I would make the argument that Sega knew that.
Yes, but it was already too little too late. Financially speaking, they couldn't sustain themselves.
Dreamcast did suffer from lack of software at launch, but by the time PS2 hit they were in full sprint. I think the biggest thing lacking was third party support outside of Capcom.
Ubisoft & Capcom were huge for the Dreamcast, but yes, they lacked a lot of big 3rd party support. Squaresoft and EA were big companies and they brought zero software to the Dreamcast, there was no way it would survive without them.
I might be wrong, but I think Sony had marketing and DVD and they would have won any way history could have played out.
Marketing was certainly behind them and yeah, i believe they oversold the PS2.
I think Sega were trying to pull away from the arcade games on the Dreamcast, but time and money was against them and others were in a better position.
I agree, but as i mentioned it was too late. Shenmue is a prime example of Sega trying to pull away from arcades and trying to offer a more cinematic and longer gaming experience. But the game ultimately was too expensive to develop, costing upwards of $50mil, which again brings me back to Sega's inept business practices. Anyone with common sense would know that there was no way they would be making any profit on developing a game like that, period.