In their defense, Model 1 was quite expensive in 1993. SEGA did think 3D was the future, just in arcades where they could sell expensive boards and cabinets for some nice profits, and back then their margins in arcades were really good. They did fail to foresee the home console market take to 3d graphics the way it did with the unveiling of the Playstation. We all know the last ditch efforts of putting in a second SH-2 core just to be able to compete. SEGA itself was best when it came to the Saturn and damn did NiGHTS and Panzer Dragoon Orta, Sega Rally etc. look really nice for the time.
Yeah, between the lack of cache memory for the CPUs, non-existent libraries/tools, and better/easier options out there (PSone), I'm not surprised with the development issues on the saturn. I'm not even sure how the VDP chips measured up for 3D rendering outside of missing support for even the most basic 3D effects.
Like you mentioned though, there were still plenty of great looking games on the system though. VF2, Last Bronx, Nights, Sonic Jam's 3D level, Scorcher, Panzer Dragoon Trilogy, Fighters Megamix, Burning Rangers, Burning Rangers, Duke 3D, PowerSlave, Quake, Daytona CE, Sonic R, Virtua Cop 2, Shenmue demo, and plenty other games proved that good looking 3D could be done with the saturn.
The one thing I wish SEGA did back then is make Fighters Megamix high res like Virtua Fighter 2 was.
I imagine it was easier to just use the Fighting Vipers engine for Fighters Megamix instead of remodeling all of the Viper characters in high res.
If you really wanted to add more silicon to the DC then it might have been best to play to the system's strengths and increase the video ram and have games awash with high res textures and bump mapping (making sure to develop tools to help people use it). Try and overload scenes with detail that way - you'd never be able to match the PS2's poly counts and vertex lighting ability, but so much of what makes a game look good or look detailed is related to texturing and texturing effects that you'd still stand a good chance of being able to make stuff that looked equally impressive.
If only the DC launched with the Naomi-2 board specs, then I wonder how well it would have stacked up with the PS2