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Sony's Hollow Victory Over Microsoft

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Sony has consolidated its victory over Microsoft in the latest round of the game console war, but the next battle will be fought in the cloud, and there is no telling who might win it -- or even whether it will be one of the current contenders.

Sony says gamers have bought 7 million of its PlayStation 4 consoles, which debuted in November, while Microsoft has moved only 5 million of its XBox One, and that's to retailers, not to users. So no wonder that, on a chemistry level, the Japanese company won the presentation bout at this week's Electronic Entertainment Expo, or E3, in Los Angeles: Its executives had more confidence and were more at ease than their competitors. Moreover, the PS4 has allowed Sony to surpass old rival Nintendo in annual sales for the first time in eight years.

Andrew House, chief executive officer of Sony's computer entertainment division, deserved his moment in the limelight: His company didn't make any of the marketing mistakes Microsoft has spent the last year correcting. It didn't try to bundle a motion controller with the PS4, the way Microsoft did with its Kinect, so, at $399, Sony's offering was $100 cheaper. Nor did it set unnecessary requirements like always-on Internet, or try to limit second-hand game selling or trading. It won by presenting a cleaner, more customer-friendly offering.

There is, however, nothing much to celebrate in the medium- to long-term. In the first quarter of 2014, according to NPD Group, spending on video hardware increased 47 percent compared with a year earlier, to $983 million -- all thanks to Sony's and Microsoft's next-generation consoles. Yet total consumer spending on video gaming actually fell 1 percent, to $4.6 billion. The drop is mainly explained by a slump in sales at brick-and-mortar stores, still an important channel for the industry.

Although millions of the new-generation consoles are sold, the industry is still shrinking, as it has done since 2009. It is now clear that the PS4 and the XBox One will not replicate the runaway success of Nintendo's DS and Wii at the end of the last decade.

The industry has changed. The advent of mobile is only part of the story: a content glut and consumers' newfound streaming habits are just as important. In the first quarter of 2014, NPD noted a 4 percent increase in the digital sales of full games, as well as growth in mobile and second-hand sales.

Amazon, not Sony or Microsoft, was actually the first to market in the U.S. with a device that took these changes into account: the $99 Fire TV. It works as a set-top box for streaming content, but it is also a powerful game console with some original content produced for it. It's cheap and a compromise, but it does the job for people who are not all that serious about gaming. For that matter, consoles are already a compromise: True digital warriors assemble their own rigs at a much higher cost than $400.

To me, Sony's biggest news at the E3 was the upcoming Western release of the PlayStation TV set-top box, which Sony has already tried out in Asia. The box, priced at $99, will work with Sony's streaming game service, PlayStation Now, which will become available in beta version on the PS4 at the end of July. Streaming is an excellent way to move all that old game inventory: People will be able to rent games for $2.99 to $19.99, as much as they pay now for a second-hand game. Not surprisingly, the beta library offers only previous-generation PS3 games.

Microsoft doesn't have a similar offering. Even though it is extremely serious about using the cloud in game development, it is about to be left behind in areas where the video game industry has the most potential. As has happened many times in its history, Microsoft had the winning idea before its competitors but failed to capitalize: The company's E3 presentation last year sold the XBox One as a universal media center rather than just a game console. Consumers booed. Now that Sony is offering the same functionality for $99 and throwing in game streaming, they are intrigued.

The revolution that transformed video and music distribution is now inevitably coming to gaming. Games will be streamed to various devices, from powerful PCs to cheap set-top boxes, and the industry's eventual winners may be the likes of Amazon or some up-and-coming equivalent of Netflix or Spotify, rather than the current market leaders. And that's not the end of disruption in the video game industry: The virtual-reality battle is coming, and both Sony and Microsoft would like to slug it out with newcomers like Facebook-owned Oculus.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net