[Edit 21/05/2014:] This particular post seems to get quite a bit loving around the internet, so if you're interested in this general subject, I created a video detailing all these reasons. It can be found here.
After a session the other day on my new Dreamcast playing MSR and Sonic Adventure, I thought to myself; "how did such as awesome console like this die such a young death?"
The Dreamcast was released in Japan in 1998 with a hugely positive response. It was then released in America the following year with the huge 9/9/99 release date marketing campaign. You can see an original TV advert here.
It broke a record by having 300,000 preorders and it sold 500,000 units in the first two weeks! The campaign was obviously by no means a failure. It was way ahead of its time with an inbuilt modem and fantastic VGA graphics.
The opinion that is was and still is totally awesome is not only shared by me, the Dreamcast got a cult following after its untimely death. Many claim it was Sega's best console and Indie Developers still make and sell games for it to this day!
So what killed the Dreamcast? After some research (mostly around forums of chums like me discussing the subject) I have come to some conclusions. This is by no way a defining list of what killed the DC, probably only Sega know the actual exact reasons. But its widely known that the following reasons certainly didn't help the fate of the poor Dreamcast:
Sony
It is widely thought that the PlayStation 2 was the main factor in killing our beloved Dreamcast. While being released two years later, it had about the same graphics and sound.
It did have one thing though, a DVD drive. At the time of the release of the Dreamcast DVD was a brand new medium and wasn't widely used. Everyone was still into VHS's and god forbid, Laser Disks.
But by the time PS2 came into the scene DVD was the must have tech, especially in Japan where all the technology trends tend to begin. The PS2 could play DVD's and it was actually cheaper than a normal DVD player. DVD shops in Japan actually started selling PS2's! So anyone who was in the market for a DVD player naturally bought a PS2 instead because then you scored a new console as well.
This is up for debate though if it actually killed the Dreamcast sales. If someone was a gamer and had been for a while they were probably going to stick with their desired brand of choice. There were and still are plenty of Sega fanboys out there. Would they buy a PS2 instead just because it came with a DVD player? Hard to tell unless you have all of the sales records for both the consoles at the same time in the same places. This humble blogger unfortunately does not.
We do know that Sony sure put out a hell of an Ad campaign though. It was the true definition of Hype Machine. You couldn't go anywhere without being assaulted by the weird adverts. You can see one such ad here, beware though, it will truly make you go WTF?
EA
A lot of people argue that Sega not securing EA support was a downfall. While I personally don't think it mattered either way, they surely would of lost some buyers. There are a lot of sport playing gamers out there (its a huge casual gamer market) and EA is the biggest when it comes to sports games. One of their biggest franchies is the Maiden series.
Long story short, EA wanted sports exclusivity and since Sega had just bought Visual Concepts which was a sport making game developer, they said no dice. You can read more here.
Needless to say Sega developed the highly successful NFL 2K1 which outsold Maiden in its first couple of weeks in the market. It successfully marketed its self as the first Football game that supported online play.
Piracy
One thing the Dreamcast was known for was that piracy on it was amazingly easy.
All legit games ran on Sega's own GD-ROM disk, but Dreamcast's could also play CD-R's. Anyone could buy cheap blank CD-R's and burn Dreamcast games and they would work! I'm not exactly sure why Sega allowed this but they certainly regretted it. All Dreamcast's made after October 2000 disallowed this to happen, but sadly by then it was pretty much dead.
It was a blessing in disguise though as Indie Developed DC games can be made and sold with CD-R's, which are bigger than GD-ROM's and are obviously way more easy to obtain.
Sega
Yes, that's right. Sega may have killed their own creation.
Not purposely though, Dreamcast was a great console and had plenty of potential to go on and do great things.
But lets face it, there wasn't very much third party support and Sega wasn't known for its fantastic marketing decisions. Saturn was as hard as hell to develop for and Sega pretty much gave up on that, confidence was low in Sega after the 1990’s and they really didn't do much to my knowledge to fix that.
In America it seems that they gave up on the Dreamcast as well. They announced in the March of 2001 that they were discontinuing Dreamcast's, as well as all future Sega hardware. They came an exclusive software company and released all their IP's on other platforms.
They were quick about it as well, Crazy Taxi got released on the PS2 as soon as June 2001. They released a sequel but the series pretty much died in the ass after that.
In my opinion other series went down the drain as well. For example have you played any recent Sonic game? Enough said.
I think that they may have been too quick to jump the gun on discontinuing Dreamcast's in America. Dreamcast's kept selling in Japan until 2006! This is big enough proof for me that they should of tried a bit more in keeping the console alive as they could of got five more years out of the white brick. Who knows how far it would of gone. America pretty runs advanced nations when it comes to technology trends, it could of been a long lived global success.
All we can do now it appreciate it for what it was. An awesome console, yet short lived.
The game library is small but fairly cheap and there are heaps of classics on it. These include the likes of Crazy Taxi, Sonic Adventure, Ecco the Dolphin: Defender of the Future, Shenmue and way more.
You can also find the console everywhere. If you're interested in finding one try your local Swap Meets, Garage Sales, Thrift Shops and online sites such as eBay.
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