I heard somewhere - and I don't know if this is true or not, just bear with me - that Sonic Xtreme was way behind development schedule for whatever reasons it was, and Naka wanted the game to be released in time for the holidays, or something to that extent; thus leaving the team absolutely little to no time to iron out the myriad bugs, glitches and problems that plagued it, as well as giving them virtually no time to sort out the boss engine. The chap who wrote this article concluded by saying that, had they done this and released it to the gaming public rather than scrapping the damned thing, it would have been akin to Sonic 06, circa ten years prior.
Anybody like to hazard a guess as to what that would have done to Sega at that relatively early stage, before the rot really began to set in?
Assuming this is true? It's difficult to say. The Sega Saturn was already doing a lot to undermine Sega's image, lack of "mainstream" Sonic game or not.
a. The "best" we can assume is that it would not change much. There was nothing the Saturn could do to help Sega really win back Japan, and Western support was slipping away quickly too, thanks to the encroaching Dreamcast. If marketed correctly (...questionable, given the Sega we know from the last decade), it could have been a thing that Sega pushes the game and all those associated under the bus, a la Nintendo with the Virtual Boy, and keep things moving with the Dreamcast. Perhaps Naka would have pushed his version of Sonic in a different way, if he knew that some things would just not be acceptable.
b. On the other hand, finally getting a mainstream Sonic game, only for it to suck, might have done a lot to possibly kill Sonic off for good. In fact, a lot of what I've been reading on this era showcases that there was a good chance that Sonic could have been phased out entirely (or at least, given the extended vacation that the likes of Shinobi got until well into the PS2 era). If things had worked out differently like say, Bug! and the sequel doing better on the marketplace, it's very likely that Bug! could have been the new Sega hero.