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I heard the problem was with how licensing would go on it. Supposedly Sony wanted rights to the Nintendo franchises that was going to be put on the SNES CD, or Playstation. Thus if later it didn't work out Sony would still be able to use the characters. So then Nintendo dropped them without telling and announced Phillips. Then lawsuit for Playstation brand came out when Sony announced it as their entrace into the market and Nintendo lost the lawsuit.

Personally I think Ninty was in the right for the first part but the wrong on the second part. But they should have won the lawsuit for the Playstation brand considering it was their project.