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By Julie Meyer, 14 November 2006 09:55

COMMENT

The need among large technology companies to be all things to all people is throwing up some clashes between names who once rarely occupied the same space. Software behemoth Microsoft versus home electronics giant Sony is perhaps the most mouth-watering. Ariadne Capital's Julie Meyer explains.

This Christmas season looks set once again to throw up intriguing battles between some of the biggest names in tech. But the difference this year to seasons past is these could now be battles which define the very futures of their protagonists.

The battle for the hearts and minds of gamers is well and truly on in the run-up to Christmas and the bout everybody is talking about is Microsoft's Xbox 360 versus Sony's PlayStation 3.

And the two companies will also lock horns in the music player space once the Microsoft Zune is thrust into a market where Sony has already been playing catch-up on the market's dominating force, Apple.

Sony Walkman portable MP3 players don't sell anything like Apple iPods and it is unclear whether the new Microsoft Zune will do any better despite some bullish predictions and pre-release consumer interest.

But Microsoft's target is Apple, not Sony, and the Redmond giant is a master at iterating and earning the profits by watching the market and bringing in innovation. So don't count them out.

Could the same thing happen to the iPod as happened to the Macintosh? Will Apple never tire of launching insanely great products that open new markets only to lose out over the long haul on the profits from the mainstream?

Where Sony does make an impact in the portable music space is in selling mobile phones under the Walkman brand - a massive help to Sony Ericsson. But that space will likely also see some serious competition, especially with rumours rife of an Apple iPhone.

If anything, serious competition – or perhaps having a lead to follow – tends to bring out the best in Microsoft. And of course Microsoft and Sony have done battle before – with Sony the clear winner in the previous generation of game consoles.

Playstation 2 has sold over 100 million units worldwide to date with Microsoft Xbox a distant second.

But Playstation has been an overweight contributor to Sony's bottom line for a decade. Now Sony's profits are down, much of which is attributable to the launch costs of the delayed PS3, while Microsoft recently announced forecast-beating profits.

Microsoft also has a head start with the Xbox 360, having already sold six million worldwide. PS3, meanwhile, is only just reaching the market, and even then only in Japan at present - with a US launch scheduled for this side of Christmas.

The delay is due to Sony making the Blu-ray drive (next generation high capacity and high definition DVD format) central to the PS3; they are having problems building them in quantity. In effect, they are sacrificing PS3 to make Blu-ray the next DVD standard, raising the stakes into a 'must win' battle rather than a mere product launch.

Having seen Betamax lose to the VHS standard, the industry knows there’s a lot to play for in establishing the next standard in the DVD space.

Sony will have to play catch-up with PS3. They may be able to sell as many as they produce for the first year as their brand is strong, demand is huge and the big price tag will not deter the early adopters. They are likely to surpass Microsoft's 360 eventually (360 is not selling in Japan, just like the original Xbox, and that is a huge market) but it will not be a runaway success like last time.

And as with the music player market there is a third, very significant player in all of this. And much of the smart money is going on Nintendo.

Nintendo's new Wii gaming console is out before Christmas. Cheaper than both 360 and PS3, it will be available in quantity. Many who follow the space closely believe it will match or exceed the sales of 360 or PS3. It does not sport High Definition output like the others but, really, who cares?

Consolation for Sony: if its PS3 and Blu-ray combination strategy works, the PS3 will seed the market and defeat the Toshiba/Microsoft High Definition rival. Blu-ray's licence revenues will offset the PS3 relative decline and Sony could look very smart on the other side of 2007.

But the bottom line is Sony's future as a company is dependent on PS3 and Blue-ray success. Microsoft's future is not.

Julie Meyer is CEO of investment and advisory firm Ariadne Capital, with contribution from Ariadne Capital digital entertainment executive Paul Flanagan.