E3 is the showcase for the world's computer-games industry. But have the big players come up with the goods? Rebecca Armstrong went to find out

One exhibitor summed up the week up as "lap dances, champagne, intimate piercings, broken lavatories, sinking boats, days on the beach, and games". The venue for such high jinks? Los Angeles. Where, of course, there were palm trees, big bucks, and high-powered producers.

One exhibitor summed up the week up as "lap dances, champagne, intimate piercings, broken lavatories, sinking boats, days on the beach, and games". The venue for such high jinks? Los Angeles. Where, of course, there were palm trees, big bucks, and high-powered producers.

But this wasn't the movies. The Electronic Entertainment Expo - better known as E3 - is where anyone who's anybody in the computer games industry comes to make it big. Everyone from Sony's CEO Kaz Hirai, Nintendo's president Satoru Iwata to Robbie Bach, chief of Microsoft's Xbox division, gathered in downtown LA to showcase their latest products to the 60,000 visitors flocking from across the globe to the most exciting - and enormous - show of the gaming year.

Two themes emerged: delays to consoles, requiring makers to think of new ways to please the punters; and the increasing effect of films on the games industry.

Everyone was anticipating a next-generation console showdown between Sony and Microsoft. But instead of hearing the magic words "Xbox2" or "PS3", games fans got "customisation". Sounds whizzy; instead it's a cloak for "wait". Customisation means allowing gamers to alter what they already have, keeping the focus on the current generation of consoles.

The first to use the word was Microsoft's Jay Allard, the head of platform gaming. To Microsoft it means giving gamers tools such as integrated video chat, voice messaging, downloadable arcade games and even a matchmaking service as the tools to personalise their gaming and turn their Xbox into a "new form of social entertainment", called "Xbox Live" (XBL).

With nearly one million XBL subscribers already, Microsoft knows which side its bread is buttered, and intends to keep online gamers happy with more internet gaming options. As well as announcing a long-overdue partnership with EA Sports, Xbox launched the long-awaited Halo 2, making a lot of Halo fans very happy.

But not all were smiling. The launch of Xbox2 was notable for its absence: gamers face a wait of at least two more years until the next Xbox appears.

Over at Nintendo, the big news was the launch of the DS handheld device - a two-screened affair met with some suspicion at first, but it plays like a dream. DS doesn't stand for dual screen - that would be too obvious. Instead it's "Developers' System"; and developers are very excited about it. Gamers play using a stylus or a finger on the bottom of the two screens: it makes play more challenging and gives you a totally new perspective. But again the delays: European Nintendo fans must wait until 2005 to get their hands on one.

The second handheld debut was Sony's PSP - a slimline handset with a large screen that looked pretty but was deemed by many to lack the impact of Nintendo's little bundle of joy. Hirai said film studios are lining up to develop games for the PSP, but didn't name names. Watch out for blockbuster collaborations when the PSP hits the UK at the end of the year.

Sony, like everyone exhibiting at E3, has caught the movie-licensing bug. Phil Harrison, head of development at Sony PlayStation Europe, gave a keynote speech at the film festival in Cannes yesterday about the similarities between films and games. The future of gaming is bigger, better film tie-ins. Simply, games based on films sell well. But that's not all positive for the industry.

For some it is. Activision is one of the industry's top producers of movie-licence games, a position it has striven for since the 1980s when it moved from San Francisco to LA to be closer to the bright lights of Tinseltown.

Activision celebrates its 25th anniversary this year, but it's still not easy. Will Kassoy, the company's global brand manager, said the task of creating super-slick movie games boils down to one challenge: timing. "Because it takes on average two years to develop a video-game title, and the motion picture is on a 10-month production schedule, we have to be ahead of the game and plan in advance, working with the rough script and the director early on in the process."

But for smaller developers without a recognised brand name, the industry's obsession with movies is detrimental. Mick Stockton from Mere Mortals, a UK-based developer, thinks smaller developers get pushed aside when it comes to Hollywood licences. "So much money goes directly to the studios with games such as Harry Potter that a lot of control goes away from the games companies, because [for the film studios] it's such an expensive and vital thing to not have anyone mess up your game."

Peter Molyneux, the managing director of Lionhead Studios, champions the industry's smaller developers, for whom things are far from rosy. "Independent developers are really suffering. For a movie franchise game you need about 100 people and £10m. At this year's E3 I really haven't seen any new really successful titles from any independents, and I think it's because of this."

Over at Activision, Kassoy disagrees: he thinks big-name games actually help smaller developers crack an increasingly tough market. "We work together with independent developers - in a lot of cases we would take a feature film property and if a particular developer had great ideas or technology then we'll approach them to gauge their interest on doing a movie-based game. That's welcomed as a good thing because they see that as a way to set themselves apart in the marketplace."

Jay Allard at Microsoft believes that with great power comes great responsibility, and that wherever possible games titans should be looking out for smaller developers in the industry. "We're in a very fortunate position but also a position of responsibility where we have to lift the industries we participate in, not just for our own value."

Molyneux agrees this is vital for the games industry's future. "One thing is certain - for this industry to grow we need to breed innovation, and that comes from small developers. Games that become huge are very seldom sequels or licenses: they're breakthrough games from fledgling developers."

But can licence games provide creativity in game development? Terminator 3 may be fun to play, but there's life beyond film sequels, and endless star-chasing seems to prevent developers from producing truly original games.

Stockton believes that while movie tie-ins can limit creative development, he's happy to let the industry's big fish chase big-name titles. "With our games you don't get the studio involvement that confines what you do," he says. "We have a lot more creative licence as a small developer than others who have to fall in with a film studio's line."

And UK developers can still lead the market in new and innovative games. The Movies, a sim based on running a Hollywood studio - from filming right down to preventing your star from taking too many drugs - was developed by Lionhead Studios, and exemplifies how an original idea can excite gamers and publishers equally.

While some may see this game as the perfect way to reclaim Hollywood for the little guy, Molyneux insists it wasn't a conscious decision. "It wasn't my intention when I was developing the game, and now it seems a bit cheeky for a UK developer to do a Hollywood game.

"A huge number of people in the film business are fascinated by The Movies: I had dinner with a Hollywood studio scriptwriter last night who was really interested in the game - which goes to show how far a little developer from Britain can go."