Not just playing around
These next-generation game consoles from Sony and Microsoft are designed to be high-definition centerpieces for home-entertainment systems.
By Peter Lewis

(FORTUNE Magazine) – WHEN I WAS A CHILD, I spoke as a child, I understood as a child, I played as a child. But when I became a man, I refused to put away my joystick. And if Sony, Microsoft, and Nintendo have their way, the next generation of videogame consoles will expand far beyond the traditional target audience of pale, twitchy teens and twenty-thumbthings. The new boxes are evolving into digital entertainment hubs for grownups-even those who consider games to be childish.

Not that there's anything juvenile about the game industry today. Last year Americans spent nearly $10 billion on videogame hardware and software, according to the market researcher NPD Group. They bought about 250 million games, or roughly two per every U.S. household. One game, Halo 2 for the Microsoft Xbox console, had first-day sales of $125 million, a better opening than the latest Star Wars movie ($115 million). If you're the kind of person who is surprised by those numbers, you're the kind of person the videogame companies want to reach with the Microsoft Xbox 360 (winter 2005), the Sony PlayStation 3 (spring 2006), and the Nintendo Revolution (sometime in 2006). A lot can change between now and then, and none of the console makers have revealed pricing. But in case your thumbs are twitching, here's how I score the top two contestants. (Nintendo is conceding the high end to Sony and Microsoft, preferring to focus on making less expensive games and devices.)

Sony PlayStation 3: The PS3 is based on a new processor called Cell, developed jointly by IBM, Sony, and Toshiba. Sony calls Cell a "supercomputer on a chip," which is an insult to supercomputers but not too far off base. At a recent trade show, prototype PS3 games were stunning in their cinematic quality. Assuming the games were running on actual PS3s as Sony claimed (and not some supercomputer behind a curtain), they support the idea that next-generation videogames will essentially be interactive, high- definition movies. In fact, the PS3 is expected to provide many households with an excuse to upgrade to high-definition televisions (HDTVs), especially those capable of the highest of the high-definition standards, 1080p (1,080 lines scanned progressively). Sony has equipped the PS3 with a next-generation DVD player based on the Blu-ray technology, which offers several times the capacity of today's DVD discs. Blu-ray competes with a rival high-definition DVD format called HD-DVD, and because Sony will sell a lot of PS3s, Blu-Ray will get a big boost in the battle to set the standard.

The PS3 also supports Sony's SACD (Super Audio CD) high-resolution music CD format, which is one of two would-be standards for high-resolution audio, the other being DVD-audio, or DVD-A. Currently SACD is found mainly on high-end audiophile components, but its inclusion in the PS3 could finally do to stereo what stereo did to mono sound a half-century ago: bring greater realism to music.

Sony uses Bluetooth wireless networking to connect up to seven controllers. The PS3 will also work closely with the Sony PlayStation Portable handheld media device, and it has a slot for a removable hard drive. Sony has been vague about plans to exploit the broadband capabilities of the PS3, including the possibility that it could deliver Sony music, Sony movies, and Sony television shows directly to consumers.

Sony says the sleek PS3 will be fully backward-compatible with PS2 and original PS1 games. But the big question is whether smaller game developers will be able to handle the cost and complexity of making games for the Cell-based PS3. The average development cost for a blockbuster video game these days is already in the millions of dollars-$10 million is no longer unusual-and the costs will rise with the arrival of PS3 and Xbox 360. Many of the small, independent game companies today may be forced to consolidate or be acquired in order to compete in this new gaming environment, a dilemma familiar to Hollywood. Or, Sony suggests, they can specialize in developing new titles for the PlayStation Portable.

Microsoft Xbox 360: Microsoft has sold more than 20 million Xboxes and contends that the Xbox 360 has a chance to become the videogame leader, although anything short of an asteroid strike on Sony headquarters makes that unlikely. But with a funky new design, the support of all the major gamemakers, the phenomenal success of Xbox games like Halo 2, and a broad strategy intended to make the Xbox 360 the centerpiece of home-entertainment systems, Microsoft is poised to make a serious run at Sony. Plus, it will beat its rival to market by several months.

Microsoft refuses to concede that the PS3 is more powerful, arguing that total system performance-including online services and software-will make the Xbox 360 the gamer machine of choice. The Xbox 360 supports high-definition games, with a top resolution of 1080i (1,080 interlaced lines), slightly inferior to Sony's 1080p-but sharp-eyed gamers may only notice the difference in fast action games. The optical drive in the Xbox 360 is standard DVD, which will be a liability, at least compared with the Sony, when high-definition DVDs begin showing up. The Xbox 360 supports a maximum of four wireless controllers, and it will offer a detachable hard drive. Microsoft vows to have 25 to 40 new games available for the Xbox 360 at launch. It also says a limited number of current Xbox games will be compatible with the 360.

The key to the 360 is that it's much more than a game machine. Microsoft designed it to connect wirelessly to Windows XP-based home PCs, allowing PC users to store digital music, photos, and movies on the PC in the den and stream them through the Xbox to the big-screen home-entertainment system in the living room, and to go the other way to browse the Internet, buy music, or download movies. Microsoft's big edge is in online gaming. Some two million gamers subscribe to Xbox Live, where they can match thumbs (and, with a microphone headset, trade verbal insults) with competitors across the street or thousands of miles away. The company plans to offer a videocamera to enable live videoconferencing and in-your-face trash talk.

Microsoft is making a massive financial bet on Xbox-billions of dollars-and it has been unrewarding so far. But entertainment is also a huge new market opportunity for the company. Analysts say Microsoft is losing at least $100 on every Xbox it sells because of high manufacturing costs, and the sooner it brings out the cheaper-to-build Xbox 360, the sooner its games division can stop hemorrhaging money.

Both the Xbox 360 and the PS3 promise to be killer game machines, but both have a grander ambition: to be the centerpiece of a digital-entertainment lifestyle for the whole family. Oh, great. Yet another remote control to fight over.