Sony's ( SNE) PlayStation 3 video game console just got a lot more interesting.

Sony has built an online virtual world, much like Second Life, where PS3 users can create their own avatar, watch movies, build and furnish their own personal spaces or "apartments" inside the online community and interact with other users through video or text chat.

The service, called Home, will be available as a free download and can be directly launched from the console.

"We are building a rich 3D social networking service for PS3 users from around the world," says Phil Harrison, president of worldwide studios for Sony Computer Entertainment.

Sony said it plans to do beta tests in April and launch the service in fall.

The virtual world of Home could also bring more users to the PS3 and help Sony catch up with rival Microsoft ( MSFT), which has the lead among networked consoles.

"It's a very nice user interface and will appeal to PS3 users who want to be part of an online community," says Colin Sebastian, an analyst with Lazard Capital, which doesn't own stocks or have an investment banking relationship with Sony. "This has been a long time coming, and we are now getting some visibility into their online strategy." he says.

Sony also said it plans to release LittleBigPlanet, a new community-based game in which users build objects, explore obstacles and solve puzzles. LittleBigPlanet will be a title exclusive to the PS3.

Shares of Sony were recently off 66 cents, or 1.3%, to $49.99.

Much like Second Life, Home users can create a customizable avatar and use it to explore the "public" and "private" spaces within the online community.

Each user is assigned an apartment in Home, a private space which they can invite friends to and personalize with furniture, art and other items. Inside their private spaces, Home allows users to show their personal videos, pictures, and other digital media content found on their PS3 hard drives.

Users can also launch multiplayer games from within Home itself and play against others online.

Home also has the potential to bring digital revenue, because users can buy additional clothing for their avatars, furniture and decor for their online apartments, and even watch movies within the virtual world.

Home could help Sony compete better with Xbox Live, the online game service from Microsoft, says Sebastian.

Microsoft said Tuesday that more than 6 million gamers worldwide already connect to Xbox Live, four months ahead of the company's target.

The interface for Home, which many analysts called "impressive," will help get users excited about the PS3, suggests Billy Pidgeon, an analyst with industry research firm IDC.

"Sony needs the perception that something exciting is happening on the PS3," says Pidgeon. "And this could be another way to differentiate themselves."

In itself, Home might not help Sony sell more PS3 consoles, says P J McNealy, an analyst with independent research firm American Technology Research. But the new service has made PS3 a lot more "sticky," he says.

Sony plans to have game publishers such as Electronic Arts ( ERTS) and THQ ( THQI), as well as brands outside traditional gaming categories, participate in Home.

"The possibility of online revenue for third party publishers just got a lot more real," says McNealy.