THIS should have been when Sega realized having Sonic tear through a game level as fast as he could was a cool gimmick, but not something to build a multidecade franchise out of. But then again, Sonic games keep selling, so what do I know??
Nintendo did it with a guy that just jump, Namco with a yellow ball that eat dots...
Because it's a simple gameplay doesn't mean it's a wrong idea to make up for it.
The problm with Sonic is that Sega Japan and Sega of America wanted the character to evolve in different directions. The Japanese one was and still is a cheerful and cocky character, but for SOA, in the good olde "true heroes are badasses" fashion that plague US gaming, Sonic went from cocky to arrogant.
Those disputes over just everything it parlty what lead Sega to vanish from the market - they were unable to have a coherent publishing and release plan between their largerst/more profitable market (and they forgot to listen to their most faithful market - Europe).
Sonic R is a prime example - Nintendo had a Rally game, so Sega had to have a rally game, no matter what... and doesn't matter if the gameplay blows, as long as it has Sonic, it's racing and include stuff from the classic games : it's what everyone wants right?