Nintendo backed out of a partnership with Sony to develop the SNES successor because Sony wanted full branding rights to the console (basically, they wanted Nintendo to become a 1st party developer). Nintendo attempted a deal with Philips to provide the disc dive instead but it never made it through. Nintendo was then forced to keep using cartridges which also made Nintendo late to the generation.
Because the cost of cartridges was high, Nintendo had to charged 3rd parties a very high licensing fee. Sony being able to use CD's was able to charge a very low licensing fee and the cost per disc was also very low. This pushed a lot of 3rd parties into Sony's camp just for the economics of it all.
Many big titles were originally planned for the new Nintendo console but were then moved to the Sony console (the most famous being Final Fantasy VII).
Once Sony (and later MS with buckets of money) grabbed a majority of the 3rd party pie, Nintendo was in a tough position to compete. Keep in mind that both MS and Sony were more than 40 times larger than Nintendo during the late N64 and early GC days.
The rEVOLution is not being televised
