Back in 1988, Nintendo inked a deal with Sony to produce a disc-based console tentatively titled the "Play Station" (two words). Sony and Philips jointly created the CD-ROM format, which boasted greater capabilities and (at the time) better anti-piracy measures than floppies or cartridges. (Sony also designed the SPC700 sound chip which is found in the SNES.)
A Play Station console was shown at trade shows in 1991, and while it was originally envisioned as a way to play CDs on the SNES, a deal was struck in 1992 to have Sony's console sport a slot for SNES cartridges (with Nintendo keeping full ownership and most of the profits from said carts).
Everything quickly fell apart when Hiroshi Yamauchi, the then-president of Nintendo realized the contract's wording let Sony have full ownership and profits over the console's games, which Mr. Yamauchi felt was an insult to Nintendo. The company terminated the contract and forged a partnership with Philips without telling them while Sony rebuilt the project from scratch, dropping the cartridge slot and creating the CD-ROM-only PlayStation (now one word)... but not before turning to Sega first.
After their partnership with Nintendo crumbled, Sony approached Sega of America and proposed a deal for Sega to assist their developer Sony Imagesoft on developing games on optical discs. Sega of America, who also thought that disc-based consoles were the future of gaming but were having trouble developing their own disc-based add-on for the Sega Genesis at the time, accepted the deal while also convincing Sony that the two finance Digital Pictures on the basis that Digital Pictures had made the most progress on programming games on discs (both Sony and Sega would eventually each publish three games from Digital Pictures), which Sony funded through it's Sony Imagesoft software publishing arm. This led to a close relationship between the two parties, with Sony even assisting Sega on development of the Sega CD for a while and the two drawing up specifications of a disc-based hardware system.
This ultimately culminated in Sony proposing to Sega of America a optical disc-based console jointly marketed by the two companies, with Sega and Sony sharing the losses made by the console-"the Sega/Sony hardware system". Sega of America loved this idea and pitched it to Sega of Japan for their approval, only for it to get shot down as the head of Sega of Japan was unwilling to believe Sony was capable of developing hardware or software for video gamesnote . This led to the relationship between Sony and Sega breaking down and the two going their separate ways, with Sony continuing the "PlayStation" project by themselves. Sega did eventually create their own disc-based console in the form of the Sega Saturn, but it was plagued by a series of problems that turned it into an unpopular platform for both developers and consumers. Sega's role in this is by far the least-known part of the whole affair.
It should be noted that Nintendo's moves to snub Sony happened behind Sony's backnote , with Sony and Ken Kuratagi not being informed of the termination until the last minute, at the CES, and in publicnote . Sony's then CEO took the insult to heart and reacted accordingly (especially since Nintendo snubbed Sony, a fellow Japanese conglomerate, for Philips, a "gaijin", which in the eyes of Japanese businessmen, is as blasphemous as it gets) and thus started to find ways to get even with Nintendo, first trying to partner with Sega, and failing that, giving Kuratagi and the other engineers the ultimatum to build their own console. Sega of Japan looking down on them only making Sony's CEO more determined then ever to push out a console.
Nintendo later terminated its contract with Philips, and the latter company created the CDi which featured three games based on the Zelda franchise and one based on the Super Mario Bros. franchise (another two were planned, one based on Super Mario World and another called Mario Takes America, but didn't get very far). These games were all reviled (although it's almost always the low-quality animated cinematics of Hotel Mario, Link: The Faces of Evil, and Zelda: The Wand of Gamelon that draw the ire...or the mockery), and are best left unmentioned in discussions about their parent franchises.
Before going at it on their own, Sony, after the Sega fallout, did reconvene with Nintendo one last time, co-creating an updated prototype of the joint system to be, this time agreeing to let Nintendo retain all game software royalties as they desired. However, like the partnership before, this was not to last. Wanting control of their own destiny, Sony emancipated themselves once and for all and with their newfound technical expertise, they created the Playstation, which would launch at the end of 1994 in Japan and steadily change gaming history.
During this situation, Squaresoft known these days as Square Enix was becoming increasingly frustrated with with what they saw as draconian censorship policies by Nintendo, publishing restrictions, and refusal to move away from cartridge media (which, at the time, had far less storage space than CD-ROMs). Their first planned CD-ROM title, Secret of Mana, suffered massive cuts in its transition to a cartridge title. Squaresoft then Nintendo's most popular third-party development studio eventually signed a contract with Sony, which eventually published the PlayStation's Killer App: Final Fantasy VII.
