It was a dead market. Everyone wanted 3D because that’s what they saw at the arcades so that’s where Sega’s developers were already skilled at. Plus that’s what was already appearing on PCs.

I'm curious if that was the whole story. Arcades were clearly a major factor in steering customer preferences, but nowhere near a complete lock on it.

Home consoles and computers had already established a huge range of gaming experiences that are not viable in the arcades. (RPGs, strategy games, more sophisticated sports games-- anything where the mean game time is more than a couple minutes)

I wonder if Sega could have leaned into the strengths of 2D hardware by capturing lucrative, well-known franchises rather than rushing to make something 3D. In retrospect, a lot of the early 3D games were sort of forgettable, and aged poorly?

If they could have said "we wooed Square, and the next two Dragon Quest and Final Fantasy games exclusive", the Saturn would have sold several million units regardless of hardware.

Most probably. Even with the best 2D games, the playstation would have wiped the competition even faster if left alone on the 3D market.