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With console launches, it's game time for Sony and Microsoft

Wednesday, 13 Nov 2013 | 2:23 PM ET
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Let the games begin.

The unveiling of Sony's PlayStation 4 on Nov. 15 and Microsoft's Xbox One on Nov. 22 doesn't just mark a new console cycle but is a new start of sorts for the companies: The former is trying to right the ship after years of losses, while the latter is moving to expand its empire beyond the PC desktop.

"The launches are of extremely high strategic importance to both of them, but for different reasons," said P.J. McNealy, founder of Digital World Research. "Sony as a corporation is looking for a new product line to breath life into the brand—and the PS4 has a chance to do that. For Microsoft, the Xbox One launch is the anchor to try to grab consumer mind-set as part of a bigger approach with tablets and phones."

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Both companies have solid track records in gaming. The PlayStation 3 and Xbox 360 have sold over 80 million units each, and both makers have pledged to continue supporting their legacy models.

But game publishers expect the next-generation consoles to quickly become dominant.

"Our feeling is the installed base of these machines will be much faster to take hold than previous generations," said Tony Key, vice president of U.S. sales at Ubisoft. "In the first couple of years, we expect them to double the installed base of previous generations in the same time period. ... The games are going to get so much better on the new [consoles] that you're going to have to have one."

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Analysts are similarly upbeat about the new consoles. While the degree of optimism varies, most believe the Xbox One and PlayStation 4 will be catalysts that spark a sales boost for the industry.

"Gamers have been hibernating for the past few years, waiting for the new technology," said Jesse Divnich of video game research firm EEDAR. "It looks like ... during the first year we could see sales increase. [This] week we're going from playing on a console designed eight years ago to one that was created today.

The gaming divisions are notable parts of the larger Microsoft and Sony environments. While both the Xbox 360 and PlayStation 3 have had disappointing sales this year because of the looming launch, they have been strong performers historically.

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Sales of the Xbox 360 last holiday season led Microsoft to sales of $6.62 billion in its second fiscal quarter. And the company says Xbox One will be profitable at launch—a rarity in the gaming industry, which typically sells hardware at a loss and compensates in software sales.

PlayStation 3 sales struggled initially but have rebounded toward the end of this cycle, and gamemakers have noted that developing for the PS4 is significantly easier than for its predecessor.

For two systems that will fight so fiercely for customers, PlayStation 4 and Xbox One are shockingly similar in a number of ways. Both have notably faster processors and offer features to share in-game video. Both come with Blu-ray/DVD drives. Both have a heavy focus on digital downloads and offer cloud storage. Neither will play the games from their predecessor.

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The Xbox One also comes with the Kinect sensor. That's a big part of the reason it costs $499—$100 more than the PS4—and will eventually offer original video content, including a live-action series built around its "Halo" franchise, which is produced by Steven Spielberg.

Meanwhile, the PlayStation 4 will tap the resources of corporate cousin Sony Entertainment for content tailored specifically for the gamer audience. Given that the PS4 is one of the tentpoles of Sony's turnaround effort, the division expects to see support from other units.

"People realize that the PlayStation 4 is very important for the company and are looking to lend their resources," Jack Tretton, president and CEO of Sony Computer Entertainment America, said in June. "What's good for us is good for them, not only in terms of being good corporate citizen, but in helping them drive toward their financial goals."

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Microsoft is looking to conquer the living room with both games and mainstream entertainment content. Beyond its original programming, the company has struck a deal with the NFL to enhance games for fans via the Xbox One dashboard.

"People like to watch TV and like to play games," Yusuf Mehdi, Microsoft's chief marketing and strategy officer, said at E3 earlier this year. "It's the hits that drive adoption growth and business success. In gaming, the big hits for us are things like 'Halo'. We want to find some big hits on the TV side that open people's eyes as to what's possible. And the NFL is one of those."

Both Sony and Microsoft hope to avoid Nintendo's fate when the Wii U debuted last last year. A lack of compelling software and unclear consumer messaging have resulted in less than 4 million units sold. (The Wii had sold over 13 million units at the same age.)

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Colin Sebastian, senior equity research analyst at R.W. Baird, projects worldwide Xbox One and PS4 shipments at 5 million to 6 million by year's end. Some analysts have predicted the PS4 will be the top seller, but he said Xbox One will have equal or even higher sales by the close of the launch window.

Analysts dismiss claims by some gamers that console makers hold back inventory during the holidays to create buzz.

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"You want to have shortages ... but not at the expense of losing a couple million units of sales," said Eric Handler, senior equity analyst at MKM Partners.

Analysts also said the price differential won't matter much this holiday season. Price is much less important to core gamers—the primary buyers—than bragging rights that go with having the newest generation.

McNealy of Digital World Research said volumes probably will hit a point in about 18 months at which manufacturers see cost savings they can pass on to the public.

Of course, games also drive demand for consoles.

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Divnich expects big franchises, including Activision's "Call of Duty: Ghosts" and Electronic Arts' "Battlefield 4," to be big, adding that early console buyers tend to stock up.

"When you buy a new hardware system, you don't just buy one game," he said. "People generally buy up to five different pieces of software in the first six months, so games like "Knack," "Forza" and "Killzone" will do well. This is where the first-party titles [those made by Sony and Microsoft] have an advantage."

—By Chris Morris, Special to CNBC.com.

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