Discontinuation of the Dreamcast

The Dreamcast is widely regarded as the best game console Sega ever made, released in 1998 for Japan and 1999 for other territories. It was the first console of the sixth generation of gaming, one of the first consoles with internet connection for online gaming out of the box, and is still fondly remembered by its fanbase.

However, it was also a massive commercial failure that nearly drove Sega out of business, was discontinued less than two years after release, and forced Sega to abandon the console market and become a third-party developer.

Background
Sega entered the console market in 1983, competing mainly against Nintendo's Famicom/NES with the SG-1000 and Sega Master System. They didn't have much success anywhere until the Sega Genesis and the release of Sonic the Hedgehog, which became a massive hit in North America. However, the Mega Drive was significantly less popular in Japan, leading to major conflicts between Sega of America and Sega of Japan that led to a series of mistakes and mismanagement. The Sega CD and Sega 32X add-ons for the Genesis/Mega Drive were both commercial failures, especially the 32X because it was released right before the Sega Saturn, in Japan it was released after the Saturn. Sega Saturn's launch in the USA was a disaster and the console flopped hard, not releasing a proper Sonic the Hedgehog game for the Saturn kept even hardcore fans away from it.

These repeated flops soured the opinion of gamers that felt Sega was milking them with too many consoles and add-ons, likewise, retailers were angry at Sega for releasing too much merchandise that didn't sell so they often gave bigger and better shelf spaces at their stores for Sony and Nintendo while Sega products were often left unnoticed. Sega now had a reputation for releasing too many systems that they didn't support and dropped too quickly. Gamers were losing interest in the company, developers saw no reason to make games for Sega because they rotated their systems so frequently, and retailers distrusted them. Sega's hope to solve their problems was to release a new next-gen console that would win consumers and retailers back, said console would be the Dreamcast.

From the very beginning, there were many problems even before the console itself was released. Sega was in serious financial trouble, having lost $309,000,000 by 1998. This meant the company had to resort to many cost-cutting measures which resulted in weaker hardware specs than hoped. Even with those measures, the console was very expensive to manufacture because all components had to be bought from third parties and the inclusion of a modem increased the cost by about $15 per unit. In other words, Sega was spending a lot of money while already having big debts in order to produce the console.

People still had bitter thoughts towards Sega from the Saturn and 32X. At one point during development of the Dreamcast Sega wanted to completely remove their name from the console so consumers wouldn't think of them when buying it. "Dreamcast" was planned to be a brand of its own using the orange/blue swirl as its icon rather than the Sega logo. In the end, the "Sega" logo stayed on the console displayed on top of the controller ports.

To make matters worse for Sega, the mh:awesomegames:PlayStation 2 was announced shortly before the Dreamcast's release. The PlayStation 2 had significantly better hardware specs than the Dreamcast, was a DVD player out of the box (indeed, at the time it was one of the cheapest ways to buy one), and was backward compatible with PlayStation 1 games. The Dreamcast, on the other hand, had no DVD functionality and couldn't play Saturn games. This quickly took away a lot of hype away from Dreamcast.

The Japanese release of the console was somewhat lackluster due to manufacturing shortages and very few launch titles, there were also reports of many customers refunding their Dreamcasts. In the USA, Sega had a strong marketing campaign for the console and set the release date to be 9/9/99, they also managed to secure a larger amount of launch titles including Sonic Adventure, which would prove to be the console's best selling game. The US launch was very successful for Sega, the Dreamcast broke both pre-order and first-day sales records. Sega announced that more than 500,000 units were sold in less than two weeks. Sega seemed to be on their way to making a triumphant comeback, however, that was short lived.

The first major problem the Dreamcast faced was the legacy of the Saturn's failure. Many third-party developers, knowing of the company's financial problems, were reluctant to dedicate resources to development for a console that might disappear at any moment, with some such as Electronic Arts outright refusing to make games for the Dreamcast. The Dreamcast thus ended up relying heavily on ports of Sega arcade games and ports from PS1 and N64 games, and even though the latter ports were often superior, gamers who already owned a PS1 or N64 often chose to stick with those versions over the Dreamcast ones.

When the PS2 was announced Sony pushed a strong advertisement campaign for the PlayStation 2 while Sega had a very small budget for marketing the Dreamcast post-launch. The Dreamcast soon looked like old news while Sony convinced people not to buy a Dreamcast and instead wait for the PS2.

When the PlayStation 2 was finally released it sold nearly a million units and broke every single record the Dreamcast had set within a single day, and sales of the Dreamcast plummeted almost immediately afterwards. As before with the Saturn, Sega allowed themselves to be drawn into a price war with Sony, ending up selling the Dreamcast at a heavy loss per system. As mentioned before, Sega was already suffering serious financial trouble, and was now engaging in a battle they had no hope of winning. Chairman Isao Okawa had to make a donation of nearly $700,000,000 out of his own pocket to prevent the company from going bankrupt. By the end of 2000, Sega projected they would have to sell about 4-5 million Dreamcast units to keep the console alive for another year: this proved to be an impossible undertaking.

