There's MK3 on the consoles, too. Playstation version. As well as MK Trilogy. Yeah, it had to load for a few seconds during the fight, but they still did it.

He ment this gen

Well, from what I've seen, in MKA, on the choose your fighter screen, it only takes a matter of about 3 - 5 seconds for the game to load the 3D model of the character, and this is among over 60 different characters. The 3D model and texture take up a very small amount of disk space.

And still it is possible. The reason why ROMs have everything "preloaded", is because that when a ROM was inserted, it was part of the console itself and thus directly accesible by the console.
Consoles like PS1 and PS2 where not able to do this, because discs constantly need to be read.

And now, welcome to the next gen consoles. Consoles which have a hard drive. So like any game, a part of the gamefiless will be installed on the hard drive. A hard drive is easy accesible for the console. So... let the character models be installed on the hard drive and then they are immediatly available for Shang Tsung to morph in.

Impossble?! No, no, it is very possible.

One of the reasons to choose Shang Tsung was for it's morphing abilities. So what if you can choose another character with the next fight?! Having Shang Tsung was like having everybody in the fight. So if you knew everybody's abilities and how to morph in them, you had a great advantage. That is why Shang Tsung was so good.

Well not for nothing, have you tried prgraming something like that? It's not as easy as you're making it sound.

Well, I'm not a programmer, so yeah, to me it's not easy, and I HAVE tried it.
But I've seen some of my classmates do some truly amazing things, in very small amounts of time, and they've been programming for barely 15 months.
The programmers at Midway are supposed to have, if nothing else, over 10 years of experience.