Why did the Dreamcast fail?

Most of the information in the previous 2 answers is true, but it is not the core reason. The following isn't my own work, it is copied from an FAQ on www.megagames.com. If you don't understand it, you need to do some researching, but I'll explain a couple of things at the end

"The Sega Dreamcast was released in the USA on Sep 9 1999, the Utopia Boot CD was created by Wildlight of Utopia and was released on Jun 22 2000. It ushered in the age of Dreamcast piracy, with Utopia releasing Dead or Alive 2 and Soul Calibur in the next two days, then Kalisto released Evolution on the 26th and continued to flood the DC scene with games, mastering the art of the self boot and DiscJuggler with their release of Dynamite Cop on Aug 19 2000, until Sept 02 2000, when they called it quits, claiming Sega had offered them stock options to stop releasing DC games (note that their other console groups like the PSX remained and remain in full swing.) Only 2 days afterwards, Echelon released Flag to Flag CART Racing, and quickly filled in the gap left by Kalisto, releasing most of the major games in the scene and going forth with new tools like the Echelon Selfboot Kit. Kalisto came out of hiding on Nov 09 2000 to release the highly anticipated 4-CD Shenmue. Eurasia, Hooligans, Paradox, Paradiso, Drastic, NBC, Accession, CCS, MiniMe, Stone Arts, Infinity, Lightforce, Aphex, R18, Genius, Krema, Ecko, and last but not least, Klone, to name a few, have all provided many quality US and import releases where Echelon may not have had access to the games or interest in releasing them.

The scene was wild and rampant until December when Kalisto and Echelon were expected to release at least one game daily. In January, new releases started coming few and far between, since most of the games that could have been ripped had already been ripped. In mid-February 2001, Sega announced the end of Dreamcast unit production would take place on 31Mar01 citing the loss of hundreds of millions of dollars, and many third party companies scrapped their DC games in development even if they were near completion for more viable platforms, such as the Playstation 2, Nintendo GameCube and Microsoft X-Box. In late March, Sega announced that they were planning on developing Sega games for other platforms, namely the Microsoft X-Box which was a no-brainer since the Dreamcast's inclusion of MS' WinCE. Mar 31 2001 came with a whimper, and the Dreamcast scene continues slowing as the number of slated games decreases..."

As most of you know, the Dreamcast uses a unique type of disk called the GD-ROM. Although CD-ROM drives can't read it, you can connect the Dreamcast to your PC and copy the game like that. Since the GD-ROM holds more than a CD-ROM, games had to be cut down to fit on a CD, but this could be done easily (i.e. removing audio). The Utopia Boot CD is a CD to let you play pirate games on your Dreamcast. Self-boot, is the ability to just put a pirate game in th Dreamcast and play it.

The Dreamcast allowed you to play games on CDs as well as GDs (although the laser wasn't designed for it, and repeated use of CDs can strain the laser). which opened it up to easy piracy.