There is no way they could have put a DVD drive and the necessary playback hardware in the Dreamcast and still sold it for a price people would pay in 1998. Standalone DVD players still cost $600-$1,000 back then. The argument should be that Sega launched the Dreamcast too early, but they were in dire straits and needed to replace the Saturn sooner than later. I'm not convinced they had much choice.

I think the PS2's success is a lot more complex than "it was a DVD player and a game console in one". The PS2 also benefitted from the massive amount of momentum built on the PS1, backwards compatibility, a better controller, and much faster hardware.