Nintendo really fucked up by not locking in a deal with Sony.
Sony was an unproven colleague at the time, so maybe they saw something they didn't like.
It looks like my memory of the situation was incorrect. Based on what I looked up Nintendo was right to not want the deal, but wrong in not trying to work it out with Sony.
Nintendo backed out primarily because the contract gave Sony excessive control over CD-based games and licensing. Specifically, Sony would receive royalties on all SNES-CD software sales (even Nintendo's own titles), effectively treating Nintendo as a third-party publisher on its own hardware. This threatened Nintendo's strict control over its ecosystem, including software approval and profits—key to their cartridge-based dominance.
Instead of renegotiating openly, Nintendo's president Hiroshi Yamauchi secretly negotiated a better deal with Philips (Sony's rival) and publicly announced it at the 1991 Summer Consumer Electronics Show (CES) in Chicago—just one day after Sony had revealed the partnership. This left Sony humiliated, as prototypes were already built (about 200 "Nintendo PlayStation" units existed, with one auctioned for $360,000 in 2020).
Corporate backstabbing. Yay.