Now for the OP
Since they said they would like a proposal other than Sega completing the games and everything going great, here's a proposal for a possibly Alt-Development:
Sega accepts the deal with Sony
Now that predates the POD(Dreamcast Era) but I think it works if you want something different
Basically with Sega working with Sony to create a "Sega Playstation" the Sonic the Hedgehog franchise would by extension become the mascot of the console much like Crash Bandicoot did IOTL
Now, Crash wouldnt cease to exist, but there wouldnt be any reason to pick him over Sonic when Sega is helping you build your console
So instead of the Adventure Series I would expect Sonic under a partnership with Sony to be more of what Xtreme was going for, with a path of development mimicking that of Crash's own IOTL, at the expense of his franchise
Thus I'd expect something like "Sonic Xtreme, Sonic Xtreme 2: Eggman Strikes Back, Sonic Xtreme 3: Wrath of the Egg, Sonic Twinsanity, Sonic & the Titans " and so on with every Crash & Sonic Post-Genesis games being butterflied away
Thus Sonic remains a prestigious worldwide success and the face of not only Sega but Playstation itself from 1 all the way to the current 5
But at what cost?