But that's exactly what Nintendo did. Nintendo were so arrogant that they thought people would jump at the chance to develop games for the N64 because they were Nintendo and they were the last word in gaming. While that was partly correct, a lot of developers wanted to develop for the N64 even though Nintendo made it difficult just because they wanted to have a game on the Nintendo, a lot of big name developers like Square, Enix, Capcom, Konami and Namco basically said 'Fuck you' and either went completely Playstation exclusive or put out a very limited catalogue on the N64 compared to what they were developing for Sony. Meanwhile, a lot of those developers who wanted to develop for N64 just to have a game on a Nintendo console released buggy, broken messes, like the infamous Superman 64.
Nintendo figured they could get away with being hostile to third parties because they were Nintendo and Sony was nobody in the console market or the video game industry (and Sega was busy pissing itself and dying). Sony easily undercut them by basically buying their way into the industry. They gave developers bigger production budgets, bigger promotional budgets (Square were able to localise and release FFVII all across Europe with what Sony paid them to make it. Final Fantasy was basically unknown in Europe prior to FFVII's release), they had a platform that was easily develop for, had bigger storage capacity and offer Full Motion Video, something Nintendo was unwilling to offer developers.
Nintendo was humbled, and they lost their market dominance.
It's a little more than that, but to get into it, we need to talk about both their licensing agreements and their deal with Sony, and why Nintendo had to break it.
In the 1980s, Nintendo secured market dominance through signed-in-blood licensing agreements that were so stringent that companies were actively finding ways around the stricter parts of them. This market dominance allowed Nintendo to
utterly strangle out third-party development for their competition (mostly Sega at this point). Sega got around this only a few times, usually with "We Have This At Home" games that were basically their own homebrew versions of other games by other third-party devs (Black Belt and Rambo being prominent SMS examples).
By the time of the 90s, Sega had begun to turn the tables
very effectively by turning Nintendo's restrictive policies against it. Nintendo was infamous for protecting its family-friendly image, so Sega would encourage games towards an older crowd. Nintendo's licenses were ridiculously restrictive, so Sega offered infinitely gentler ones. And this worked: You started to see Sega outright own Nintendo in some angles, which led to Nintendo ditching its infamous nanny policy.
What I'm getting at with the above palaver is that, by the time that the 32-bit era was upon us, Nintendo had burned a fucking
lot of good will, and a large number of the big boys in the pond were champing at the bit to fuck off for greener pastures rather than keep going under the Big N's management, whether because of frustration at Nintendo's more censorious era, restrictive licensing agreements, and so on.
And it is into this horrifying environment that Sony cowboys up and offers a deal to work with Big N.
Nintendo originally contracted Sony for developing a CD-based addon for the Super Famicom, akin to the Sega CD. However, when Sony posted the contract, and Nintendo signed onto it, Nintendo's higher-ups realized, to their horror, that they had been fucked courtesy of a very..... Sony move: the new contract (which Sony had intentionally obscured, being rather infamous for shit like this in Japan) functionally had given Sony the keys to Nintendo's kingdom - as the agreement not only gave Sony complete control over the Super CD format, but exclusive software licensing rights, and profits from non-game media -
functionally turning Nintendo into a second-party publisher for Sony. Anyone familiar with how Sony acted up through the 80s and 90s knows exactly why this was a fucking death sentence for Nintendo if allowed to persist.
Nintendo's solution: Intentionally breach the contract to get out of the deal by subcontracting with Philips. Make no mistake, Nintendo really had no choice
but to go through with this, lest they be effectively devoured by Sony once the deal went through - but in Japan, fucking a Japanese company for the sake of an outsider company (which Philips was) was seen as a particularly vile snub - a snub so bad it led Sony to create the Playstation as retaliation.
When Nintendo embraced the cartridge format of the N64, it did so with the express intention of solidifying control over its own licenses and maintaining the same control over its IPs that it always had. Because Nintendo had pissed off so many though, a lot of the third-party companies jumped ship, either because of frustration with Nintendo's censorious behavior in its early years, frustration with Nintendo's restrictive licensing, top-down managerial approach to absolutely everything, or seeing Nintendo as a filthy contract-breaker who happily broke a massive agreement with Sony for reasons that would only become apparent way later.
