Thunderstone: The fact that they would need to downsize shows that whatever they are doing now isn't working. They need do something fresh and different to give new life to their brand. Clearly making Sonic game after sonic isn't working.
StingingVelvet: Oh that's true. I just don't think a big budget Vectorman is the answer either.
They should have focused on the Wii early and made more classic style games for that starving market. Maybe Vectorman and the rest could have played a part there. It's too late for that though, so what do they do now? I would guess they will start focusing on downloadables and smaller titles, which could be a good way to bring your faves back if they see it as profitable. They haven't so far though.
In short they didn't respond to a changing market well at all and are getting left behind. That's business.
I wasn't necessarily thinking it would have to be a big budget games either (although their track record for advertising anything outside of Sonic is pretty shoddy anyways). What they need to do is experiment more, see what works see what doesn't. Or more importantly a change in leadership.
I consider Sega a lost cause at this point. They haven't shown much foresight before, as mentioned in my last post, and I doubt they will start doing so now.