This column was originally published on RealMoney on March 22 at 12:59 p.m. EST. It's being republished as a bonus for TheStreet.com readers.The tide is turning in the video-game sector, and recent news events have made this clear. There's no doubt that Sony ( SNE) 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) 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.
Investment ImplicationsIn the wake of this, I am definitely negative on Sony due to the company's potential market-share loss in video games and its periodic missteps in the volatile and competitive consumer electronics business. In fiscal 2005 (ending in March), Sony's game segment accounted for only 10.2% of revenue, but a whopping 37.9% of operating income. In fiscal 2004, those numbers were 10.4% and 68.4%, respectively. So a market-share shift would not only give a modest financial benefit to Microsoft, but also do some serious damage to Sony's profitability. Microsoft, of course, is a larger fish to fry. Despite tens of billions of dollars invested in R&D over its history, Microsoft has yet to prove it can make money outside of its core software business.
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