Sony made two big bets with PlayStation 3. First was the cell processor which promised to be a breakthrough in computing power and bridge the gap between x86 architecture and specialized hardware. It proved to be challenging to develop for. The second big bet was on the Blu-rayDVD format. This bet was a mixed blessing. The shift from standard DVD to HD DVD has been much slower than other industry format changes. Sony ultimately won the format battle with Toshiba but they might have lost the war. The Blu-ray drive which is included in every Sony Playstation 3 causes the price of the PlayStation 3 to be $200 more than other consoles like the Xbox 360.

PlayStation 3’s run rate has a compounding negative impact on Sony. Game developers are less likely to build blockbuster titles something the PlayStation 3 has lacked.  Even more important are the third party royalties that come with licensing the PlayStation 3 platform and contribute a majority of profit to Sony’s gaming business. The PlayStation 3 has become a big boat anchor on Sony’s bottom line.

The Wii has been a run away success from a unit perspective. Nintendo cracked the code, broadening the gaming category by pioneering physical game play. Xbox 360 took the next gen gaming console to a new level by creating games in full HD. Microsoft also created an online service with Xbox Live that made games more interactive and social. Microsoft also addressed the expense of game development by creating a tools platform with XNA that makes it easily and cheaper to develop games. All in all Nintendo and Microsoft have both made significant strides in the console wars. Sony seems to be left in the dust.

With all the success the Wii has brought Nintendo, they still are not fully realizing the opportuntiy and taking advantege of the mometum. Supply has been one of the Wii’s biggest missed opportunities. The demand has always outpaced supply and even last year you could not find a Wii any for Christmas. Now, two years later instead of the Wii console being the #1 seller on Amazon its not its the Wii Nunchuck controller. The Wii console is sold out again on Amazon.

The next miss step Nintendo made was not making the Wii fully support HD TV. With sales of HD LCDs and plasmas increasing dramatically people get a poor experience and its not merely a software update to support higher resolutions. The last and most important mistake was not taking full advantage of the massive online community that could be created with 35 million people. Just like Sony missed the boat on building world class online service, Xbox Live has really set the bar on this one and it has proven to be a real competitive advantage.