts of software were still in active development in 2001. Many of these, including internal Sega projects, would find themselves being converted to the Xbox or PC.
In fact, most of Sega's third-party offerings in 2001 and 2002 originated on the Dreamcast, be it straight up ports of Crazy Taxi, or unfinished Dreamcast games such as Gunvalkyrie and ToeJam & Earl III: Mission to Earth.
While consoles with varying levels of internet support can be traced back several decades (for example, the Sega Saturn's NetLink Internet Modem and the Mega Drive's Sega Mega Modem), the Dreamcast is widely considered to be the first console to provide online support for all of its users from day one, owed to the existence of a built-in modem. Furthermore, access was free for much of its existence, including the ability to play against other humans online.
Sega's plans are generally perceived to have been ahead of their time. Much of Sega's corporate structure had been changed in the late 1990s to reflect the concept of online play, but most third-party publishers were unwilling or unable to mirror this enthusiasm until the mid-2000s. For many, the concept of prolonged use of the internet was still a pipe dream, as prices were high and speeds were low. 33.6kb or 56kb modems were unsuited to complex games (not to mention products such as the Dreamcast Microphone and Dreameye), and while a Dreamcast Broadband Adapter was released, it took until 2001 and failed to reach PAL regions.
The Dreamcast was the only video game console to adapt itself to the idea of "narrowband" modems. While the PlayStation 2 and Xbox spent much of 2000 promoting the idea of broadband connections (Nintendo side-stepping the concept entirely), Sega took the view of New York research firm Jupiter Communications, which predicted that by 2003, less than 25% of those with access to the internet would be doing so via broadband. Surprisingly, Sega's predictions turned out to be generous - statistics from the OECD and others suggest broadband adoption in the developed world was around the 10% mark at this time.
Nevertheless Sega pursued the concept of online gaming through the likes of ChuChu Rocket!, Quake III Arena and Phantasy Star Online and its sequels, and with the introduction of Xbox Live and the subsequent "seventh generation" of consoles (starting with the Xbox 360 in 2005), online gaming and interaction similar to how Sega had envisioned it is now the norm.
Sega's failure to secure a deal with Electronic Arts is thought to have been a significant factor in the Dreamcast's Western decline during 2000. While the likes of Visual Concepts were able to bring out comparative and often better experiences with the 2K range, the sector can make or break a console's relationship with the mass market. Fundamentally the Dreamcast didn't have Madden or FIFA, the dominant sports franchises for American and association football, respectively.
While the throwaway and incremental nature of sports titles are not always looked on favourably, it was the genre of gaming that kept the Sega Mega Drive (or Genesis) relevant in North America, and was a key reason to side with the PlayStation 2 and later Xbox. More importantly, Sega spent a great deal of time in North America marketing the system as a home for sports games - from the beginning, advertising featured NFL players, and even a Sega Sports-branded Dreamcast was released.
Unlike the Sega Saturn, the Dreamcast lacked a product that could surpass more modern outings of FIFA. Earlier attempts such as UEFA Striker, Sega Worldwide Soccer 2000 and Sega's own Virtua Striker 2 Ver. 2000.1 were given mixed reviews by critics (though Virtua Striker 2 opts for a more fast-paced arcade-style mode of play rather than a "simulation"), but while Sega Worldwide Soccer 2000: Euro Edition was a marked improvement, most commentators cited the PlayStation and Nintendo 64 as better places to play football games.
In the days of the Sega Mega Drive (or Genesis as it was known in the US), Sega of America had vastly out-performed Sega of Japan and were at many points industry leaders. However, when forced to take on the Sega Saturn, SoA struggled, and was constantly fighting internal pressure from the Japanese arm to manage the console in a certain way. Japan's heavy hand led to Tom Kalinske's walk-out, and continued failure of the US operation culminated in the late 1990s.
