Maybe he means that if Nintendo won then we might not have a "big three" now.

He refers to the "expansion" of the industry, but I hardly think an N64 victory using CDs would have somehow crippled the growth of the industry. Third parties would still have made the games they wanted to make, they just may not necessarily have been on the same platforms.

Sony not dominating the 5th gen would've stunted the growth of the industry IMO. They took gaming to a whole 'nother level Nintendo wouldn't have IMO. 

I really don't see anything about gaming on the PS1 that a CD-equipped N64 couldn't have delivered. Also bear in mind PS1 would've still been there, it just wouldn't have had a near-monopoly.

It costs billions to design a monolithic CPU/GPU these days, cost which became untenable after the 6th gen... Nintendo, Sony etc' will likely never go back to custom designed chips for their consoles ever again.

Fact is, consoles need PC technology as it's cheaper, already designed and allows a faster time-to-market...
Not to mention AMD, Intel and nVidia spend billions in R&D every year and leverage the latest manufacturing from TSMC, Samsung, Global Foundries etc' to have the best possible performance, it's difficult for other companies to keep pace with their cadence.

And that is before we touch on the issue of game development costs, leveraging commodity components means it is easier for developers to come to terms with the hardware, reducing development time and costs for games.

You are mistaken.
The Nintendo 64 dropped in 1996. (1997 in many other parts of the world)

The PC had 3dfx Voodoo. - And it was propelled by the likes of Resident Evil, Quake 2, Descent II, Tomb Raider and more.
And unlike the Nintendo 64... The PC games weren't a low-res blurry mess of 320x240 like the Nintendo 64... 800x600 was more than possible, which is a higher resolution than some Nintendo Switch games!

And on the CPU side of the equation... You had the Pentium 200MMX which was pretty beastly and it wasn't unusual for PC's to have 32MB or more of Ram... Which is multiples better than the Nintendo 64.
And unlike the PS1, it was all perspective correct... And unlike the Nintendo 64, developers didn't need to rely on garaud shading to make up for a tiny framebuffer.

Games like Turok: The Dinosaur Hunter looked and played better on PC at the time, especially under Glide.
In-fact many N64-PS1 to PC multplats were better on PC like Final Fantasy 7 and 8, Doom, Carmageddon, Duke Nukem, Rainbow Six, Indiana Jones and more.

In short, the PC has always been ahead of the consoles, except in the Audio department where the SNES was pretty damn brutal, but it lost to Soundblaster once that came about.

Graphically there would have been a reduction for the N64 side of the equation, especially in the texturing department as it's less effective to stream textures from a slow CD-Rom verses the N64 cart which was pushing a few hundred megabytes a second... Would still be better than the PS1 of course.

But yeah, there is absolutely nothing the PS1 could have done that a CD-equipped Nintendo 64 couldn't.

N64 with CD would still have the same Nintendo that didn't care about Europe and RotW at the helm. So if you expect that PS1 wouldn't have a signficant lead over N64 then likely the Market wouldn't have reached the size it did, much less when imagining the PS2 gen.

PS1 still would've grown the market in Europe, while Nintendo would've dominated Japan and NA. Same market reach, just less monopolized, IMO.

Could happen, but that would likely put PS1 with a sizeable lead. That is why I said that expecting Nintendo to have massively won the alternate timeline and still see the big growth doesn't seem likely.

While I do think N64 would've won this scenario, I do think PS still would've done quite well, so I'm not coming from the angle of it being a massive curb-stomping win.

I wonder if it was the PS1 that expanded the market or if it was the combination of cheap software, older gamers that never left the hobby (which has been the case every generation), 3D graphics reaching an impressive level, and in that same vein, the leap from 2D to 3D. Maybe Sony was just lucky to be the best system on the market during that historic time.

Unless VR takes off or holograms become real, I can't imagine there ever being a leap like the one from 2D to 3D.