Jan. 8 (Bloomberg) -- Microsoft Corp. and Sony Corp., the world's two largest makers of video-game consoles, reached shipment targets during the year-end shopping season, a sign their machines will drive electronics sales in 2007.

Microsoft sold 10.4 million Xbox 360 consoles last year, beating a target for 10 million units, the company said yesterday at the Consumer Electronics Show in Las Vegas. Sony's U.S. head said the company overcame production delays to meet its goal of shipping 1 million PlayStation 3 machines to the U.S.

The results underscore the battle between Microsoft, Sony and Nintendo Co. in one of the consumer electronics industry's fastest-growing markets. Sales of video-game consoles may rise 23 percent to $16 billion this year, outpacing 7 percent growth in the industry as a whole, according to the organizers of CES.

``For the consoles, the big year is now,'' said Jean-Michel Salvador, an analyst at Fideuram Wargny in Paris, who tracks video-game software makers. ``Certainly Sony will face a larger challenge than in the previous cycle.''

Microsoft, based in Redmond, Washington, sells the Xbox 360 for $300 to $400 compared with a retail price of $500 to $600 for Sony's PlayStation 3. Nintendo's Wii, introduced in November about the time as the latest PlayStation, sells for $250.

`Most Direct Competitor'

``Sony is our most direct competitor,'' Microsoft Chairman Bill Gates said late yesterday at a dinner with reporters. ``Our goal was to not be Sony, not be a big box, not be expensive.''

To make shipments, Tokyo-based Sony diverted parts meant for its Blu-ray DVD movie players to game consoles after a shortage of diodes limited PlayStation supplies, said Jack Tretton, Sony Computer Entertainment's U.S. president. Stan Glasgow, president of the company's U.S. electronics unit, said in an interview that the company had ``strong holiday sales'' in the U.S. and Blu-ray player sales won't be affected by the move.

Microsoft shares rose 29 cents, or 1 percent, to $29.93 at 4 p.m. in Nasdaq Stock Market composite trading. They have risen 11 percent in the past year. Sony's U.S.-traded shares rose 1 cent to $44.81 in New York Stock Exchange composite trading. Markets in Tokyo were closed today for a holiday.

Sony, the largest maker of video-game consoles, initially stumbled with production glitches that led the company to delay the PlayStation 3's introduction last year as well as slash shipment and profit targets in October.

``In 2007 we'll see everyone establish their market share,'' Salvador said. ``The Xbox came out first so Microsoft has an advantage of timing. We'll see whether the Wii can take a meaningful share of the market.''

Home Entertainment

Sony is billing PlayStation 3 as a complete home entertainment system. In response, Microsoft said yesterday it will enable the Xbox to function as a television set-top box in time for year-end holiday shopping. The feature is another attempt by Microsoft, the world's largest software maker, to broaden its offerings beyond personal-computer programs and capitalize on higher sales of its video-game consoles.

``Because Microsoft has been associated so much with work software they do have a little challenge in making Microsoft a sexy consumer brand,'' said Matt Rosoff, an analyst at Kirkland, Washington-based Directions on Microsoft.

Gates gave his 11th speech at the Consumer Electronics Show, joined on stage for the first time by Robbie Bach, president of Microsoft's entertainment and devices division, which includes Xbox and the Zune music player. Microsoft introduced Zune last year to take on Apple Computer Inc.'s top-selling iPod device.

Whenever, Wherever

``We want people to be able to get their content whenever and wherever they want on whatever device they want,'' Bach said yesterday. ``I'm very excited about the progress we've made. This ecosystem is alive, it's growing, it's burgeoning.''

Bach didn't give details on negotiations with potential Xbox partners or say what features will be enabled by the Xbox 360 when it is used as a set-top box. Typically set-top boxes are distributed by cable companies and can offer services such as digital television, video on demand and digital video recording.

Microsoft also plans to double the number of games it sells for Xbox to more than 300 by the end of this year, Bach said. He said in an interview that the company shipped 2.7 million copies of the game ``Gears of War'' during Christmas. That title as well as ``Halo 3,'' the third installment to the most popular Xbox franchise, will keep Xbox 360 ahead of Sony's PlayStation 3, Bach said. ``Halo 3'' goes on sale this year.

``The replacement of old consoles will accelerate this year,'' Fideuram Wargny analyst Salvador said. ``The growth in software will follow.''

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Michael White in Los Angeles at mwhite8@bloomberg.net

Last Updated: January 8, 2007 16:06 EST