LOS ANGELES (CNN/Money) - While many observers thought the showdown in the gaming industry started during the 2001 holiday season, the real fight kicks off Wednesday.

Sure, the Microsoft vs. Sony vs. Nintendo console battle seemed to be a competitive one, but the results were fixed: Sony would dominate the industry, while Microsoft and Nintendo would sell out of units as fast as they could ship them. Heck, even Sega's defunct Dreamcast was a winner, with remaining inventory selling out at bargain prices.

Console hardware sales help establish a user base, but it's ultimately the games that make or break a system. And while Sony has an ironclad grasp on the industry's top spot, Microsoft and Nintendo are still struggling for the No. 2 spot. Now, that they've got their consoles launched, it's time for them to get in the game.

Software sales are where the money is in the gaming industry -- and that's why so many publishers are rolling out new, AAA titles at the Electronic Entertainment Expo, the annual trade show of the computer and video gaming industry.

Sony and Eidos are counting on the new, improved Lara Croft to hit big.

Most hardware manufacturers lose money on the consoles they sell, with plans to make it back through licensing fees on software. Typically, Sony, Microsoft and Nintendo garner a licensing fee of roughly $7 or $8 for every copy of a new game sold. That's a significant part of the reason the average console game costs $50.

Certain factors can affect that licensing fee, though, such as whether the game is a continuation of a franchise and whether a movie studio also collects a licensing fee, as with the current hit games based on the "Spider-Man" film.

As titles age -- and their retail price begins to fall -- the licensing fee gets smaller. Take, for example, Sony's "greatest hits" games: Once a title has been on store shelves for nine months and sold 400,000 copies, the retail price drops to roughly $20 and Sony takes a significantly lower fee.

The way to really rack up the licensing fees, though, is to have a game that's exclusive to your console.

"We're getting to the point where it's important for each platform to have unique, differentiated titles -- so that if consumers want to buy that game, they have to buy that system," said John Taylor, managing director and analyst for Arcadia Investment Corp.

Smash, exclusive hits can make or break a console. Mario and Donkey Kong helped build the Nintendo Empire. Xbox got a nice boost with Halo. And Sony saw the PlayStation rise on the success of Tomb Raider and Final Fantasy.

As prices fall on consoles, a new type of gamer is about to become important: Children. Hardcore gamers and adults have so far been the only people able to afford the next generation console systems. But with the recent price drops, the audience base will expand dramatically, making licenses and mass market titles have a much larger impact.

"Super Mario Sunshine" leads the charge for Nintendo this fall.

"Up until now, the primary users of PlayStation 2 and the Xbox were guys over 20 years old," said Taylor. "There are a lot of those guys that bought 'GTA3' ("Grand Theft Auto 3") and 'Halo' and mature titles. What becomes increasingly important this year are titles for the mass audience -- like the Nickelodeon titles and Spider-Man -- as the prices come down."

Look for Nintendo to capitalize on this. With a new Mario game leading the charge this year, the company is expected to have a successful holiday season. Over the years, Nintendo has built the most distinctive library of exclusive characters.

Sony (SNE: up $0.40 to $58.05, Research, Estimates) has the edge with third-party developers. Their longtime leadership of the console world let them secure exclusive relationships with some of the biggest names in the business.

Microsoft (MSFT: down $1.82 to $52.19, Research, Estimates), however, is still the new kid on the block -- and it needs to prove itself fast.

"It's very important for (Microsoft) to show us a portfolio of titles that are only available on Xbox and that show the power of that machine," said Taylor. "I think there is a ton of headroom that has yet to be exploited in the Xbox."

While exclusive games are certainly key to a machine's success, console-neutral titles are also important. Third-party publishers often make games for two -- or even all three -- of the console systems, in an effort to expand sales and increase profits.

In cases like this, analysts say it's critical for the console to show off its muscle.

"It comes down to platform 'excellence'," said PJ McNealy, research director at GartnerG2. "What I mean is when Spider-Man (the game) launches on all three consoles on the same day, that it looks better or plays better on one of them than it does on the others."