Analyst: Xbox 360 challenging Sony supremacy

Wedbush Morgan Securities analyst Michael Pachter has released his 2006 Interactive Entertainment Industry Report, and in the middle of 188 pages of history, research, graphs, charts, stats, interpretation, and prediction, he concludes that the outcome of the next-generation console wars will rest not with the game publishers, but with the movie studios.

By Pachter's reasoning, the movie studios will choose a winner in the current battle between the Blu-ray and HD-DVD high-definition disc formats by virtue of which one receives better support, and that battle will have a trickle-down effect on gaming to tip the balance in favor of the PlayStation 3 or the Xbox 360. Sony is using a Blu-ray drive for the PS3, and while Pachter thinks that decision has greatly increased the cost of the system and allowed Microsoft to get a yearlong head start on the PS3, he says it could still pay off.

"If Sony is successful with its strategy, we think its console will outsell the Xbox 360 by a factor of 2:1," Pachter writes. "If not, we think that the company will be faced with a choice between conceding significant share loss to Microsoft, or subsidizing the Blu-ray drive by essentially giving it away for free."

The risk is there, but so is the reward. On top of winning the console war, Pachter estimates that Sony stands to reap nearly $2 billion a year on royalties from games and movies sold using the Blu-ray format.

Regardless of whether or not it moves the most hardware of the three next-gen systems, Pachter believes Microsoft can thrive in the current generation and projects that the Xbox 360 will command a significantly larger market share than the original Xbox ever did. Even though he projects Sony and Microsoft as taking the top two spots, Pachter thinks highly of the Wii, calling Nintendo's strategy "risky and brilliant." While he finds the Wii unlikely to finish first, Pachter still expects Nintendo to grab a larger market share than it did with the GameCube.

Over the course of each system's lifetime, Pachter expects the PS3, Xbox 360, and Wii to rack up US sales of 41 million units, 32 million units, and 15 million units, respectively. All three of those numbers are higher than what the companies' current-generation units have managed to move. Pachter projects the PS2 to be retired with 40 million units sold in the US and the GameCube's final tally to come in at around 13 million systems, but Microsoft looks to gain the most ground according to his numbers. Pachter expects lifetime US sales of the original Xbox to come in at 15 million, less than half his projection for the Xbox 360.

Pachter also offers his speculation about the PS3 and Wii launches, as well as Microsoft's strategy to counter them. He expects the PS3 to launch at $499.99, with the Wii selling at or below $299. As far as price cuts go, Pachter doesn't expect Microsoft to make one on the Xbox 360 until 2007, and even then he expects the price on the premium system to drop to somewhere between $349 and $379. Pachter also adds fuel to speculation that a GameCube price drop is in the works, anticipating the system to start retailing for $79 sometime before the launch of the Wii.

For the industry as a whole, Pachter reiterated his projection of domestic software sales being down 3 percent for the year. However, once the PS3 and Wii are on store shelves and the next generation begins in full, he expects booming growth in 2007 and 2008, with US software sales jumping 16 percent and 17 percent, respectively.

He even projects that the gaming industry will start to overtake some of its media rivals. While it still doesn't hold a candle to the film industry (which Pachter estimates tallied roughly $33 billion in US box-office, rental, and sales revenue last year), he is expecting game sales to overtake domestic music sales in the next two years.