In other words, Nintendo and Sega indirectly created one of their greatest rivals. A rival that actually killed Sega as a console developer, forcing them into making third-party games. Nintendo fared rather better; while they got thoroughly trounced in home console sales by Sony for a decade before making their big comeback with the Wii (after which, they lost it all again), they've continued to keep a stranglehold on the portable gaming market that both of Sony's attempts have failed to make a dent in. It's really hard to say how much of this could have been avoided though: give or take any slights, Sony had exhibited a devious knack for leveraging their own tech to gain a foothold into the industry while absorbing knowledge of whatever tech they got their hands on from their future competitors. Regardless of the royalty fees, they had every intention of producing their own consoles based on the standard (think the JVC Wondermega based on the Sega CD) had the CD-ROM console materialized which would have been pure profit for Sony. So either way, Sony had already entered the game market. The fumbles of their rivals had simply accelerated their rise to dominance.
Nintendo's next system, the Nintendo 64, was the only cartridge-based system of its era. Nintendo's decision to stick with cartridges when other systems had moved on to a CD-based format was boneheaded, but this isn't the place to discuss that. Nintendo's home systems would ultimately upgrade to discs, but the Nintendo GameCube's discs were half-size (80mm) and weren't quite mini-DVD, while the Wii discs aren't quite DVD either and the Wii U is said to use a proprietary format which isn't Blu-Ray. In an interesting turn, the company's most recent console (the Nintendo Switch) had the company return to using cartridges due to the system's dual nature as a home and portable gaming device.
As an aside, the company who was really scared of all this was Atari, whose Jaguar console wasn't doing too well against the SNES and Sega Genesis (despite technically being the technologically-superior system). Then-CEO Sam Tramiel began idiotically boasting about how the Jaguar was better than both the PlayStation and Sega Saturn, neither of which had been released at the time, and threatened to take Sony to court if it sold the PlayStation for less than $500; Sony did ($300)...and Tramiel didn't. Atari's foray into the CD format via an add-on for the Jaguar didn't help matters, as only 15 games were made for it (none of which were very good) and it was really badly designednote .
As another aside: an enterprising emulator developer, byuu, took it upon themselves to create a "What If" situation as to what this CD-ROM add-on could've been capable of. To that end, the MSU-1 enhancement chip was created with media streaming capabilities and a storage capacity of 4GBytes, well above any official game ever released. There's currently one game that uses it: Super Road Blaster, a homebrew SNES port of the Sega CD game Road Blaster (size 512MBytes). If nothing else, it's worth watching a true CD-quality game running on an actual SNES (albeit with a modern flash cart with a built-in MSU-1).
A true SNES CD-ROM prototype unit (as shown on the page image, possibly the last of its type, as both Nintendo and Sony ordered the prototypes, numbering 200, destroyed) was discovered in 2015, and the owner has given several interested parties the right to do a teardown and reassembly. Originally wanting to auction it off after the ordeal, they changed their minds and decided not to sell it after all. Information obtained from the teardown has been scrutinized by various parties. The owners of the prototype had also brought the console to renowned console modder Ben Heck, who is working to fix it up (including, yes, making the CD-ROM drive work), and is documenting the repair on The Ben Heck Show no less. Based on Ben's findings, the SNES CD-ROM was no more powerful than a standalone Super Nintendo, with most people assuming that the system's actual "oomph" would've been built into a special cartridge called the SuperDisc, which likely would've been included with the SNES CD-ROM; the ROM for this cartridge and the CD-ROM portion of the device was dumped in 2016, giving the people a good idea how the SNES CD-ROM could have worked in action.
While the prototype ROM cartridge lacked any co-processors thus rendering the system no more powerful than a stock SNES with the exception of the abundance of storage space, it would also be reasonable to think that cartridges with additional co-processors onboard are planned, creating yet more sales revenue for Nintendo as users would be forced to buy additional cartridges not only to save games, but certain games would also require cartridges with co-processors on them.
Just days after said dump become available, and thanks to information gleaned from the prototype, most emulators have implemented SNES CD-ROM emulation and a slew of homebrews have been made. In the meantime, repair of the real deal is ongoing (when Ben started with the console, there isn't sound at all. The latest fix saw Ben getting the CD-ROM drive working again), with Ben hoping to get the console to boot a homebrew game off a CD for real eventually.
Which happened on the late afternoon of the 5th of April 2017, during the second livestream of the repair of the console. With everything done and put back together, the console booted Martin Korth's Magic Floor demo, from disc, for real. Except it turns out that the emulators got their assumptions wrong and failed to emulate the real deal correctly, and the game glitches out. Still, seeing it run on the real hardware's quite the magnificent sight. On the other hand, the highly acclaimed Super Boss Gaiden doesn't run at all. Ben is working with the writer of the game to work out what needs to be changed to make said game boot from disc and work without glitching. Without doubt, information gleaned during this endeavor will be of help to emulator developers, to bring their emulators closer to the real thing, and homebrewers, who dream of making games that actually run on the real deal.