It was essentially a sequencer/sampler, just like the SNES except more advanced. They actually still use them today in many games (mostly console games) or hybridized versions that are part mp3, part sequenced. It's how they keep the filesize down and allow for dynamically changing music. They pretty much had only one sample per instrument for the most part, and that one sample was pitch shifted to give the entire spectrum of notes. Pretty cool stuff. MOD Plug Tracker is a pretty good representation of the concept. It's also what we're using for our next game, which is going to be more SNES style.
The other way they keep filesizes down is by making the songs last only so long. Most of the tracks you hear in OOT and many other console games (even today) are usually around a minute, a minute and a half, maybe 2 minutes. Very rarely did you ever find tracks that had longer than 2 minute loops.
The way they made them sound much longer than that was through compositional trickery: each section in the songs only last a few bars at most before they switched to a transition section that would lead into a brand new section. Each section had their own quick identifiable hooks.
Now Construct 2 can't handle MIDI or MOD files (yet!) but you can still make your music/sound files take up as little space as possible through smart composition. In Happiness! we composed 16 music tracks, which was separated into around 84 files, including the ogg, m4a, and wav formats and separating most of the tracks into "intros" and "loops". All in all, the 84 files take 95.9 MB. 75.5 MB of that are the 28 uncompressed wav files.
Fortunately, Scirra thought ahead and Construct games only load audio files when you need to use them, and you also have plenty of options to control preloading audio files.
I don't recommend nixing the wav files, for compatibility reasons. Ogg is the best format though, best compression while maintaining the best quality. And nevernevernevernever mp3.