Crazy how this one simple change of format for a single system could potentially have so massively changed the course of gaming over the last two decades. It's like the butterfly effect.

I agree with everything you are saying, but sticking with cartridges wasn't actually the dumbest part.  The dumbest part is that Sony was originally their business partner.  Nintendo brought Sony into the gaming space, so that Sony could develop a CD based system for them.  After Sony develops the hardware, the Nintendo Playstation, Nintendo backs out and partners with Phillips instead to make the CD-i (e.g. Wand of Gamelon, etc...).

Nintendo could have actually had Sony as their partner.  Instead they turned Sony into their competitor.  This was the ultimate self-destruct move.  Nintendo wasn't anti-CD or anything.  They just backed out of their original CD system, the Nintendo Playstation, because they got a better deal from Phillips instead.

That's a little naive, don't you think?  Sure, the wouldn't have been at a disadvantage in terms of media storage.  However, that doesn't do anything to change the fact that Nintendo had the mentality that 3rd party devs/pubs needed them, not that they were in a partnership, which is how Sega and Sony treated it.  Sony still would have snagged plenty of exclusives, which may have still included FF7, and just as many multiplats.

No, I don't think it's naive to say it potentially could have. Obviously we can never know for sure.

It all depends on which story you want to believe. On one side, yes Sony was their partner developing hardware and Sony got betrayed in the deal. On the other hand, peripherals were more often than not failures and Sony stood to potentially make an unfair amount of profits off of the Nintendo name.

Sony was already in the gaming industry but they weren't exactly setting the world on fire with their software. 

Driver 1, GTA precursor on PS1...not sure if it used streaming from CD, but it had big open world.

I don't think it's a simple matter of format, but the business desicions that lead to Nintendo going with CD.

IMO, it would mean they've recognized problems 3rd parties had with them and their draconian policies - and that would be much more important for future relationships and hardware design philosophy, potentially giving us Nintendo that has strong footing in what is current PS/Xbox market...if Xbox even exists in that timeline.

I think N64 would've won. FF7 would've definitely released on the N64, along with a string of third party games that would've most probably gone multiplat (possibly exclusive for Nintendo) as theonly reason they went to Sony was because of how cheap CD's were and how large their file sizes were compared to cartridges.

If you add those to Mario 64, Ocarina of Time, Banjo, Goldeneye, Smash, Mario Kart and a whole bunch of Nintendo titles, that easily could've beat the PS in my opinion

Do you have a source for this side of the story?  I have read more than one book about this topic and I have never heard anything like the bolded statement.

I’m sorry?

Hironobu Sakaguchi

Producer and executive vice president, Square Japan; Chairman and chief executive officer, Square USA

Of course, back then I wasn’t the president of Square. There was a management level above me, and I talked with them to make the decision. But PlayStation games being on CDs was the biggest factor. If you wanted to make a 3D action game on a Nintendo 64 cartridge with that limited space, you could do it. But I wanted to create a 3D role-playing game. It was very clear in my head what I wanted to make, but that would have been difficult on Nintendo’s hardware. …The biggest problem was, of course, memory. Based on our calculations there was no way it could all fit on a ROM cartridge. So our main reason for choosing the PlayStation was really just because it was the only console which would allow us to use CD-ROM media.

Shinichiro Kajitani

Vice president, Square USA

At that time, Square was really close to Nintendo — we were basically like a second party for them. So when their new system was in development, we gave them lots of advice, like, “You’re going to need a CD-ROM drive for it,” “You don’t have enough bandwidth to do what we’re trying to do,” and, “With what you have now, we’re not going to be able to make an RPG.” We gave them lots of advice. But [Nintendo president] Yamauchi-san at Nintendo basically refused to listen to any of it. And that’s when Sakaguchi-san and the management team at Square decided, “OK, we’re going to go with Sony now.”

https://gonintendo.com/stories/289651-square-enix-opens-up-about-trying-to-make-final-fantasy-vii-for-n

What you mention about the SNES CD add-on most likely contributed, considering they were having the same struggle making the games they wanted for Nintendo’s hardware, but there is no denying FF VII was the tipping point. 

You can make conjectures based on what happened with Mana and the SNES-CD, but Sakaguchi and co have been candid about the reasons from the very beginning and their story has always remained the same throughout the years

Yep Nintendo created Playstation... more or less.