Nintendo accepted the deal, and then single side decided to terminate the contract. So they were fully at fault.

A lot of these policies were products of the NES era, were strictly for the US market, were implemented as a backlash against the market conditions that destroyed the American video game market in 1983, and most of them were rolled back by the time the SNES hit the market, such as the five game limit. More policies still were rolled back or ended as the 16-bit generation went on. Konami disbanded Ultra Games in 1991 because they no longer needed to go through a shell corporation to release more than 5 games a year. And within a few years, publishers and developers were complaining about Sony's licensing restrictions.

The fact that they were rolled back doesn't erase the damage done nor the unsatisfaction that devs had with it. They had to do a lot of work around to go to Sega and they did because they weren't satisfied with what they had under Nintend. What licensing restrictions they were complaining under Sony? Haven't seem it, would like to read.

Sega also had multiple failed consoles. Sega NEVER had a successful console in Japan. The Mega Drive came in third to the Super Famicom and PC Engine in the 16-bit era in Japan. The Saturn ran neck-and-neck with the N64. The Master System didn't even really register in Japan. And console add-ons have likewise never successful save for cheap ones like the Super Game Boy. The Saturn was an underpowered train wreck of a console that was technically incapable of 3-D, developers had to manipulate sprites to create 3-D on it. There's an interview with the producers of Panzer Dragoon Saga that explains all that.

Not sure what you want on the multiple failed consoles, Nintendo had their share as well. Virtuaboy, N64, GC, WiiU....

Ease of development is a huge thing. Game developers would rather spend time and money fleshing out a game rather than fighting with a console's architecture just to make it do what you want. 

From what we know Sony consoles until PS4 wasn't exactly an easy development marvel as well, still didn't prevent games from releasing. So not sure the point.

Why would developers jump ship from Nintendo to a company that had a long track record of failure? Sony offered them the space they wanted without Sega's baggage or the Saturn's bizarre architecture.  

They had already jumped ship during Genesis, and some more on Saturn. But sure Sony offered something better so they gone in more intensity there.

You underestimate just how huge of a value proposition CD-ROMs were. They offered 80 times the storage of a cartridge at pennies on the dollar. Furthermore, you could use as many discs as you needed for a single game with minimal increase in manufacturing costs. I guarantee you that far outweighs any hurt fee-fees over Nintendo's policies. Had Nintendo had CD-ROMs, their track record of dominance in video games would have made them the clear first choice, especially with the loyal backing of Square and Enix.

Sony had sold 100M PS1 and was set to do more than that on PS2, didn't prevent a lot of games to launch on Xbox and even some exclusives on GC. So dominating the market don't assure anything (even more when change of gen is coming).

Square did everything they could to stay with N64 and only left when it became clear that the N64 didn't have what they wanted for FFVII, namely the storage necessary to contain a huge game and the cinematic FMV scenes. FMV is extremely space-intensive. They specifically cited storage space as the issue. They weren't "under the lash" at all. Nintendo actually treated them very well given their role in the success of the Super Famicom. 

They listed as the major reason, not the sole reason. Interviews were given in this thread. And they treated Square and Enix so well that they listened to 0 of the requests and FF or DQ weren't the sole games that both companies forfeit on N64 were they?

Xbox was an American console. Japan is notoriously nationalistic when it comes to cars and electronics, save for outliers like the iPhone. Japanese developers knew this and didn't waste their money on developing for it. The Gamecube did far better than the Xbox in Japan and got far more Japanese games. 

Not sure what the sales of Xbox have to do here, but ok.

NES had no effective competitors in the market. SNES had two major competitors and still smoked both of them. Plus they had the Game Boy, which crushed every competitor it ever had. 

Then Master System done fantastic as a console that didn't exist. SNES didn't smoke anyone, it won against Genesis by very thin margins. If that is smoking a competitor I would like to see the superlative you would use to describe what PS1, PS2 and PS4 have done to Nintendo HW.

Incentives only go so far. Microsoft moneyhatted quite a few Japanese games early in the 360's life to try and boost the system in Japan. After a few games actually turned into financial failures despite Microsoft's money, the developers in question moved them to Wii or PS3, which were more popular, in order to salvage the situation. We almost lost the Tales series for good because of Microsoft moneyhatting Vesperia on 360. 

Sure. Still don't know why do you think that a moneyhat wouldn't have changed FFVII to PS1 even if N64 had a CD-ROM. SE put FF XIII on X360 even though PS was the platform it appeared and sold most from several releases. And even after seeing how little Xbox sold FF they still launched FFXIII-2 and Lightning Returns, FF XIV and FFXV.

I’m sorry?