For the fiscal year ending in March 1998, Sega Enterprises Ltd. predicted a ¥39 billion loss - down from a ¥15 billion profit the year prior. Non-Japanese operations accounted for a ¥47 billion loss, ¥40 billion of that loss (~85%) being owed to Sega of America. Profits from the Japanese arm could mitigate the figure slightly, but Sega of America was forced to cut 30% of its workforce on account of the Saturn's poor performance.
Sega of America was restructured, with many staff migrating to the PC and later internet-focused SegaSoft, to the point where it lost its ability to develop games in-house. This was never rectified with the subsequent launch of the Dreamcast - with the exception of subsidiaries such as Visual Concepts, all first-party Dreamcast development occurred in Japan.
Without a strong footing in the Western world, it can be argued that Sega did not have a firm grasp of what its American (and European) customers wanted. In 1993 for example, Sega of America secured the rights to the blockbuster film, Jurassic Park and made big profits from its tie-in game. Equally the release of Eternal Champions played into the hands of the Mortal Kombat phenomenon - with decisions being made in Japan (and thus more likely to follow Japanese trends) Sega of America were unable to repeat this success in 1999.
Compared to the PlayStation, the Dreamcast distribution service was not well received by Western retailers. If a store was seen to be selling large numbers of PlayStation consoles, Sony would offer discounts on bulk ordering and increased credit limits. Sega offered no such incentives, and was also slow to recredit retailers for faulty items. Furthermore it offered no price protection for price drops, and was considered to be biased towards large multiples, as opposed to smaller outlets.
Fundamentally this meant that retail was more likely to stock PlayStations than Dreamcasts (and indeed Saturns from the previous generation) on the grounds of retail deals alone.
While the GD-ROM format protected the Dreamcast for the first year, on the 22nd of June, 2000, a group calling themselves "Utopia" released the first Dreamcast "boot disc" - a CD-R disc which would bypass the console's security measures. Once the process was finished, the disc could then be substituted for a pirated Dreamcast game downloaded from the internet, housed on a second CD-R without issue. For bigger games this usually meant audio had to be compressed or omitted to fit on a CD-R, as the format could hold less memory than a GD-ROM, but the vast majority of games would otherwise function fine.
Sega were forced to adjust the Dreamcast to remove CD-R compatibility, but despite Charles Bellfield claiming this had occurred back in the Autumn of 1999, the fix is only thought to have been applied to consoles manufactured very late into the platform's life span. That is to say, the initial two years of Dreamcast stock was vulnerable, which may have severely impacted the console's standings in the years ahead.
One of the biggest controversies with the Dreamcast is its relationship with the PlayStation 2 - that despite having a thirteen month lead in the US and a whole two years in Japan, it was unable to divert attention to Sony's upcoming console. Much of the gaming media were giving their preference to the PS2 before it was even released, such was the power of the PlayStation brand in 1999.
Sony was accused of announcing "vapourware" at its first PlayStation 2 conference in March 1999. On display were no games, but a raft of technical demos that gave the impression that games were coming, with appearances including but not limited to Gran Turismo, Final Fantasy VII, Crash Bandicoot, Tekken and Ridge Racer - big releases on the original PlayStation, but which would not materialise on the PS2 for months, if not years, and in entirely different forms (save for launch title Ridge Racer V).
Sony's figures were also inflated, for example, boasting the possibility of its processor rendering many millions of textured polygons a second without taking into account the lack of VRAM to adequately support them all. It also discussed the potential of gaming over the internet as early as 1999, but no online service came into effect until July 2001 in Japan (August 2002 in the US and June 2003 in Europe). Even then, with earlier models a separate network adapter had to be purchased, and there was virtually no support for those not using broadband.
Other PS2 announcements included movies on demand and an e-commerce system - something not realised until the Xbox 360 in 2006. By 2000 Phil Harrison was talking of 100Mbps internet, hard disk drives and the potential for servers containing downloadable versions of every original PlayStation game ever made, and for aspiring publishers, the idea of server-generated in-game advertisements, pay-per-view events and episodic titles, all of which bypassed the console. These announcements, alongside the significant hype generated by the media and Sony, led to the Dreamcast's record launch being beaten by the PlayStation 2's launch, and over the next year dominate the video game market.
