It's funny, back in the days when it was announced that FF VII will not be released for N64 but instead exclusively go to PS I didn't saw it as a big deal. I knew that the FF-series is big in Japan and has some fans in the US but weren't even published in good old Europe. Just because of that fact I thought the FF-series can't be that big - otherwise, why would you miss the European market? Especially as it wasn't absolutely necessary to translate it - back in those days we were still used in Europe to have English in-game texts (but a translated description in the package - oh man how I miss those). I guess Nintendo saw it likewise and didn't see it as that big of a loss. They thought, FF VII would sell about as much as FF VI, with Sony's marketing power pushing it maybe all little more but no that much more. So, like myself, Nintendo didn't see a danger in losing FF VII.
As far as I know the mindset of old Nintendo, I think even after it was clear that FF VII is a massive hit, Nintendo just shrugged its shoulders and thought we can do our own big RPG IP or let someone else do it for us and we will have publishing rights. It think up to now, Nintendo think of themselves as the best gamer makers, period! No matter which genre - we can counter! That's really much their mindset. Nevertheless, I don't think that games like Mario Kart, Smash Bros, the divers Mario Sports games, Mario Party, etc. are meant as a counter to any other existing IP out there as Nintendo embraces the blue ocean strategy and are more focused on themselves than on what others do. Still, I think Nintendo wants to proof themselves and the gamers that they are the "masters of all genres". Splatoon (online-shooter) and Arms (innovative online-fighting game) are just their newest foray into new genres (they were not known for).
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