LOS ANGELES (TheStreet) -- The video game industry's biggest conference, E3, has kicked off. The annual show is typically home to hardware releases that will carry the gaming industry forward. It also features the titles that could make or break developers. It's simply a must-watch for anyone interested in investing in the multi-billion dollar industry.

Microsoft vs. Sony

Console makers Microsoft ( MSFT - Get Report) and Sony ( SNE - Get Report) will take center stage at E3 this year and the battle between the companies will be one to watch.
E3

Yesterday Microsoft showed off Kinect (shown above), a motion-gaming device previously known as Project Natal that will allow gamers to control on-screen action with body movements. The functionality might seem Wii-esque, but it ditches any use of a remote, potentially providing more movement opportunities for players.

Kinect will launch on November 4 in the U.S., but the company stopped short of announcing a price. It did say, however, that 15 games will launch with Kinect.

Microsoft also announced a new Xbox 360, featuring built-in wireless connectivity, an improved design, and the same $299 price tag as its predecessor. It's a nice upgrade, but game customers are tough to attract. And its $299 price probably won't be cheap enough to dramatically increase Xbox 360 sales.
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Sony's event, which is scheduled to begin today, will undoubtedly center around PlayStation Move, another motion-gaming technology that uses a remote to control on-screen movement. Look for all the details on Move, including its release date. But since Microsoft didn't tip its hand on price, expect Sony to keep Move's pricing close to the vest.

Some investors might be wondering if now that Sony and Microsoft are breaking into the motion space, it's time to jump on the bandwagon with investment cash. That's certainly up for debate. Although Nintendo's Wii has been wildly successful, its sales have declined over the past few months. During its last fiscal year, Nintendo posted an 18 percent drop in profit compared to the prior year. It reported that its Wii sales are expected to decrease to 18 million units in 2010, compared to 20.5 million units in 2009. It's also worth noting that the Wii's top-selling games come from Nintendo. Third-party titles that feature motion controls just don't seem to appeal to consumers.

But Microsoft and Sony could have the trump card. A major issue with the Wii is that developers are forced to use the motion-control mechanism in games. It limits what they can and can't do with the console. Sony and Microsoft have made it abundantly clear that their motion-gaming products are peripherals. If developers want to develop for Kinect or Move, they can. If they don't, and simply want to make games with the traditional controllers, all the better. Such a strategy ensures a more robust line-up of games for consumers to choose from, and it's something for investors to keep in mind.

The developer side of the story

Companies like Electronic Arts ( ERTS), one of the world's largest game developers, will be showing off a slew of games. For EA, that means a steady supply of sequels. According to the company's E3 page, EA will unveil Crysis 2, Medal of Honor, Dead Space 2, and The Sims 3, among several other titles.

Expect a similar story from Take-Two Interactive ( TTWO - Get Report). The company, which just came off the wildly popular Red Dead Redemption, recently posted $268 million in quarterly earnings, a sharp increase over its prior-year quarterly revenue of $174 million. Take-Two plans to talk about Mafia II, Sid Meier's Civilization V, and perennial favorites NBA 2K11 and NHL 2K11.

For an investor, that's a good thing. Although sequels have been panned by gaming critics that want to see the latest in gaming innovation, EA and its competition are trying to run businesses. As game costs continue their rise well into the millions, sequels are arguably the best way to make a quick profit. The first game in any franchise is usually more expensive than its follow-up because of all the upfront costs that go into creating a new franchise; a sequel simply requires a refresh of already-designed game elements and a new story, boosting per-game profits.

Going forward

But E3 is about more than just what certain hardware makers and developers plan to offer. It also tells investors and industry followers what to expect from the gaming business over the next year. Going forward, those trends will likely revolve around motion-gaming and 3D games. Nintendo plans to unveil its 3DS mobile hand held at E3. And now that 3D televisions are starting to gain popularity, there is speculation that 3D console games will also make a showing at the conference.

But perhaps the most important element of the show is what it will do to help the industry. According to market-research firm NPD, overall game sales were down 26% year-over-year in April. It was the fourth-largest year-over-year decline in history. Worst of all, the industry is down 11 percent in year-to-date sales, compared to 2009.

Such a decline is troublesome. For a while, the gaming business was booming through the recession. But all that has changed. And without some swift movement on sales, it might be a down year.

If E3 creates enough excitement, expect better performance from game companies. But if Kinect, PlayStation Move, and blockbuster titles fall short, don't expect much from gaming stocks this year.

--Written by Don Reisinger in New York.

Don Reisinger has been writing columns and blogs about the technology and video game industries for years. His work appears in some of the tech industry?s biggest publications, as well as in the Los Angeles Times, where he blogs about social networking. Follow Reisinger on Twitter @donreisinger.