Date Xbox, Marry Wii, Kill PlayStation

Now that we have all three next generation consoles on the market, the video game wars are getting interesting. It should be great for software developers and websites that cater to diehard gamers. But what about the console makers themselves?

That is where I'm going in today's installment of the "date, marry, kill" game. Want to play along? Just plug in your controller and hit Start.

Date Xbox 360
The Xbox 360 is a slick machine. Sure, the first few may have overheated now and then, but that's the price you pay to be an early adopter. Even I experienced the dreaded "red rings of death" malfunction and had to ship my system in for service. However, Microsoft (Nasdaq: MSFT  ) has made the most of its head start, moving 10.4 million units through the end of calendar 2006.

Things aren't perfect, though. The company posted a loss in its consumer electronics division (that includes both the 360 and the Zune media player) for the December quarter. It is also looking to sell just 12 million units by the end of its fiscal year in June. Mr. Softy had originally expected to sell between 13 million and 15 million consoles by the end of fiscal 2007.

There are still some reasons to get excited, though. Every gamer worth his or her salt is waiting for the release of Halo 3. Microsoft's Xbox Live service is finding new ways to create incremental revenue through downloaded games and add-ons. The company's acquisition of Massive, the leader in selling in-game advertising, places Microsoft in the pole position of a booming industry.

I may have given Microsoft a death sentence in paid search earlier this week, but it should continue to be the console to beat in the near term, as Nintendo's (OTC BB: NTDOY.PK) Wii and Sony's (Nasdaq: SNE  ) PS3 establish their systems and ramp up production.

Marry Wii
I'll just say it, the Wii rocks. I was skeptical as I was placing it under the Christmas tree two months ago. Its spec sheet pales in comparison to its rivals. Thankfully, the $250 price point has it cashing in at a fraction of the price of its competitors.

Despite the low price, just about every industry source claims that the Wii is the only system being sold at a profit. Sony and Microsoft will make their killing in software royalties.

Is the Wii simplistic? You bet. However, I can't think of a single video game that has gravitated my entire family to play together like Wii Sports. I remember making fun of the system's silly name and its gutsy move to go with motion-based controller, but I'm a convert. I can be engrossed in games of Call of Duty or Gears of War on what are technically superior systems, but I never find myself laughing the way I do when the family gets together for a little Warioware or Wii Sports bowling.

Like its inventive, noggin-massaging titles for the Nintendo DS handheld system, the Japanese gaming giant is doing it right. It is winning casual gamers over on personality, while its beefier rivals duke it out for the fierce gamers. Free cash flow has been on a tear over the past two years.

Some still see the Wii as an eventual third-place finisher. After all, the 360 had a year lead on its competitors, and the PS3 should benefit from the PS2 being the platform of choice. I don't agree. I don't think that there will be one runaway winner here in the seventh generation of the console wars. They all stand to carve out thick slices. My nod to Nintendo as the winner stems from the argument that it will be the most profitable player thanks to its low-cost hardware and strength in proprietary software.

Kill PS3
The PS2 is the best-selling console of all-time, and is still selling briskly. It's also a slap in the face to the PS3. Sony's new gaming device is a thing of beauty, yet the pricey hardware that banked on rapid adoption of the Blu-ray disc format is off to a slow start.

Even with a limited number of units available during its launch, the systems were being swapped for meager markups on auction sites over the holiday season. You don't have to jump through hoops to get a PS3 these days, yet shoppers still aren't flocking.

Sony can't admit its mistake and scrap the PS3. It has no problem selling plenty of PS2s until the market does come around. However, Sony will soon discover that it's not easy being in the pack. As the undisputed leader, software publishers often earmarked titles exclusively for the PS2. It's where the money was. Now the dynamics have changed. Companies like Electronic Arts (Nasdaq: ERTS  ) and Activision (Nasdaq: ATVI  ) , which were pretty good about spreading the wealth, will continue supporting all three systems.

In the meantime, platform-specific titles -- like Halo for the Xbox and the Super Mario, Donkey Kong, and Zelda Nintendo franchises -- will stand out even more as ambassadors for their consoles. And that equals more bad news for Sony.

Sony will be pressured. It's already being pressured financially. Because of its embattled state, the company may be hesitant to commit to price cuts to help grow the PS3's base at the expense of near-term profits.

Oh, you've got to love the video game wars. Sometimes they're even more exciting than the video games themselves.

Check out the rest of the "date, marry, kill" series:

Electronic Arts and Activision are popular recommendations for Motley Fool Stock Advisor subscribers. To see what other great stocks have been selected, take a free 30-day trial today.

Microsoft is an active pick for Inside Value readers.

Longtime Fool contributor Rick Munarriz loves to play games but he does not own shares in any of the companies in this story. He recognizes that nearly all of the 50 states ban marriage between a man and a stock. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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