Microsoft, Sony are far behind No. 1 Nintendo

There’s no denying that Nintendo is the videogame industry’s most powerful force. With sales of its handheld DS topping 43 million and the Wii selling more than 30 million, it’s the indisputable market leader.

But despite that success, there’s something very old school about Nintendo. Its consoles and games don’t capture the bleeding-edge sensibilities of the industry. That’s what makes the fight for second place so interesting.

Squaring off for that rather odd title are Microsoft’s Xbox 360 and Sony’s PlayStation 3. Both systems offer high-definition graphics, lucrative franchises and a host of entertainment options. And while neither company would mind dethroning Nintendo, they generally reserve their barbs and attacks for each other — both fighting fiercely for the loyalty of the industry’s most treasured customer: the core gamer.

Sure, Nintendo made a fortune this generation by courting the casual gamer — but casual loyalties shift. The audience that embraced the Wii is increasingly distracted by the iPad and Facebook games. The core gamer never wavers.

All systems have their loyalists, but this console generation has seen a fair bit of sampling — gamers who own multiple machines. Early on, that meant buying a Wii and either a 360 or PS3. Today, more core gamers are buying all three systems. And in an industry whose sales will top $20 billion in the U.S. alone this year, that’s a tremendous opportunity to boost the bottom line.

Where things stand

From a purely sales perspective, Microsoft is the clear winner over Sony. The Xbox 360, which had a one-year head start on its competition, has sold 22.2 million units life-to-date. Sony has sold 13.7 million PlayStation 3s. Even momentum seems to be on Microsoft’s side. Xbox 360 hardware sales have grown 34% year-to-date thanks largely to a redesigned model of the system, which launched in June.

From a software perspective, 2010 has been a great year for Microsoft. “Halo: Reach” generated sales of $200 million in its first 24 hours. And buyers of “Call of Duty: Black Ops” — the year’s biggest game, and available for both systems — appear to have purchased significantly more of the Xbox 360 version.

Sony, though, has been a slow-building fire. Priced at an eye-popping $399-$599 at launch, the PS3 hit a palatable price point only last year. With the system now at $299, some industry observers believe its time has come. DFC Intelligence, in fact, recently issued a report saying it believes the PlayStation 3 will overtake the Xbox 360 in 2011.

“When you look at a worldwide basis, they’re pretty much on par with each other,” said Jesse Divnich, vice president with Electronic Entertainment Design and Research. “Even though the PS3 is trailing in North America, it’s still a chief focus for publishers right now.”

Homegrown talent

A major point of contention involves the titles which are exclusive to one console or the oher.

The Xbox 360 has plenty of big franchises, including “Fable” and “Gears of War” — but nothing has come close to the success of “Halo.” The Master Chief made Microsoft’s gaming division viable, and the series is among gaming’s best. Bungie Entertainment, which has made every major “Halo” game, has moved on, however — leaving a question mark about the next installment.

Sony, which has been making game consoles since 1994, has an embarrassment of riches when it comes to successful franchises, including “Gran Turismo,” “God of War,” “Twisted Metal,” “Ratchet and Clank” and “Uncharted.”

That’s significant — because ultimately, a game console is about the fun factor.

“The driving force for any console is always going to be the games,” Divnich said.

While their chief focus is on the core gamer, neither Microsoft nor Sony is ignoring the Wii audience. Both launched motion control devices this year — Sony released PlayStation Move, a handheld device that is reminiscent of the Wii controller, while Microsoft went with Kinect, a 3D camera that uses motion capture technology to let players use their bodies to control videogames.

Both have sold well, but it’s the Kinect that has achieved pop culture breakout status, earning raves from Oprah Winfrey and Ellen DeGeneres.

Sony, though, has taken a commanding leadership position in 3D gaming — issuing a patch earlier this year that let the PS3 support stereoscopic 3D games (and movies).

Microsoft has downplayed Sony’s move, saying the 360 is 3D capable but that the company doesn’t see real demand for the technology.

“We’re not a consumer electronics company that’s trying to sell 3D TVs, so we have the benefit of waiting until the market responds,” said Aaron Greenberg, director of product management, earlier this year.

Sony, naturally, disagrees. “It’s a whole new dimension for the industry,” declared Kaz Hirai, president of Sony’s Networked Products and Services Group, at E3.

Beyond the game

Good games are crucial to any system, but this console generation has also incorporated other forms of entertainment. Both the Xbox 360 and PS3 offer Netflix functionality. Microsoft also streams content from ESPN and Last.fm. In recent months, though, Sony’s PlayStation 3 has made several nongaming additions to its lineup that Microsoft has yet to match, including content from Hulu Plus and BBC America.

It also has taken the lead in generating original programming. In February, it teamed with producer 51 Minds to launch a reality series, dubbed “The Tester,” that was available only to PlayStation 3 owners. Season two of the show launched recently.

“Ultimately, for us as a programming team, we aspirationally look at something like HBO,” says Susan Panico, senior director of the PlayStation Network. “They created groundbreaking original content that becomes a part of pop culture. … That — in the long, long term — is the direction we’d love to go in.”

Microsoft, so far, has been slow to react to those additions. That could be because it has bigger plans. In November Reuters reported that Microsoft had held talks with several media companies about acquiring content for a pay-television subscription service that would stream through the Xbox 360’s dashboard.

The bigger picture

Competition is nothing new in videogames. But there has never been a time when there have been so many forces trying to steal audiences away.

Apple’s iDevices and social network games get the bulk of the attention, but neither is likely to permanently woo away the core gamer and catastrophically damage the Xbox 360 or PS3. Instead, it’s streaming services that pose the biggest threat.

OnLive, the largest of these, recently launched a set-top box that lets gamers play the latest PC games on their TVs instantly. As a standalone device, that’s not a real threat — but the company is more interested in integrating the technology into other devices. And that’s where things could get interesting.

“We’ve spoken with several cable companies,” said OnLive CEO Steve Perlman. “We have no agenda as long as there’s a way to deliver this service. … If you take the chip inside of every digital TV, we can adapt our algorithm to work with almost all of them, so there’s no added cost to a TV to perform like the highest-end game systems.”

The fight these days is for No. 2 — but as digital distribution gains a foothold in the videogame industry, more and more industry observers wonder if the long-term fight will be for survival.

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