Nintendo had a different relationship with Squaresoft than it did with Capcom and Konami. They funded their games, and also lent them their Mario IP (Super Mario RPG), which was very rare with Nintendo. Their relationship with Square was very unique and their departure from Nintendo was seen as a severe betrayal, especially becoming exclusive to the Playstation and Sony giving them the 1st party treatment, luring them away from Nintendo was a huge betrayal and a very sneaky move by Sony. Such moneyhatting was a new practice at the time, and Sony knew that they were trying to steal the apple of Nintendo's eye. That's why they bent so far backwards to attract them, to give them support and funding, and even celebrated hard with them when FFVII succeeded. All is fair in love and war, but Sony's move was a threat to Nintendo and Nintendo took it as a threat and an insult, and they were right to do it in my point of view.
Also, the N64 didn't release yet when all of this happened, the SNES was still in its lifecycle when Square departed from Nintendo. Square decided to make the jump at the urgency of its engineers and esp. of Sakaguchi, who felt like he couldn't realize his vision on the N64 dev kits vs Playstation dev kits, due to less polygon counts and limited media space. So this is from the SNES time, the N64 was not yet released. All this is described in the article you linked to.
Also, bad is very relative. Nintendo being "bad" is what allowed it to actually resurrect the video game market in America. How was Nintendo bad? It's simple: they limited the amount of games each developer could make to 5 titles per year. They also required exclusive development to their console and put severe pressure on developers to produce games only for Nintendo. They also charged high royalty fees. However all this is what led to Nintendo's platform being viable in the US and even in Japan, due to the overall quality of their games library.
However times were changing and devs needed more freedom and flexibility. Also, the N64 was limiting the creative freedom of the developers. So, what Sony offered was very welcome by developers, even those who had a very strong partnership with Nintendo. In the end, some developers were very angry at Nintendo for their business practices, but history shows that what Nintendo did was not really bad at all. Actually without it you probably wouldn't be a console gamer today.
I agree that Nintendo became a much better company today, mostly thanks to Satoru Iwata's agreeable mentality, and they have a much better relationship with 3rd parties today for sure. But what happened with Square was very much a mistake on Square and on Sony's part. Also, notice that Sony had not played nice with Nintendo when they partnered with them to make the Nintendo Playstation. The history of betrayal is not new between them, there was a pattern, and for some inconspicuous reason, Sony was always involved in the cases of major betrayal. It begs the question, was Sony looking for its own greatness since the begining? We will never really know, but one thing is for sure: when Sony tried to steal royalties and licensing authority from Nintendo on the Nintendo Playstation, and tried to subvert Nintendo, they learned one big lesson, that Nintendo is a king and you don't try to subvert a king. They also started a cycle of betrayal. Thankfully Nintendo being true to its pedigree, was able to survive the devastation that Sony Playstation caused their brand. Not only that, they pushed back Sony in the Portable space, while everyone was predicting Nintendo's extinction. With almost no 3rd party support, Nintendo trudged through the gamecube and game boy eras. This threatened their very existence. Yet with all that, articles and posts like these try to show Nintendo as the enemy, when the moves that Sony did almost brought Nintendo's ruin. But Nintendo was stronger than people thought, and reinvented itself, and rebranded itself, and took the world by storm, a few times. And now they are what they are today due to their awesome resilience.
It makes you see this story from another light I hope.
So in your logic it's Sony fault by inviting them (Square ) to Playstation ??? Also is Sony fault by making CD on Playstation also Nintendo is have a great decision by using cartridge??? Or is Square fault by trying to become innovative with their new FF series???