Video Gaming Sees a Turn

The tide is turning in the video-game sector, and recent news events have made this clear.

There's no doubt that Sony (SNE - commentary - Cramer's Take) has been the clear victor in video games for the past decade, with phenomenally successful products like the PlayStation 2 and PSP portable.

However, Microsoft's (MSFT - commentary - Cramer's Take) Xbox franchise has a clear opportunity to take the video-game crown, or at the very least take market share and do some serious damage to Sony.

Microsoft's seized some advantage in gaming by having brought the first next-generation video-game console to market, the Xbox 360, in November 2005, a full year ahead of the Sony PlayStation 3, which was recently delayed until November 2006 due to technical issues involving Blu-ray, Sony's next-generation DVD technology.

While the Xbox 360 launch itself was a mess due to a lack of console supply and quality software, that situation is quickly changing.

First off, the games lineup is clearly improving. At the Xbox launch, there were only two games (racing game Project Gotham Racing 3 and World War II simulation Call of Duty 2) that clearly deserved the title "next-generation," according to most video-game review sites. However, newer games have since come out that show off the Xbox 360's graphics power, like military combat game Ghost Recon Advanced Warfighter and boxing game Fight Night Round 3. These titles should help sell the system.

Plus, a science-fiction shooting game, Gears of War, will be released in the third quarter of 2006, and the strong consumer and industry buzz around it lead me to believe it has blockbuster potential. And, of course, we will eventually see Microsoft release the next installation of the Halo juggernaut.

Sony also has made a serious financial error by including its next-generation Blu-ray DVD technology in the PlayStation 3. Blu-ray technology is dramatically more expensive than the standard DVD drive in the competing Xbox 360. For instance, according to Merrill Lynch, the Blu-ray drive will cost Sony approximately $100 per unit at launch vs. $25 for the standard DVD drive included in the Xbox 360.

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In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau performs stock analysis for ActionAlertsPLUS and Stocks Under $10. His market interests include consumer technology, retail, and small- and mid-cap financials. He appreciates your feedback; click here to send him an email.