Game Definitely Not Over

On the eve of the launch of PS3 and Wii, stakes in the console tussle amid Sony, Nintendo, and Microsoft have never been higher

by Cliff Edwards

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The battle for supremacy in the game-console industry has raged for decades. Earlier skirmishes have pitted Microsoft and Sony against Nintendo, which itself had unseated the first generation of stalwarts, including Sega and Atari.

Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY) remain very much at odds—and their contest escalates on Nov. 17, when Sony releases the next iteration of its centerpiece PlayStation console in the U.S. Nintendo's Wii hits stateside stores two days later. As longstanding as the scuffle may be, the stakes for each contender in the $30 billion video game market have never been higher.

Consider Sony's challenge. Stung by the failure of its Betamax video recorder decades ago, Sony began assembling a media empire that aims to tie films, music, and other content to the company's hardware. The consumer-electronics giant had high hopes for PlayStation 2, which has sold more than 100 million units and has left Sony the console market leader, with an estimated 70% share at one stage. But PS2 ultimately remained a gaming console at heart.

Prelaunch Stumbles

Enter PlayStation 3. Arguably the most powerful system on the market, it's run by a cell processor that cost billions of dollars and contains Blu-ray drive technology at the base of its video capabilities. And the company will suffer tens of millions of dollars in losses at the outset, in part because of a delay in the introduction of the PS3 (see BusinessWeek.com, 10/19/06, "Video Biz Hits Sony When It's Down").

More PS3 setbacks ensued in the critical days leading up to the launch. A scarcity of consoles bred chaos among retailers and exasperation among consumers. And on Nov. 14, Sony said not all the games made for earlier PlayStations would be compatible with the new machine, contrary to the company's previous promises (see BusinessWeek.com, 11/14/06, "Sony's PS3 Issues Threaten Revival").

Stumbles aside, Sony has high hopes for PS3, betting the console can become the centerpiece of consumer home media. It sports a built-in Web browser, wireless Internet, and a hard drive for downloading movies and music. Sony hopes the built-in Blu-ray player, a format it helped create, will give it a boost against competing HD-DVD technology. Sony holds patents on Blu-ray, so its success could translate into hundreds of millions of dollars in licensing revenue from other electronics makers over the next decade. The lure of crystal-clear movies also could spur DVD sales, audio products, and high-def TVs, all of which are important to Sony's future.

Nintendo's Strategy

That's not all that's riding on PS3. Sony is also betting that, despite being a year behind Microsoft in launching a next-generation console, game developers will be attracted to the massive amount of storage capacity on Blu-ray disc. If they are, some of the best-looking and most innovative games eventually would only be possible on the PS3, giving Sony another leg up on rivals.

Chief among them, of course, is Nintendo, maker of the Wii. After the GameCube failed to make much of a splash, pundits have argued Nintendo should get out of the console business and focus mainly on making handhelds like the Gameboy and Gameboy Advance. Others then questioned the company's future when Sony announced it would begin selling the PlayStation Portable device to compete with Nintendo's DS handheld.

Nintendo faced down naysayers by moving to attract more casual gamers. Nintendo's DS has outsold the PSP, thanks to innovative games like Big Brain Academy, which helps keep the mind sharp with a series of daily game challenges, and Nintendogs, where users own and train a puppy.