The first conceptions of the PlayStation date back to 1986. Nintendo had been attempting to work with disk technology since the Famicom, but the medium had problems. Its rewritable magnetic nature could be easily erased (thus leading to a lack of durability), and the disks were a piracy danger. Consequently, when details of CDROM/XA (an extension of the CD-ROM format that combines compressed audio, visual and computer data, allowing all to be accessed simultaneously) came out, Nintendo was interested. CDROM/XA was being simultaneously developed by Sony and Philips. Nintendo approached Sony to develop a CD-ROM add-on, tentatively titled the "SNES-CD". A contract was struck, and work began. Nintendo's choice of Sony was due to a prior dealing: Ken Kutaragi, the person who would later be dubbed "The Father of PlayStation," was the individual who had sold Nintendo on using the Sony SPC-700 processor for use as the 8 channel ADPCM sound synthesis set in the Super Famicom/SNES console through an impressive demonstration of the processor's capabilities.
Sony also planned to develop another, Nintendo compatible, Sony-branded console, but one which would be more of a home entertainment system playing both Super Nintendo cartridges and a new CD format which Sony would design. This was also to be the format used in SNES-CD discs, giving a large degree of control to Sony despite Nintendo's leading position in the video gaming market.
In 1989, the SNES-CD was to be announced at the June CES . However, when Hiroshi Yamauchi read the original 1988 contract between Sony and Nintendo, he realized that the earlier agreement essentially handed Sony complete control over any and all titles written on the SNESCD-ROM format. Yamauchi was furious; deeming the contract totally unacceptable, he secretly cancelled all plans for the joint Nintendo-Sony SNES CD attachment. Indeed, instead of announcing their partnership, at 9 am the day of the CES, Nintendo chairman Howard Lincoln stepped onto the stage and revealed that they were now allied with Philips, and were planning on abandoning all the previous work Nintendo and Sony had accomplished. Lincoln and Minoru Arakawa had (unbeknownst to Sony) flown to Philips headquarters in Europe and formed an alliance of a decidedly different nature—one that would give Nintendo total control over its licenses on Philips machines.
The 9pm CES announcement was a complete shock. Not only was it a hysteric surprise to the show goers (Sony had only just the previous night been optimistically showing off the joint project under the "Play Station" brand), but it was seen by many in the Japanese business community as a fatal betrayal: a Japanese company snubbing another Japan-based company in favor of a European one was considered absolutely unthinkable in Japanese business.
After the collapse of the joint project, Sony considered halting their research, but ultimately the company decided to use what they had developed so far and make it into a complete, stand alone console. This led to Nintendo filing a lawsuit claiming breach of contract and attempted, in U.S. federal court, to obtain an injunction against the release of the Play Station, on the grounds that Nintendo owned the name. The federal judge presiding over the case denied the injunction. Thus, in October 1991, the first incarnation of the new Sony PlayStation was revealed; it is theorized that only 200 or so of these machines were ever even produced.
By the end of 1992, Sony and Nintendo reached a deal whereby the "Sony Play Station" would still have a port for SNES games, but Nintendo would own the rights and receive the bulk of the profits from the games, and the SNES would continue to use the Sony-designed audio chip. However, at this point, Sony realized that the SNES technology was getting long in the tooth, and the next generation of console gaming was around the corner: work began in early 1993 on reworking the "Play Station" concept to target a new generation of hardware and software; as part of this process the SNES cartridge port was dropped, the space between the names was removed, and the PlayStation was born.Wikipedia