Bach says things are coming together. Xbox Live is years ahead of Sony, with more than 4 million active members, he says. Microsoft has also launched its $199 HD-DVD add-on accessory to compete with the PS3's ability to play Blu-Ray high-definition movies. Microsoft has begun a service to allow 360 owners to download movies and TV shows onto their consoles. And with a new update, the 360 can now display games in the same 1080p resolution the PS3 uses. "As far as technology goes, it's a wash," Bach says.

Sony's executives say they're just getting started.

"If you look at our launch titles, our lineup looks very good compared to what Microsoft has," said Phil Harrison, head of Sony's worldwide game studios.

But Sony has plenty to worry about. At the very least, industry executives and analysts believe Microsoft will gain market share in the newest generation of consoles. And if Sony and Nintendo fail to execute, Microsoft might have a chance to take the lead.

"Sony could go from first to third," said David Cole, an analyst at DFC Intelligence in San Diego, CA. "Clearly, it will be a much closer race this time."

But it's too early to count anyone out. Both Sony and Nintendo were able to delay their own launches of next-generation consoles because their profits were being fueled by the launch of new handhelds. In 2005, those handhelds accounted for the bulk of the growth in the market, allowing Sony and Nintendo to hang on to a lot of the industry's profit. In 2006, the Xbox 360 has fueled a lot of growth in revenues, but Microsoft hasn't been able break into the black. Meanwhile, Sony is enjoying a lot of residual sales for games on the PlayStation 2, which has been outselling the Xbox 360.

Some of the company's big first-party titles, such as Crackdown, Too Human and Mass Effect, have slipped in production, and won't be released until 2007. The dearth of first-party titles reflects the fact that Microsoft has the smallest internal development team among the console makers. It has about 1,200 game developers, while Sony has 2,500, Nintendo has an estimated 1,500 and Electronic Arts has more than 5,500. It will be hard for Microsoft to beat its rivals if it doesn't have enough soldiers on the battlefield.

Microsoft has also failed to take advantage of its lead as much as it could have. A big shortage of memory chips hamstrung production in 2005, and poor quality on the initial units forced Microsoft to make an embarrassing admission 10 months after the launch: Units made before 2006 were so poorly constructed, Microsoft promised to offer free repairs to anyone who had problems with an early console. And while Microsoft promised to hit 10 million units before Sony sold one, the company only had sold six million units - shipped into the distribution system - as of Sept. 30. Clearly, there has been a lot of friction that has held back Microsoft from cementing a huge early lead.

P.J. McNealy, an analyst at American Technology Research, says Microsoft's production problems are behind it, and he estimates it could sell 10 million to 11 million consoles by the end of the year. By comparison, he thinks Sony will be lucky to ship two million consoles, while Nintendo could move four million Wii machines. Thanks to its long head start, McNealy said Microsoft will still be ahead of Sony by the end of 2007.

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