Sony ( SNE) has been king of the video-game hill for the past decade, but its position is beginning to look precarious.

Rivals Microsoft ( MSFT) and Nintendo are on the attack, and they seem to have a better footing than in the past to truly challenge Sony's dominance.

By the time Sony's PlayStation 3 console shows up on store shelves this November, Microsoft's own next-generation console, the Xbox 360, could have a lead of more than a year and 10 million units in the marketplace.

And recently, Microsoft took away a potential weapon in Sony's arsenal by getting Take-Two Interactive ( TTWO) to release the next version of its uberpopular Grand Theft Auto franchise simultaneously on both Microsoft's Xbox 360 and the PlayStation 3 -- rather than giving Sony an exclusive, as it had done in the past.

Meanwhile, Nintendo has drawn rave reviews for the emphasis it's placed on fun and innovative games for its upcoming Wii console. And with a price that will be hundreds of dollars less than the PlayStation 3, the Wii could attract gamers who are eager for a new console but not willing to pay a premium price.

Sony's shakiness compared with its rivals seemed especially evident at last month's video-game conference. While its rivals made big splashes with their announcements, Sony's presentation was generally considered to be a dud .

To Sony's Jack Tretton, though, the company is exactly where it needs to be. Sony has faced challenges in the video-game business before and has always ended up on top, says Tretton, who is co-chief operating officer of Sony Computer Entertainment America, which heads up the company's video-game efforts in the U.S.

I spoke with Tretton earlier this month about the challenges Sony faces as it prepares to launch the PlayStation 3, and how the company plans to meet them.

TheStreet.com: The general reaction to Sony's presentation at E3 this year seemed to be disappointment. How did the company view it internally?

Jack Tretton: We were really pleased.

If we were trying to do a PR blitz on our announcements, we would have perceived it a little bit differently. But we really saw this as an opportunity to announce some very important details to the trade. And I think if you ask the trade, meaning the retail constituency and the third parties, they came away pretty pleased with how everything went.

But what about the reaction of the consumers and the consumer press?

We are in the process of reaching out to the consumers to try to explain what our platform's all about and why they're going to want one between that May and November time frame. But I think six months out of any platform launch, it's a little bit early in terms of being able to roll out all the details.

The PlayStation 3 is going to be priced significantly higher than the machines from your two other competitors. How do you think that's going to play in Peoria?

Well, I guess if price is the only consideration, then we've won the war, because we've got a $129 PlayStation 2 that outsells the Xbox 360 today.

If you look at the cost of the components and more importantly, the value to consumers, you have everything in the box at $399 on the Xbox 360; and it still falls well short of what the PlayStation 3 offers at $499.

Microsoft is going to have somewhere between 6 million and 10 million Xbox 360s sold by the time Sony gets to market. How do you catch up?

Well, we've never been first to market in any generation. We weren't first when we debuted the original PlayStation. We weren't first with PlayStation 2.

It ultimately came down to the system and what consumers preferred. At the end of the day, what you do in the first year, and whether you do 6 or 10 million units does not determine whether you're successful or not. We're looking to sell 100 million-plus worldwide. We're looking to sell 50 million plus in North America.

So, if a competitor gets to 6 to 10 million worldwide, I would not consider that to be a significant advantage or a significant disadvantage as far as we're concerned.

This time, though, you're going up against a competitor who's much better financed than the ones you went up against in the first two rounds, at least in terms of who came out first.

Right. There's no question they have a higher pain tolerance. I think most companies, if they'd lost the billions that Microsoft has lost on the Xbox, would question whether or not they belong in the business. Obviously, they have a different standard of success.

But doesn't that affect your strategy? Not only do they have a lead, but they've also got a ton of cash to throw at this.

I don't think we ever got into this business with any expectation other than winning and winning early on. We've always done that. If we had suffered the struggles that Microsoft had, I'd question whether we'd be serious about the business today. Fortunately for us, we've never been in that position. And I guess until we get in that position, it's difficult to determine how we would react.

It's widely expected that Sony will be losing money on PlayStation 3 at launch. Do you have any estimate of what your losses will be or when you might turn a profit in the games division after it's launched?

No, I think it's always been the razor and razorblades business, but I think the key to success for us is to be successful in all worldwide markets. We've done that consistently on all our platforms.

When we got into the business back in 1995, what we're doing today in 2006 is very consistent with that vision. And it was always knowing that you had to invest in technology, that you had to give great value to consumers, and that you had to provide great software content.

If you could do that and provide an environment that was profitable for retailers, profitable for the developers and palatable to the consumers, then you would be very profitable long-term.

Arguably what determines which box wins is which one has the best games.

No question.

Last time around, your company had several exclusives on the Grand Theft Auto franchise, which many folks feel was the killer app for the PS2. You're not going to have that advantage this time around. How much does that hurt you?

There's no question that having the Grand Theft Auto franchise helped us a lot and helped us sell some units, but I don't think the battle would be any different with or without Grand Theft Auto.

If you look at our first-party library and the franchises that we've brought to market over the course of PlayStation 2, we have a very formidable first-party library of exclusive software that will help define us.

The days of locking up exclusive content from a third party and having that be key to your strategy is really a dangerous road to go down because I think with the cost of development, not many developers can afford to do exclusivity. So, really what defines the uniqueness of a platform from a software standpoint are the offerings that you have from first party.

So are you saying that not having an exclusive on Grand Theft Auto doesn't hurt you at all?

No, I don't think it hurts us. No, I really don't.

Going to your point about first-party software are you saying that Sony has anything comparable to Microsoft's Halo 3 ?

I think it's a fact that Sony Computer Entertainment software has far outsold Halo, because Halo was the one and only title to come out there. So, do we have a title? I don't know.

I guess I'd have to look at the numbers on Grand Turismo vs. the numbers on Halo. But I can guarantee you that Sony Computer Entertainment's first-party software far and away outsold Microsoft's first-party software.

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