The contract was signed in 1988, even before the Super Famicom was released, so who even knows what was in there. My guess is it was probably a little vague on certain terms.
In hindsight maybe Nintendo should've just let Sony release the stupid thing and let it flop and moved on.
But even still if they had not used CD-ROM for the N64, they would have lost to the Sega Saturn IMO (yes Sega Saturn). Even if you remove Sony, once the Saturn got games like Final Fantasy VII and Metal Gear Solid that couldn't run on an N64, it would've changed the trajectory of Sega's fortunes and put them in the driver seat of the market.
Had Sony, say, released the PlayStation as a moderately unsuccessful SNES addon and then given up on videogames at least for a while, what would have happened... hmm.
Well, I think that in the US the N64 probably would have benefited the most. The N64 did well here as it was, and Sega was a mess at that point for its own reasons and was going to fail unless they dramatically changed things (which is a whole different set of hypotheticals that usually end with Sega giving up on gaming anyway by the '00s because they were a so much smaller company), so yeah, N64 would probably have won the generation outright. Games like FFVII and MGS, even if they had been Saturn games, would probably have released too late to turn that system's trajectory around. It would have sold a lot better than the Saturn did here, but my guess is it'd definitely have been second to N64.
In Japan, yeah, Sega would have benefited a lot. The biggest question would be, had Sony not released the Playstation, would that mean that Square would go to Sega? Square never showed any interest in supporting Sega platforms, after all; Square never released a game for any Sega console as far as I know. Would they have changed that based on really wanting to make games on a CD format? Maybe, yeah, and in that case yes, the Saturn definitely would have won Japan. That would have helped the system a lot in the US too, but I think the early failings here would have hurt it long term. A best case scenario... uh, maybe like the PS3, with early bad failure but later success? The problem is the fifth generation wasn't going to be as long as that one was, though, so you probably would not see a 'PS3 eventually actually outsold X360 worldwide' moment. Worst case scenario would be things going pretty much like how they did, with Sega being flattened.
And here's the wildcard -- would Square have considered going to 3DO instead of Saturn? The 3DO did sell somewhat decently in Japan for a while, after all. Now, by the time Square moved to releasing PS1 games in summer '96 the 3DO was in its last months as a platform with new games releasing so perhaps not, but who knows, maybe. I just checked, the final 3DO game released in Japan in June '96, a few months before Square's first PS1 game that August. Even so though, if Square wanted to continue not supporting Sega ever, 3DO was pretty much the only other option. Maybe they could have tried convincing Panasonic to release the M2 as a console? That would have been pretty interesting if successful. No Playstation would probably have made Panasonic and 3DO much more interested in releasing another console, too, so it's a definite possibility. In fact, given Square's total lack of interest in Sega (I do not have any idea why), this might actually be my guess. Who knows though; maybe they'd have stuck with the N64 despite disliking carts, you never know!
My understanding was that the Saturn had some addition problems.
A Black Falcon Is the history guy for that.
Addition problems? What do you mean?