While console wars will continue on, Nintendo was once king of mighty mountain of anything considered video games (home or portable - even though Nintendo will finally be challenged on latter with Sony's PSP in 2005). But, Nintendo has gone from #1 in market share, down to #3. Nintendo now lives by these words: be careful of whom you tick off, because one day they may be your competitor. You will understand why by end of this article.
Back in days of NES, Sega's Master System could not even put up a fight against Nintendo's original 8-bit behemoth that sold over 60 million units. Then, Super NES (SNES) was released, but was not dominant early on. Sega released 16-bit Sega Genesis (1989) two years before SNES and had a jumpstart in entertaining 16-bit console war. Sega still lacked that one title that everyone had to own until Sonic The Hedgehog was born (1991).
Sega realized a flaw in SNES processor - it was too slow. Sega exploited this flaw to public by releasing their Sonic games that displayed a fast moving hedgehog on screen (the Genesis processing power was coined as "blast processing" by Sega). The SNES had plenty of games that displayed too many moving sprites onscreen and game would actually slowdown because processor could not keep up with onscreen action.
However, in end, Nintendo prevailed due to its many new franchises it created on SNES (Super Mario Kart, Star Fox, F-Zero) and killer sequels (The Legend Of Zelda: A Link To The Past, Super Metroid, Super Mario World). Sega stopped supporting Genesis with quality games in late stages of its life cycle leading to death of console. Nintendo sold 49 million Super Nintendo consoles initially losing a big chunk of its market share when Genesis was first introduced, but Nintendo still managed to retain a 60% market share after 16-bit console war was over (and selling twice as many SNES consoles as Genesis).
When Genesis was popular, Sega saw opportunity to incorporate CD gameplay by introducing Sega CD peripheral attachment for Genesis. But lack of any quality games made most gamers stay way from CD add-on. Nintendo, however, saw a threat when news broke of a Genesis CD peripheral, and since Nintendo had no experience with CD consoles, they enlisted help of Sony (ah, plot thickens).
Nintendo is king of cartridge-based consoles, but Sony had resources to create CD add-on for SNES that was ironically named Playstation. After months of working, eventually two companies split. Both were in disagreement about final specs of system and how profits would be divided.
Sony was already a major consumer electronics leader with their Walkmans, TVs, VCRs, stereos, etc. and now figured they could try their hand at video game business. Since Sony invested so many hours of labor and money into this CD machine, they decided to make it a full-fledged stand alone console with their specs and would then be able to keep all of profits. The Sony Playstation was born (and eventually becoming more popular than Sony's Walkman).
Sony jumped to CD gameplay and Sega followed suit with Sega Saturn, but Nintendo opted to stay with cartridge format for one more generation. By doing so, Nintendo alienated many game publishers - none more important than Square Enix (best known for their Final Fantasy RPG franchise). Square Enix (and many other publishers) decided that disk gameplay was future and left Nintendo's cozy camp to partner with Sony (and enjoy Sony's lower licensing fees).