According to Nikkei Shinbun, Microsoft will join the race in the console-gaming industry independent of Sega's help, despite recently published rumors that stated otherwise. The reason behind the decision, which apparently was made late last night by Sega, is mostly due to a negotiations breakdown with Microsoft on the night of March 6. According to the article, the royalties for the Windows OS and the cost to make the X-Box compatible with Sega's Dreamcast were factors in Sega's decision.
The deal is not entirely off, however, as Sega may possibly be manufacturing an OEM X-Box for Microsoft in the future. Microsoft has now decided to prioritize X-Box development by seeking Japanese developers and publishers directly. Without Sega's support for the X-Box, however, Japanese game companies might be a bit ambivalent about jumping on the X-Box bandwagon.