Sony, Microsoft face off at video game show (Reuters)

LOS ANGELES (Reuters) - This year, Sony Corp. must proveit's not "game over" against Microsoft Corp.

At the biggest video game show of the year, Sony (6758.T),which has dominated the console market with its ,must show gamers reason to wait six more months for its PS3,even though Microsoft's (Nasdaq: - ) next-generation 360already sits temptingly on stores shelves.

The video game industry is closing in on $30 billion inannual revenue, with U.S. sales pacing Hollywood's box officereceipts. Its young male audience is sought after byadvertisers on television and the Internet.

The newest heavyweight, Microsoft, last year launched thefirst of a new crop of high-powered machines withsuper-realistic graphics with its Xbox 360. At the ElectronicEntertainment Expo, or E3, this week in Los Angeles, currentleader Sony is expected to unveil details of the PS3.

Sony plans to launch its PlayStation 3 console in November,a year after Microsoft, and its margin of error is razor-thin.

Game play on the Microsoft and Sony consoles will bevirtually the same, but each machine brings a weapon to thebattle that could turn the tide, analysts say.

"There is a very different playing field this time around.One thing we've learned is never apply the rules of the lastgeneration to the next one," said Peer Schneider, vicepresident of content publishing at IGN Entertainment, a unit ofFox Interactive Media.

Sony promises to bundle a Blu-ray, high-definition videoplayer into the PS3 right out of the gate, while Microsoftplans to eventually offer an add-on external drive for HD DVD,a rival format to Blu-ray.

Microsoft holds the clear advantage online with Xbox Live,a service that connects users to the Web through its consolesto compete, chat and download games, videos and other content.Sony plans to debut a new online services with the PS3.

"Sony really has a lot of catch-up to do with Xbox Live,"Schneider said.

Microsoft could have up to 8 million Xbox 360s in the handsof gamers even before Sony finds its way to the market,according to analysts' estimates.

"We expect Sony to come out as the winner, but they have tostick to their November schedule," said David Mercer, principalanalyst at independent research firm Strategy Analytics Inc.

"Sony can't afford to miss that this time around. If theydo, the Xbox 360 lead could become unassailable," Mercer said.

Sony already delayed the release of its new high-techgaming device, which was originally slated for a spring debutin Japan before a gradual roll-out to other regions.

Strategy Analytics predicts Sony's share of the worldwidevideo game market will narrow to 62 percent by 2010, from 66percent now. Microsoft, now tied with Nintendo Co. Ltd(7974.OS) at 17 percent, is expected to grow to 28 percentwhile Nintendo's hold is seen shrinking to 10 percent.

PRICING, GAMES, MANUFACTURING

The prevailing view holds that the market is Sony's tolose, but it was only a little more than a decade ago when Sonywas the new kid on the block and its original PlayStationconsole took on market Goliaths Nintendo and Sega.

This time around some common themes -- pricing, desirablegames and manufacturing efficiency -- are still expected toplay a role in determining the ultimate winner.

Pricing will be key for Sony.

The premium Xbox 360 sells for $400. Sony must find a pricelow enough to appeal to both gamers and mainstream consumers --who may choose the PS3 over significantly more expensivestand-alone Blu-ray players -- without putting too much strainon its bottom line.

Sony's profits and ability to lower PS3 prices will alsodepend greatly on its manufacturing ability. This is easiersaid than done -- just ask Microsoft.

Microsoft suffered from Xbox 360 supply constraints duringits first holiday season and then saw production costs balloonin the past quarter as it ramped up shipments.

Sony plans to do a simultaneous global launch for PS3,something it did not do for the original PlayStation or thePS2. Sony aims to ship 6 million PS3 units by March 2007.

"Sony's being a little optimistic on how fast they can rampto mass production," Peter Moore, the head of Microsoft's Xboxbusiness, told Reuters in an interview.

Both companies understand that must-have games could playthe most important role of all. In the past, blockbusters likethe "Gran Turismo" franchise lured gamers to Sony's system,while the "Halo" games boosted sales for Microsoft.

"One game can turn the tide for a given system," said DFCIntelligence research analyst Alexis Madrigal.

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