The fact that Nintendo owned the cartridge format probably had something to do with it too. As long as companies used cartridges for N64 games they had to pay royalties to Nintendo, but Sony couldn't charge anything for CD's.

Still though the biggest reason, and likely the one that swung the decision at Square when you look at how FFVII turned out was the larger storage. You literally couldn't make that game on a cartridge at the time it came out.