Seems like this fell through and a limited variation of this was done instead for the Dreamcast. Of course with the Xbox being planned and designed in 1998 and approved in 1999 I think MS just decided to do the minimum for the Dreamcast and never had much faith in Sega from the start.
This goes double since this deal fell through BEFORE the Saturn launch so Sega screwing up its marketshare and mindshare wasn't a factor yet. Something must have went wrong for MS to drop this deal with the Saturn. Maybe Microsoft saw the PS1 early or Microsoft had difficulty managing the inside turmoil between SOA and SOJ.
Of course the fact that the console still would have been $400 MSRP with this addition makes me wonder. Sega had reacted to the PS1 by making adjustments to the Saturn as this deal was falling through, and the price cut they had to make to compete from the original $400 lost Sega money on hardware, so if the deal did go through could they still keep the price of the Saturn below $450 as promised?
But it really does bring up the question in how much Microsoft put faith in, if any, In Sega, or they just considered it a side-deal that brought in some revenue and never really expected Sega to go anywhere after the Genesis. Dropping this deal early and then approving the Xbox before the DC worldwide release and not too long after the Japanese release is interesting.