Another factor that affected the Dreamcast was piracy. The primary form of piracy protection for the system was the use of a proprietary disc format called GD-ROM, which Sega (correctly) assumed could not be copied as they were the only source of GD-ROM discs and blank GD-ROMs were never distributed. The chink in this system's armor turned out to be the console's support for an enhanced CD format called MIL-CD: by exploiting security flaws in MIL-CD, it was possible to make the Dreamcast run a CD as a boot disc. This allowed pirates to install custom BIOS settings which could then load compressed Dreamcast ISO files burned to regular CDs. This made it trivial to pirate Dreamcast games (even more so when self-booting ISOs were created), requiring nothing more complicated than a decent internet connection and a CD burner. Due to selling the Dreamcast at a loss, Sega had to rely on software sales to make a profit, and large-scale piracy severely impacted the system's profitability. The last batches of Japanese Dreamcasts belatedly removed MIL-CD support in an attempt to remedy the piracy issue, but by that point it was already far too late.

Aftermath
Because of the problems mentioned above, Dreamcast sales were not enough to make a profit and Sega continued to bleed money. The announcement of Microsoft's new console brand, the Microsoft Xbox, and Nintendo's next console the mh:awesomegames:Nintendo GameCube sealed the Dreamcast's fate. Sega initially had plans for a Dreamcast successor but many executives had already been wanting to leave the console market for many years. With the Dreamcast failing as well, they easily convinced the rest of the company that they could make more money and solve their financial problems by dropping from the console business and focusing exclusively on making games.

Sega officially announced the Dreamcast was discontinued  only 18 months after its USA release and confirmed that they would not release any more consoles and would restructure the company to become a third-party developer, also shutting down the developer studios in Europe and putting the stop to projects which were planned or even in active development, like the third game in the really popular Shenmue series (which luckily got resurrected and announced in 2015), and survival horror game Agartha that was being developed by the French studio No Cliché, formed by Frédérick Raynal, an author of the original Alone In The Dark. Support for the system continued in Europe until 2002.

The announcement of Sega retiring from the console market was met with many different reactions. Gamers without Sega consoles were eager to be able to play Sega games on their own systems, some Sega fans were understanding and glad Sega would continue to make games, the more hardcore Nintendo fans saw the announcement as Sega admitting defeat over the console war while the hardcore Sega fans were heartbroken and shocked, in particular, having to see Sonic the Hedgehog games on Nintendo consoles.

During then Sega didn't publish certain games on their own. Infogrames published Sega's GameCube, Xbox and GBA games in Europe until 2003 (and 1 PS2 game), mh:awesomegames:THQ published Sega's GBA games and Acclaim assisted with the PS2 and GameCube versions of Crazy Taxi and 18 Wheeler.

Although the death of the Dreamcast and Sega Hardware, in general, was considered a tragic event in gaming history, it allowed Sega to stay alive. There are still small companies that continue to develop homebrew games even to this day. Years after its death, the Dreamcast became a cult classic console with most gamers -Sega fans or not- agreeing that it's an amazing system.

Many gamers consider the Xbox to be the indirect successor of the Dreamcast, as many games intended for the Dreamcast were released on Xbox, the controllers shared some similarities, and Microsoft helped Sega develop the Dreamcast. In fact, Sega negotiated with Microsoft to make the Xbox backward compatible with Dreamcast games, but that didn't happen.

Fan Hopes for a New Sega Console
Ever since the Dreamcast's death, many Sega fans hoped that Sega would potentially return to the console market with a Dreamcast successor, but it's been 21 years since Sega stopped making consoles and there's no sign that they're even interested in coming back. That, however, doesn't stop obsessive fans from constantly making requests and spreading rumors hoping to convince Sega to return. Almost every year, a group of fans makes "Fan Projects aiming to bring Sega back to the console market", often with Change.Org petitions and websites claiming that a new Sega console is coming.

Those projects and petitions quickly spread and lead to false rumors that trick people and gamers who don't know any better into thinking that Sega is coming back. Sometimes even big gaming news sites pick up those rumors and mistakenly report that it's true. Those petitions and projects are always nothing but fans going "I want a new Sega console!" unaware of how much it really takes to make an actual console and that an online petition won't make that happen. At the same time, every time Sega says they'll make a big announcement soon, the more hardcore Sega fanboys assume it'll be a new console which then leads to yet more false rumors. Predictably, these projects never go anywhere and Sega never even pays any attention to them.

Often these fan projects tend to be fairly harmless, but there have been several times when they get enough attention through false rumors and claims that "Sega is supporting them" and some have even asked for money to "develop the console" despite them not having any sort of working relationship with Sega.

Why Sega Will Never, Ever Make a New Console

 * 1) Consoles cost dozens of millions of dollars in R&D, quality assurance, manufacturing, patenting, marketing, etc. Sega doesn't have enough money to spend that much with no guarantee that it'll turn a profit.
 * 2) In addition to making the console, Sega would also need to spend even more money on first-party games to support it as well as convince third-party developers to make games for it.
 * 3) It'd be near impossible to raise enough money on a crowdfunding campaign to afford the mentioned above.
 * 4) Sega would need to end their relationships with Sony, Microsoft, Nintendo, Valve and Epic Games to become a first party developer again. Why would they spend millions of dollars to narrow down their audience instead of just releasing their games on platforms they already release for and make money on the software?
 * 5) Signatures on a Change.org petition don't indicate a real consumer base.
 * 6) If Sega wanted to make sequels to Dreamcast games, they could make them on already existing platforms. They don't need a new console for that.
 * 7) Most importantly, Sega's track record with consoles is actually really bad. Every single hardware they released after the Genesis was a commercial failure, the two that they released before the Genesis (the SG-1000 and Master System) were only moderately successful at best, and the Dreamcast itself nearly drove the company out of business. Any investors, and Sega themselves would look at those sales numbers and financial records before considering a new console.