I think there are a few options, but I think it was a combination of things:

1) bad management at Sega by wasting a lot of money on add ons like the 32X and Mega CD.

2) Nintendo screwing Sony, setting Sony onto the path of Playstation.

3) Sony's pricing for the PS1 whilst Sega going higher in price.

4) Sony's huge money hatting 3rd parties.

5) Dreamcast not having a DVD player.

yep.  No room left and they could have done some Gamecube numbers and focused on profits

2) That is false narrative.  Both sides tried to screw each other in SNES CD deal.  Sony tried to get rights of all Nintendo IPs that were released on console.  Of course Nintendo would back out of deal if it meant losing rights to IPs.  Don't try to rewrite history.  

Not trying to rewrite history, that's genuinely the first time I've ever heard of it. Do you have like a StrafeFox video, article or anything so I can read up on it. Thanks :)

Sony, as the announcement, and specifically the overhyping of the graphical capabilities of the PS2 (which were nowhere near that level they hyped it up to during the reveal) took out all the wind of the Dreamcast's sales, which was doing quite well until that point, even having supply issues back then. By the time people realized that the PS2 wasn't as powerful as it was hyped up to, it was already too late to save Sega as a console manufacturer.

Sega first moneyhatted the first Tomb Raider in order to get it earlier than Sony, so I guess Sony wanted to take countermeasures with the second TR so that it wouldn't happen again.

In any case, Sega was dooooomed no matter what.

I think if it had been only Nintendo and Sega, Sega could have recovered and there would have been room for them in the market as one of the big two. But Sony's beast was out of the cage and that was that.

It was mainly over royalties Sony would get all that were produced on the CD format and Nintendo would only get money from hardware sales.   While they eventually renegotiated the deal it eventually fell apart.   Basically both sides were at fault.  There are some articles that simple portray Sony as victim but here are a few articles that go more in depth on what was happening on both sides of the deal.

https://kotaku.com/the-weird-history-of-the-super-nes-cd-rom-nintendos-mo-1828860861

https://en.m.wikipedia.org/wiki/Super_NES_CD-ROM

https://www.trustedreviews.com/opinion/the-story-of-the-snes-playstation-2934807

So even I will admit that I was wrong considering Sony under original agreement wouldn't steal Nintendo IPs but basically Sony would get all the licensing fees for the Super Disc.  I would put the blame more on Nintendo for deal falling through but Sony wasn't innocent either.

What was out of the cage the PS1 first generation consoles overheating or the PS2 laser disc failures?  PS2 had so many failures that the 360 rrod was almost a comprise.

I should have elaborated more on that, because it doesn't absolve Sega in the slightest. It's just that the Dreamcast was their last chance after all their mismanagement, and the loss of sales after the PS2 reveal meant that their business model was doomed, as the Dreamcast couldn't save them anymore.

Also, it's possible that Sega would have gone bust anyway, since the company was bleeding lots of money and the Dreamcast was sold at a loss, so if the software sales wouldn't have gone up quickly, they would have been doomed anyway, the Dreamcast would just have sold better.