Hironobu Sakaguchi

Producer and executive vice president, Square Japan; Chairman and chief executive officer, Square USA

Of course, back then I wasn’t the president of Square. There was a management level above me, and I talked with them to make the decision. But PlayStation games being on CDs was the biggest factor. If you wanted to make a 3D action game on a Nintendo 64 cartridge with that limited space, you could do it. But I wanted to create a 3D role-playing game. It was very clear in my head what I wanted to make, but that would have been difficult on Nintendo’s hardware. …The biggest problem was, of course, memory. Based on our calculations there was no way it could all fit on a ROM cartridge. So our main reason for choosing the PlayStation was really just because it was the only console which would allow us to use CD-ROM media.

Shinichiro Kajitani

Vice president, Square USA

At that time, Square was really close to Nintendo — we were basically like a second party for them. So when their new system was in development, we gave them lots of advice, like, “You’re going to need a CD-ROM drive for it,” “You don’t have enough bandwidth to do what we’re trying to do,” and, “With what you have now, we’re not going to be able to make an RPG.” We gave them lots of advice. But [Nintendo president] Yamauchi-san at Nintendo basically refused to listen to any of it. And that’s when Sakaguchi-san and the management team at Square decided, “OK, we’re going to go with Sony now.”

https://gonintendo.com/stories/289651-square-enix-opens-up-about-trying-to-make-final-fantasy-vii-for-n

What you mention about the SNES CD add-on most likely contributed, considering they were having the same struggle making the games they wanted for Nintendo’s hardware, but there is no denying FF VII was the tipping point. 

You can make conjectures based on what happened with Mana and the SNES-CD, but Sakaguchi and co have been candid about the reasons from the very beginning and their story has always remained the same throughout the years

Yeah, no Sony was never the biggest or most powerful brand in electronics not even in Japan Panasonic is still bigger and so is Hitachi.

What policies are those?

There's no evidence that gamers would have jumped ship without the games to incentivize them to do so (games and price are the two biggest factors by far in determining a system's success), and there's no evidence that the big third parties would have jumped ship anyway regardless of format. We have interviews with Square staff where they routinely single out the N64's cartridge format as a reason for switching to the PS1, so we do know that format was the reason why arguably the most important PS1 game came to the PS1 in the first place. Enix almost certainly switched over for the same reason. CDs offered over ten times the capacity of an N64 cartridge at one-tenth the cost, which made them extremely attractive to many established publishers who wanted to make grand adventures (the N64 was not known for its strong selection of JRPGs). Capcom and Konami released games for the Saturn as well as the PS1 before the former tanked in Japan and the latter hit the big time, which is in keeping with their prior behavior of supporting two systems, but their support for the N64 was minimal, again almost certainly due to the expensive, low-capacity cartridge format (both of them released far more games for the GC than they ever did for the N64, even if they weren't putting their biggest and best games on it).

Every bit of evidence accumulated over the past 23 years points to Nintendo's decisions when it comes to hardware design being the reason why they've struggled with third-party support on their home consoles after the 16-bit era.

"Let's us all remember GameCube was disc based and suffered an even worse defeat against PS2, and we can't put the "brand" as a big advantage for PS there since Nintendo had a longer image on the market and much more fans."

The PS2 was riding the momentum of the PS1, while the GameCube was also having to split the remainder of the U.S. market share with Xbox. Oh, and the GC's discs were mini-DVDs with a capacity of only 1.5MB, only a bit over double that of a CD, a third the capacity of a single-layer DVD, and less than 18% the capacity of a double-layer DVD. Many PS2 & Xbox games would not have fit on a single GC disc (even some PS1 games wouldn't have). Few developers were in the habit of splitting games across multiple discs, and nearly all of the relatively small number of multi-disc releases after Gen 5 weren't actually multi-disc games, with the second disc usually being a bonus disc with extra features (though a tiny handful of post-Gen 5 games did have the multiplayer on Disc 2, and FFXIII was a 2-disc release on the 360). Also, a developer that worked on Max Payne cited the GameCube’s lower main RAM (24MB, vs 32MB for the PS2 and 64MB for the Xbox) as a reason for why they didn’t port their game to the system despite releasing it for the PS2 and Xbox, though as far as I'm aware of they were the only ones citing RAM as a concern.

In any case, many of the most popular third-party games in Gen 6 were either PS2 exclusive, or were released on the PS2 & Xbox but not the GameCube. The GC missed out on huge titles like Final Fantasy, Metal Gear, Grand Theft Auto, Kingdom Hearts, and Star Wars: Battlefront. While it wasn't the only factor, the GameCube's format was almost certainly what kept many big-name games off of the system. As a result, while the GameCube did have arguably better third-party support than the N64, it was still inferior to that enjoyed by the Xbox and especially the PS2.

^ whats crazy is that Nintendo hasnt changed.

They still design hardware, around their own wants and needs, and basically ignore 3rd party input (on hardware).