Analyst: Xbox 360 leads console wars through 2008

In their latest gaming industry overview for investors, Piper Jaffray analysts Anthony Gikas and Stephanie Wissink are projecting continued growth for the industry, a new hard-drive-equipped PSP next year, Microsoft's Xbox 360 jumping out to an early lead in the console wars, and a less-than-revolutionary showing for the Revolution.

Starting with the home hardware, Gikas and Wissink released their sales projections for each system over the next three years. Through 2008, Gikas and Wissink expect Microsoft to sell 19.6 million Xbox 360 units, with the PlayStation 3 and Revolution trailing at 15.5 million and 5 million units, respectively. The estimates for both Sony and Nintendo's consoles are based on late 2006 releases for the systems. But while the PS3 is expected to accelerate quickly and lead all systems with 8.5 million units sold in 2008, the ambitious Revolution is listed as starting slow (500,000 units sold in 2006), and lagging behind its competition with 2 million and 3 million systems moved in 2007 and 2008, respectively.

Gikas and Wissink forecast a modest net increase in console sales, partly due to market cannibalization as the handheld sector catches fire. The analysts are projecting a 45 percent increase in handheld hardware sales for the next cycle (which runs through 2011). The combined Game Boy line (including the DS) is projected to have a banner 2005 with a whopping 7.5 million units sold compared to the PSP's projected 3.8 million, but the next three years will see Sony and Nintendo running neck and neck in the handheld business. Gikas and Wissink have the PSP and Game Boy lines both posting annual sales for 2006, 2007, and 2008 of 5.5 million, 5 million, and 6 million. One of the most interesting aspects of the pair's handheld projections is that the report mentions they're expecting Sony "to launch the next generation of its PSP (including an audio/video hard-drive) in mid-2006."

Software sales are likewise expected to jump significantly, with a projected 43 percent increase by 2008. In addition, Gikas and Wissink are expecting that new revenue streams like in-game advertising and online downloads will grow 500 percent, from under a quarter-billion in 2005 to $1.36 billion in 2008. They cautioned against short-term investing in publishers because of market volatility over the next 12 months, but reiterated their Outperform rating on major publishers like Electronic Arts, Activision, THQ, and Take-Two Interactive.