Sony and Namco did it better mainly because they designed an arcade spec that took the limitations of home 3D into account and went from there, rather than building a super-powerful arcade board (for the time) and then needing to pare down a lot of features to get it running on a 3D console from the decade.
If Sega took more of a Neo-Geo approach, made a 5th-gen system that was literally a home Model 2, then maybe that could've worked better. Which is what I guess
is getting at by suggesting a Sega-branded M2 for 1996, which would've been even more market-friendly MSRP wise than the Neo-Geo AES was for its time.
actually the issue, and the industry didn't shift nearly as far from arcade-style games as some might think. The vast majority of PS1's early content (1994-late 1997) were very
arcade-style games in terms of their game design, or in other cases being literal arcade ports. Tekken, Ridge Racer, Destruction Derby, Twisted Metal, Loaded, Jumping Flash, Motor Toon, Crash Bandicoot, Parappa etc. These were all games that either had actual arcade ports, or a lot of arcade game design sensibilities (lives systems, simple controls, very flashy gameplay etc.). A game like Destruction Derby for example, would've worked perfectly as an arcade release with just a few simple design tweaks here and there. You of course had the Resident Evils and Tomb Raiders, and various JRPGs etc. but those were exceptions. Or at the very least, didn't overpower its library compared to the arcade-style games that were present.
The shift to more cinematic games leading PS1 AAA more or less began with Final Fantasy VII and Gran Turismo, then in 1998 you got a ton of those kind of games like RE2, Parasite Eve, Xenogears, MGS etc. Those started taking over more as the marquee big AAA releases, but even then you still had arcade games like Tekken 3 in the mix, too. Sega's issue in the mid '90s with their ports to Saturn wasn't that they were arcade games, it was that they had VERY little additional home-exclusive content.
Just compare the Saturn port of VF2 to the PS1 version of Tekken 2. The former didn't have a lot of extra content, in fact the CG videos were put out as their own separate discs that only came to Japan. Why were they not included in the game directly, especially when those CG discs offered at least some element of story and characterization to the fighters? Meanwhile, Tekken 2 had a good deal of extra content, including IIRC some home-exclusive characters, and Tekken 3 took all of that to the next level.
Even early Namco PS1 ports of Ridge Racer and Cyber Sled offered a few extra bonuses, whereas with a lot of Sega's arcade ports to Saturn you were lucky to get remixed OSTs usually. I think some of them did a 'Saturn Mode' but it wasn't the majority, and the one arcade port that got a bevy of extra content, the Saturn version of Virtua Racing, was done by Time Warner!
I think Sega were of the impression simply getting home ports of the arcade games that matched or mostly matched up well visually was enough, and maybe it would've been if other companies like Namco and Midway didn't routinely pump in a ton of extra content for the home ports of their arcade games. But since they did
, that made Sega's offerings seem anemic by comparison even if often times Sega's stuff had better gameplay.
Speaking of which, none of Sega's arcade games from that period, IMO, were designed as quarter-munchers. I think that's an unfair label applied to arcade games in general; while some definitely were designed that way, the truth is quite a lot had real skill to them and if you mastered the game mechanics, you could reliably beat them on probably a couple of dollars, if not less. There are tons of shmups for example designed to be beaten on a single credit, if you have the skill to do so. A lot of Sega's arcade games, especially from the '90s, are designed with a fair difficulty level, and if you're at least somewhat decent in them, you can generally beat them without feeding a metric ton of credits into them.
And they also had a lot of depth, there were tournaments for Daytona USA for example. In fact, you can find video for them on Youtube. However, they're all in Japanese as that's where the tournaments were held, but it's pretty fascinating stuff. You simply can't have that for games if they're supposedly shallow on the gameplay front.
The Dreamcast was a lot more than just a beefed up N64 spec-wise, that's selling it short. It still had hardware advantages over the PS2, such as more VRAM, better color depth (tho that might've been due to using better video out), and on average better textures (it's not until 2003 or so where it feels PS2 games start regularly providing texture quality on par with Dreamcast). There are a few other advantages as well but I'd have to look them up.
PS2 was absolutely overhyped in terms of its technical capabilities, and while part of that was due to Sony another part was due to the media of the time TBH. Of course it did have absolute advantages over Dreamcast in a few very important areas (geometry rate, lighting, pure 3D math calculations etc.), and even over the Xbox and Gamecube (particle fillrate, mainly, partly due to the insane width of its memory bus, it was 2560-bit or something like that...that's wider than some HBM configurations today just for reference).
But structurally speaking there were no games on PS2 that Dreamcast would not have been able to do, some downscaling in certain graphical areas (and maybe increases in a few other areas) nothwithstanding. TBH the only system I feel you can reliably say had games that couldn't be (relatively) easily done on other systems that gen was the Xbox, just due to its built-in features like broadband ethernet and the HDD. A Blinx, for example, you literally could not do a game like that on the Dreamcast, Gamecube or PS2 due to its use of the HDD (and if you wanted to try on the PS2, you'd need the HDD expansion, which I'm not even sure came to market. I know the Network adopter did).