Consoles have always been the way for casual gamers to play high end games with out having to buy an expensive PC or using difficult or complicated interfaces.
The problem, culminating last gen and with HD consoles, was the abandonment of this. Why pay 400-600 for a console when you can buy upgrade your home PC with a gaming card and have a better gaming machine anyway?
N64 and PS1, hmm...
If Nintendo had used similar power plus a CD drive it would have been very expensive. PS1 was already too expensive at launch and then didn't gain popularity until a couple price drops and FFVII, along with Twisted Metal, etc. But the price drop and FF made the console in Japan, and helped it in the states. If N64 had had a CD drive maybe Square (which it still was at the time) wouldn't have switched but probably they would have anyway.
About the third parties, yeah Nintendo wasn't in a position to be friendlier. ROMs were expensive and the market at the end of the 16bit era wasn't onesided enough to compensate for piracy. Friendlier and CD would have gone hand in hand.
I would cite regulation, but I know you will simply ignore it.
