Problem is, you could pirate every single game on dreamcast. Just get a legit copy of the game (renting, buying and returning, borrow from a friend), and have a CD burner.

Then you could make a 1:1 copy of the game in roughly an hour.

You make it sound trivial. While Sega left a security hole open for games to be loaded from a regular CD, the official games were released on GD-ROMs, a dual-layer CD with a 1.2 GB capacity.

So first off, you couldn't read them completely in a regular CD-ROM or even DVD-ROM drive. (I'm not counting the "swap" method because it's failure-prone and involves partially dismantling the drive and fiddling with it during operation.) You had to connect your console to a computer and use some custom software to read the GD-ROM on the console, and send the data over.

Once you had the data, you then had the problem of trying to fit a potentially 1.2 GB GD-ROM image onto a regular CD-ROM. A handful of games were actually small enough to fit already, and 80-minute and 99-minute CD-Rs would work in the DC and could store larger games. But for many games, crackers had to modify the game files to make them fit.

Often they would just strip all the music first, because that was an easy way to save a decent amount of space. Then if that wasn't enough, they would start stripping video files, and/or re-encoding audio and textures at lower fidelity.

Burning a CD-R from a downloaded file was easy, but ripping the original discs and converting them to a burnable image generally was not.

you could go to your local library and carry a USB stick.

I don't remember it this way. Nothing else came close to the portable storage capacity of CD (and thus CD-R and CD-RW). The iomega zip drive was still a popular medium, allowing rewritable 100mb or 250mb cartridge. That was the preferred way to get big files to and from a computer lab when I was an engineering student in 2000.

USB flash drives had just been released in 2000, and their capacity was measured in like 8/16/32mb, nowhere near enough to meaningfully move CD images.

Then again, as a college student with on-campus broadband on the completely unregulated internet (back when HTTP and the WWW weren't necessarily considered the most important protocols on the internet), it was all about shared FTP logins PMed over IRC to download illegal shit. The good stuff never touched an actual website.

I'm not sure where you're getting that Nintendo sells at a loss. They don't have amazing margins on hardware, but they don't like selling at a loss. IIRC, commodity prices and a price drop meant the GameCube was briefly sold at a loss, but it wasn't long, and it wasn't by much.

Whatever else you can say about Nintendo, they are really good at managing manufacturing costs.

Why did the playstation not have the same piracy problem?

Was probably more likely just that they couldn't afford the initial loss anymore because the lenders or shareholders got scared of the PS2 and xbox when they were announced.