If you have a very small microkernel, then you can very explicitly only install the software in user space that you need, without having them pre-installed via kernel.
The fact is, the Linux kernel can be compiled with features to suit constrained environments. It is just that these features are determined at build time, not run time.
Also quite interesting this question already came up on Quora https://www.quora.com/What-is-the-smallest-in-size-Linux-ker... and also on many other websites: https://superuser.com/a/370588
A microkernel with feature control at the process/service level would actually have much worse feature control than Linux, because Linux build time configuration options are often quite a bit more finer grained than that. For example, you can build Linux for uniprocessor systems, which makes global build-time changes that disable certain kinds of locks, which makes it smaller globally. A microkernel could or could not have the same build-time feature; it is not guaranteed to.
As others have pointed out, microkernels have performance overhead and that reason alone makes them unsuitable for an N64. On a game console you need all the performance you can get.