NEW YORK (CNNfn) - For the past five years, the battle for video game addicts has been pretty much a two-way battle. Sony has been the champ, selling more than 70 million of its PlayStation consoles, while Nintendo has trailed behind, with sales of just 28.7 million N64 units (as of Sept. 1999). Sega, a one-time king of the hill, has made it something of a three-way race of late with the Dreamcast.
And tomorrow, Microsoft jumps into the fray.
For the past six months, the worst-kept secret in the gaming industry has been the Microsoft X-Box. While the tech giant has refused to comment on it, developers and analysts have quietly leaked news about the company's plans to enter the lucrative console gaming business. Microsoft Chairman Bill Gates made it official Thursday in an interview on CNNfn's Moneyline News Hour.
"[The X-Box] is the first game product designed for the Internet," Gates said. "You can download music. You can download new games. ... It is new, but we've got to make sure that we get the very best game experience."
Click below for Bill Gates interview
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The electronic entertainment industry took in $7-$10 billion dollars last year (the numbers vary depending on who you ask), making it a force on par with Hollywood. This year, as more next generation consoles hit the shelves, those numbers are expected to increase. So, say analysts, it's no surprise that Microsoft (MSFT: Research, Estimates) is taking a larger interest in the field.
"If you look at where the market's going, they're not just video game machines anymore," said Michael Wallace, an Internet and new media software analyst with UBS Securities. "Microsoft is not getting into this to sell video games ... They don't want to give up control of the living room to Sony."
While the existence of the X-Box has been widely known for several months, details are still scant. nVidia will reportedly supply the graphics chip for the X-Box. Other partners are expected to be revealed Friday at the Game Developers Conference in San Jose, Calif. There have been reports that the system will feature a 1 GHz CPU chip and 64 MB of memory. The hard drive is said to be as large as 4 GB.
Those are beefy numbers - and on a PC, they'd run you in the neighborhood of $3,000. In order for the X-Box to be successful, though, it has to have a low price point. The Dreamcast was a hit in large part because of its $199 introductory price. Sony's PlayStation 2 initially sold for $365 in Japan, but the company plans to lower that price for the product's U.S. launch this fall.
Investors seem confident in Microsoft's abilities to break into the market, however. While Microsoft stock hasn't been overly affected by the whispers, companies that are being linked with the X-Box are seeing their share prices soar. On Tuesday, Prudential Volpe analyst Hans Mosesmann told clients he expected graphic chipmaker nVidia to be named as the supplier of the X-Box's graphic component. NVidia (NVDA: Research, Estimates) shares jumped 24-13/16 - a 42 percent climb - by the end of the trading day.
Pros and cons
Microsoft comes into the market at something of a disadvantage. While the company's PC gaming division has been growing steadily over the past year (snagging big name developers and garnering critical praise for its titles), it has not tapped into the console industry. Tech-savvy
"hardcore" gamers also tend to distrust Microsoft because of its sheer size.
Console gamers, however, tend to be a more casual group. The audience base is wider - including college students, Generation X-aged young professionals, and parents of pleading schoolchildren - and the disposable income tends to be a little higher.
"The bottom line is, 'Who makes the best software?'" says Wallace. "If there are no compelling titles for the X-Box, then people won't buy it. What Microsoft needs to do is come up with some killer games. If companies just port existing titles over to the X-Box, then it's not going to work."
 The graphical quality of the games is what's capturing so much attention. The PlayStation 2's graphics are incredibly sharp, rivaling the movie "Toy Story" in clarity. nVidia has a firmly established name in the PC gaming community, with its GeForce graphics card generally considered state of the art. The company has a history of introducing new chipsets approximately every 12 months, each offering significantly enhanced graphics quality.
While the consoles of today are solely considered gaming machines, the PlayStation 2 and the X-Box are striving to become all-inclusive home entertainment systems. Sony's next-gen console system includes a DVD player, allowing consumer to watch movies on the machine as well. The X-Box will reportedly include a DVD player as well.
"Any time new technology comes out, it's very important for the game business," said Jill Hamburger, vice president of interactive entertainment for Best Buy. "First and foremost, [these systems] are a gaming platform, but I think [the DVD] is a feature set that will be beneficial."
Games and movies
The addition of the DVD player could make these systems even more attractive to consumers, who embraced DVDs in the 1999 holiday season, causing stores to sell out across the country. Initial sales numbers bear this out. Sony (SNE: Research, Estimates) says it sold 980,000 PlayStation 2 systems in the first weekend of sales in Japan. (260,000 of those, however, have yet to ship because of a production delay.) Wallace says he expects Sony to ultimately sell 100 million of the systems.
John G. Taylor, managing director and analyst at Arcadia Investment Corp. says he's not sure at this point how big a role the addition of DVD will play. "I think that remains to be determined," he said. "It's going to depend on how the DVD playback looks."
 Gates agrees that it's all about the games.
"What this box is about is about competing with dedicated gaming consoles and being the very best thing you can have in your living room for gameplay," he said.
It's hardly unprecedented for an underdog - if Microsoft can be considered an underdog - to win the console wars. When the PlayStation was introduced in 1995, its $299 price point was considered high - and competition from Nintendo and Sega was seen as formidable. Today, however, half of the software sold in the U.S. is for Sony's console, according to NPD Group.
Hamburger says the feature set of the X-Box sounds impressive, but she's not making any sales predictions until she hears more about the software that will come with the game. "It's just too early to tell," she said.
Future expansion?
The Sega  Dreamcast initially looked like it might be the dark horse in the next generation console wars. It had the advantage of hitting the streets a year before the competition - and U.S. sales were beyond the company's expectations. Overseas sales, however, have fallen short - and the company expects steep losses this fiscal year, casting doubt on Sega's future importance in the industry as the competition gets fiercer. This will be the third consecutive year of losses for Sega.
There are even some whispers on Wall Street that Microsoft is eyeing Sega, or at least various divisions of the company, as a potential takeover. Industry trade magazine MCV reported in its March 7 issue that most of the propositions focus on distribution, network services and content distribution.
The deal makes some sense. The Dreamcast is powered by Microsoft's Windows CE operating system, although the collaboration has not worked as well as expected. A Sega representative said the company does not comment on rumors.
Still, UBS Securities' Wallace says the deal makes sense.
"If Microsoft is serious about the market, they're going to need some console experience," he said. "Sega has experience on both the hardware and, more importantly, the software side. Whether it's Sega or another third party developer, that wouldn't surprise me." 
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