Hard drives keep getting fatter in the video game console war. Microsoft (NASDAQ:MSFT) will be rolling out a new heavy duty version of its Xbox 360 next month, complete with a 120-gigabyte hard drive and high-def hookup cables.

The system will retail for $480. The hard drive is six times larger than the 20-gig storage solution that shipped with its $399 premium model in 2005. The new drive will also be available as an upgrade accessory for existing 360 owners, with a $180 price tag for the drive and the tools necessary to transfer data over from the older drive.

Welcome to the arms race of the storage variety. Sony (NYSE:SNE) rolled out its PlayStation 3 this past fall at $499 for a basic model with a 20-gig drive and $599 for a spruced-up version complete with a 60-gigagbyte platform. The lower-priced Wii from Nintendo doesn't have a hard drive, opting for half a gig of flash memory instead.

It's easy to see why Microsoft is looking to fatten the capacity of its 360. It is more than a disc-based gaming console these days. A Hollywood Reporter article claims that it trails only Apple (NASDAQ:APPL) in terms of video downloads. Digital delivery is also a big part of the enhanced gaming experience. With 135 million downloads on the Live Marketplace, including the first stand-alone game to top a million units sold virtually in Uno, bigger drives mean bigger opportunities.

Just as older computers with flimsy hard drives fill up way too quickly in this day and age of MP3 music files and even chunkier video, the next-generation systems are also expanding in their functionality.

Even the Wii, despite being far behind its rivals on specs and storage, became the top-selling platform last month due to its diversity. I've used the Wii to surf online, pull up weather reports, and read up on breaking news. That's not too shabby for a $250 device that just happens to play some pretty engaging games, too.

As for Microsoft, the company's capacity-widening initiative should be a dinner bell for all Hollywood studios that want a thicker slice in the high-margin market of digital distribution. It already has most of the heavies like Viacom (NYSE:VIA), Time Warner (NYSE:TWX), and Lions Gate Films (NYSE:LGF) in its corner. The rest are likely to follow. When the game gets to be this good, you'd be a fool not to play.

Microsoft is an active stock pick for Inside Value newsletter subscribers. Yes. Mr. Softy is now a value stock! Nintendo and Time Warner are Motley Fool Stock Advisor recommendations.

Longtime Fool contributor Rick Munarriz is a fan of all three consoles but finds himself spending way too much time with the family on the Wii at the moment. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.