Atari management decided that the reason that Sega and Nintendo were doing so well wasn't good game design or third party developer support, it was their cool mascot characters. The art department was tasked with coming up with a mascot character, one that was distinctly American in flavor and would make a good plushy. (I'm not kidding!) Various designers/artists spent two weeks sketching, then presented what we'd done to management. They scratched their heads and asses and said they'd get back to them. Turns out they didn't like any of them, and they scrapped the whole project. It never got far enough to even think about the "cartridge vs. CD" question, nor did gameplay become a topic other than they wanted a platform hopper since that's what Sonic was.
'Al E. Gator' was one of the suggested characters, a rather nasty attourney alligator - fitting, eh?
(Email conversation with B.J. West,1999)

CR: How about Black ICE\White Noise?
FT: Well, that was meant to be kind of the big Atari internally-produced big, big-effort game that was going to put Atari back on the map. It basically started from Sam Tramiel, the president of Atari mandating that we create our own Sonic, Mario, iconic character and basically what happened was we went through many iterations of these kind of really lame mascot-characters, from ducks to alligators to... it was all very ridiculous. I don’t think anybody was ever terribly enthused by all these pre-mascot-things so we wanted to do something a little bit edgier. So we came up with the concept Black ICE\White Noise which was, you know, a very innovative concept at the time, in many aspects it was like The Matrix before that ever came out.
(CyberRoach Magazine #9, 2/2000 - Interview with Faran Thomason)

Related links:
http://www.cyberroach.com/cyromag/nine/default.htm
http://www.strafe.com/bj