A negative stance towards the Sega Saturn in 1995 was in many ways justified, as much of the consoles' earlier output did not match the quality of comparable PlayStation games. For much of its life the Saturn was more expensive than the PlayStation, had fewer games to choose from, and had a more complicated architecture - the PlayStation 2 had all these traits in 2000 and yet is not seen to have been affected by the same degree of scrutiny.
From a software point of view, the Dreamcast was frequently praised. Hardware shortages plagued the early years of the PlayStation 2, and the Dreamcast is thought to have achieved more in eighteen months than the Nintendo 64 had managed in five years. Furthermore the Dreamcast could boast many features the PlayStation 2 could not - while it lacked the native DVD playback capability (an extremely significant factor in 2000/2001), it would take many years until a competitor could match Sega's online presence.
Dreamcast games almost always ran in 640x480 (versus the usual 512x448 for PS2 titles), often with PAL60 support for European and Australian markets, and in most cases picture quality that could go up to VGA standard. Even Nintendo's Wii, released as late as 2006 lacks a comparable video option. The Dreamcast is also said to have better support for 50Hz television setups than the PlayStation 2.
Sony were late to pick up some ideas, such as allowing more than two players to use the system locally without add-ons (the PS2, incidentally, is thought by some to have purposely limited its options for the benefit of peripheral manufacturers). It was also a while until the PS2 could match the Dreamcast's low price and physical size.
Early PlayStation 2 games suffered from anti-aliasing issues, causing polygons to look less smooth than what was being seen on the Dreamcast (and hinted at with the upcoming Xbox).
The PlayStation 2 port of Dead or Alive 2 is sometimes cited as an example of the Dreamcast-PS2 dilemma. During the game (and console's) development, the PlayStation 2 version was expected to be dramatically superior to the Dreamcast port, however in reality, it is the Dreamcast version that is often seen as superior (despite the system costing less). It is said that only after the PlayStation 2's launch did people realise how good the Dreamcast actually was.
The Sega Dreamcast is a fan favourite, and the console is regularly referred to in Sega-related media. Several Dreamcast games have been re-released for newer consoles (and compiled in the form of Dreamcast Collection - though purists will note that neither of these four games came straight from the Dreamcast).
Most notably, the semi-open nature of the hardware means that the supply of Dreamcast games has been constant since its supposed demise, with independent studios releasing games over a decade after official support for the console was dropped.
A commonly held theory, though not always entirely true, is that a video game console manufacturer beings work on its next hardware project shortly after the previous one launches. That is to say, a so-called "Dreamcast 2" was widely rumoured from as early as 1999, as it had been with the "Sega Saturn 2" around 1995, and a 32-bit successor to the Sega Mega Drive around 1990. Typically a platform holder refrains from announcing their plans for several years so as not to undermine possible sales of the "current" system, but also to obtain a better understanding of how the market is changing.
Specifications surrounding a successor console is for the most part, nothing more than speculation, and indeed more likely in the medium term was potential "expandability" of the current Dreamcast setup, as hinted by Bernie Stolar in interviews before the console's Western launch. While it is difficult to verify potential plans, it seemed likely that a new console would be backwards compatible with the Dreamcast, and likely utilise DVD technology.
In the arcade market there were successors to the NAOMI system, the arcade counterpart to Dreamcast hardware, starting with the (backwards compatible) NAOMI 2 board in 2001 (and potentially the high-cost Hikaru board). In the home market, however, it is the Xbox which is widely regarded as the spiritual successor, once planned to support Dreamcast games and continuing the very close links Microsoft had had with Sega. Many Dreamcast games migrated to the Xbox platform, and Sega gave the console preferential treatment during 2002 and 2003, helping to create (the albeit limited) interest in the console in Japan.