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But there was no legal reason why Nintendo couldn't do CDs. There's really no good reason beyond whatever problems they perceived with the format, how they perceived the market, and how they perceived their place in said market. We''ll never get an exact reason why, but we can assume that Nintendo just saw the issues Sega had with the Sega CD, looked at how how their second partner in Phillips had issues with their system gaining traction, and proceeded to say "Screw this noise, the SNES has carts and is doing gangbusters. Let's stick with the format and forget about discs. We'll still be the king." Heck, if the deal with Sony legally meant they weren't allowed to pursue anything close to the format until the GCN on their own, then we would surely have learned of a lawsuit when Nintendo went to Phillips for a second shot. (Honestly, the entire debacle should have had more legal battles going on outside Nintendo suing over the name of Sony's console. I wonder why that is.)
And even ignoring all that, the fact still remains that Nintendo lost Squaresoft and, in turn, a large amount of RPGs due to not using the disc format. Context doesn't really matter in that regard.