North American Release of the Sega Saturn
The Sega Saturn, the successor of the Sega Genesis, was a commercial failure in the USA and heavily damaged Sega's reputation and finances. The ongoing effects of its failure are often considered one of the main reasons why Sega discontinued the Dreamcast. A big reason behind the Saturn's flop was its disastrous launch in North America.
Before the Saturn
The Sega Genesis/Mega Drive was a very popular console in the USA and was a big competitor to the Super Nintendo. However in Japan it was significantly less popular and Sega of Japan was eager to move on to their next console, the Saturn. When the Sony PlayStation was announced, Sega made some last minute changes to the Saturn to compete that in turn made the console's architecture very complicated and hard to program for. Regardless, the Saturn release in Japan was rather successful, which was helped by the fact that it was released before the PlayStation, and the Nintendo 64 was still far away from launch; in fact the system was Sega's best selling console in Japan. The "Segata Sanshiro" commercials proved to be popular and contributed to the Saturn's success in Japan.
Botched North American announcement
In the USA on the other hand, Sega of America was reluctant to abandon the Genesis and wasn't impressed by the Saturn's design. The Sega 32X was created to extend the Genesis' lifespan, but interest on the add-on was minimal because the Saturn was already out in Japan, developers saw no reason to make 32X games and gamers were more interested in the upcoming next generation consoles. With the flop of the 32X and the PlayStation quickly overtaking the Saturn in Japan, Sega of Japan wanted the Saturn out in the States as soon as possible, even going as far as discontinuing all Sega hardware except the Saturn.
Originally the Saturn was scheduled for release on September 2 1995, dubbed "Saturnday", but Sega of Japan decided to release it 4 months before schedule to give it an early lead over the PlayStation, much like the Genesis did before. Tom Kalinske, the Sega of America CEO at the time announced at the first ever E3 May 1995 at the end of their conference that 30,000 units were already shipped to retailers such as Toys "Я" Us and were to be sold at $399.
The announcement backfired horribly. Later that day Sony announced that the PlayStation would only cost $299 on their own conference, which made the console much more appealing than the Saturn. Many retailers who were not told about the new launch were angered and felt left out by Sega, so because of this, combined with the previous 32X fiasco, some of them even flat out refused to sell Sega products anymore and gave the shelf space to Nintendo and Sony. Because of the rushed launch and few retailers with the Saturn in stock, very few units were available so the console was hard to obtain. Likewise, third party developers were not told about the new release date either so most of them couldn't finish their games on time leaving the Saturn with very few launch titles, most of which weren't particularly impressive. Only 2 additional games were launched between the early release date and the originally scheduled release date.
Sega had hoped that releasing the Saturn earlier would force Sony to also release the PlayStation early to compete, instead Sony did the exact opposite. Sony pushed for a strong marketing campaign for the PlayStation to build hype while making the Saturn look bad. In response, Sega made several commercials insulting the PlayStation and claiming Saturn is superior similar to how they originally did against Nintendo, but this time the ads weren't effective as Sony's advertisement campaign was stronger and gamers were getting tired of Sega marketing their products in this manner. Gamers were not prepared for the Saturn's sudden release, the console was hard to find, retailers didn't want to sell it, there weren't many games available, and hype for the PlayStation was strong. The lack of a mainstream Sonic the Hedgehog game kept even Sega fans from wanting a Saturn right away.
Four months later, the PlayStation was finally launched, and it sold more units than the Saturn already had within a single day. PlayStation games quickly showed the console's 3D capabilities were vastly superior to the Saturn. The PlayStation was also a lot easier to develop for so third party developers flocked to it. Saturn's library relied strongly on Arcade ports but Arcades were already declining in popularity, while PlayStation had a rich library of standalone console oriented games. And even arcade games on the PlayStation were often considered superior than the Saturn versions.
The disastrous launch and competition from the PlayStation (and later the Nintendo 64) prevented the Saturn from ever building momentum in the USA and ultimately it was a commercial flop. Sega attempted to mitigate this with a series of extremely ill-advised price cuts, but all these did was result in Saturns being sold at an enormous net loss that could not be recouped through software sales. Sega pushed for a Sonic game, which would be called "Sonic X-Treme", to be released for the Saturn hoping to improve sales, but the game was cancelled due to massive development troubles.
The failure of the Saturn in USA caused Sega to lose the trust of gamers and third-party developers and Sega suffered massive financial problems due to bad sales. In Mid 1997, then CEO Bernard Stolar announced that the Saturn was discontinued saying that "it's not Sega's future". Sega was heavily criticized for releasing too many consoles then abandoning them shortly after.
The system however was relatively successful in Japan remained on sale there until 2001, in fact it even outsold the Nintendo 64 in Japan. The early discontinuation of the Saturn infuriated Japan because the Saturn was doing fine there, which in turn worsened the relations between Sega of Japan and Sega of America.
With the Saturn done, Sega began development of the Dreamcast hoping to solve all the problems the Saturn had. While the Dreamcast was a good console, Sega's credibility was so badly damaged by the Saturn that it received little third-party support, and Sega ultimately made the exact same mistake of getting drawn into a price war with Sony that they could not possibly win. The Dreamcast was soon discontinued, and Sega would later restructure, becoming a third-party publisher in 2001.