Also, and again only from vague memory, wasn't the dreamcast itself underselling drastically. If it was game sales that broke the manufacturer then maybe - but I recall the console itself being a bit of a flop?
Does it matter? You only need a few people to download and burn the CDs, and sell them in stalls or out of a backpack. From what I remember from that era, physical distribution of warez through burned CDs was very common.
One active netizen with a CD writer was enough for an entire school :-).
I don't know what impact this had over sales. Back then (~2001, 2002) I knew people who bought a Dreamcast precisely because they could get cheap games.
As I remember from my high school days, there were lots of people who were downloading ISOs (i.e. in their work or university, where they had access to fat 1Mb/s pipes), burning them and selling at a significant profit. Of course it was illegal, but still they managed to sell them through their friends or from improvised stalls on the weekend computer market, etc.
I certainly don't think piracy killed the Dreamcast, it was a lot of built up 'bad will' by Sega and lousy execution. Third parties didn't want to develop for Sega, because Sega was flaky. I remember I had the broadband adapter for the Dreamcast, but it was only supported by one game(Quake). If I wanted to play NBA2K or NFL2K online I'd have to physically remove the ethernet adapter and plugin the dialup modem. Those games would have been great over ethernet, but as it was dialup online play had its share of frustrations. I had a Genesis, a Saturn, Master System and Game Gear before the Dreamcast but I think if Sega came out with another system after Dreamcast I may have had to bolt the company, they were the epitome of 'overpromising and underdelivering,' piracy gave them an excuse to focus in on the things they were better at (not selling consoles).
