Sony wanted to have all rights for merchandising articles, too. This included all Mario and Zelda merchandising. That was too much for Nintendo and so they didn't accept the CD add-on of Sony for the SNES and separated. Then Sony decided to make an own console (PS1).
Nintendo preferred to use cartridges because of the fast start of the games and no loadings. Isn't it great to put a cartridge into a console and immediately start gaming? That's something I miss since optical discs. By the way, no loading screens were also the reason for Nintendo to use mini DVDs for the Gamecube. Everyone sees the disadvantage of less memory capacity and no one the advantage of faster data access...
Just compare the loading time between battles in Final Fantasy VII, VIII and IX on the PS1 with FF IV, V and VI on the SNES (yes, the technical data of the SNES are more comparable with the PlayStation than the N64). Nintendo never wanted to have the best graphics or FMVs – they wanted to have the best gameplay and fun in the games. That's why they prefer fluent frame rate instead of HD graphics.
The success of the PlayStation was not (only) caused by the quality of the games, but everyone had a chip in their PS1 console and copied the discs and so they reached many people. That wasn't possible on the N64. I think Sony wasn't happy about that circumstances, but nevertheless the PS1 was a big success for Sony.
I still don't think it was a failure of Nintendo to prefer cartridges in the gameplay point of view. No one could have forecast the success of the PS1. The Sega Saturn had also discs and had no success.
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