Already a somewhat surprise hit in Japan based on its mostly excellent early crop of arcade ports, Sega was desperate to maintain an edge in the United States and so released the 3D Saturn with little coordination between themselves, developers, and retailers. The price was high at $399.99, and in those first few days not a single launch title was available. Already smarting from the poor public relations that the early deaths of the Sega CD and 32X had garnered, the atrocious launch of the Saturn and ridiculous price tag sure didn't help. But, in Sega's collective mind being first apparently took precedence over all, as the company beat Sony and their PlayStation to market by several months. For a while, anyway, it would be a pretty close race.
A survey of retailers in early 1996 put Sony, Sega, and Nintendo about neck and neck with around 33% of the market each. After a drop in price, the Saturn was selling fairly well based largely on arcade ports such as Daytona USA and action shooters such as Panzer Dragoon (its three pack in games helped later on as well, when sales began to dwindle). But already the system was (wrongly, for the most part) considered obsolete technology, with the American press helping spread a rumor that the Saturn was created from the ground-up as a 2D system - hand-drawn 2D games already having become passe. In reality the Saturn did lack some of the more advanced 3D hardware features found in Sony's new machine but its raw 3D performance was nearly twice that of the PlayStation - something demonstrated far too late and far too infrequently in titles such as Sega's own Virtua Fighter 2 (almost universally thought of as a technical feat almost impossible on the PlayStation). Coupled with 2D performance that would not be equaled until the Dreamcast's release years later, the Saturn might have had a chance had it not been for Sega's poor marketing and some late decisions to leave high quality Japanese titles such as Grandia and Capcom's "Vs." series of fighting games on Japan's doorstep.
Despite the Saturn's eventual failure in the United States (where it sold somewhere around 3 million units all told), the situation was somewhat different in Japan, and this dichotomy left Sega in an odd situation that would eventually be responsible for their pullout of the hardware business. The Saturn was basically dead in the US by 1997, but it continued to sell well in Japan through most of 1999. Sega wrestled with the question of whether or not to pull the plug on a system that was successful in its home market, or to cut their US losses and start from scratch. In fact, a new system had been on the drawing board for quite some time, with competing designs from the company's American and Japanese divisions. Code named Black Belt and Katana, respectively, it was the Katana that would eventually win out - spurring a debate that would rage on to this day. Would the American-designed, 3Dfx partnered Black Belt have led to better third party developer support? Was the Katana more powerful? In the end it probably didn't matter - Sega's biggest problem was timing. In 1998 Sega released the Dreamcast - the renamed Katana - to Japanese retailers, discontinuing all support of the Saturn by the end of 1999. American gamers would have to wait almost a full year for the new system, where it was launched in September of 1999 to generally good sales and positive reviews.
But in an odd twist, it would be a case of too little, too soon. Sega's hand was forced by the early demise of the Saturn, allowing its competitors more time to develop more powerful machines while still exploiting existing consoles. The Dreamcast was far more powerful than either the PlayStation or N64, but it did not quite measure up to the later PlayStation 2. It also did not have the third-party developer support of Sony's systems, and while its first-party stable of games grew to be one of the best on any platform, the deck was stacked against it from the start. While the competition was tough, Sega's own earlier bumbling didn't help - many developers and consumers stayed away from any system carrying the Sega name (Electronic Arts being the highest profile example). With the release of the PS2 in 2000, Sega simply couldn't afford to bleed funds any longer, and finally announced they'd be pulling out of the hardware business for good. The company is currently in the process of becoming a third party developer for all major hardware manufacturers - including former rivals Nintendo and Sony. Their arcade business will be maintained.