In the killer game for three players, only one will win

Sony, Nintendo and Microsoft are going head-to-head in a market worth £1bn.

It's Christmas and it's war. The battle to be the season's best-selling hi-tech stocking-filler is raging as fiercely as in any year, but this time it isn't just the kids whose opinions matter. The scrambles for Buzz Lightyear and then Pokémon were mere skirmishes compared to what retailers now have on their hands: a fight to the death between the video games consoles.

Christmas 2002 marks the first time that three major consoles have properly competed head-to-head in the UK's festive arena. Sony has its PlayStation 2 (PS2), the veteran title-holder; Nintendo its GameCube, the bargain play; and Microsoft its Xbox, a device on which the world's biggest software company has pinned all its hopes. There has also been a big shift in the profile of console users: the average player age has been creeping up for a decade, and this year, for the first time, it is now nearer 21 than 13.

The prize at stake is more than just the honour of victory. Recent gloomy US and UK consumer confidence figures have sent a shiver down the spine of many parts of the retail sector, but the video games industry is quietly confident of a bumper year. The first nine months of 2002 have seen record software sales of £684m in the UK alone. The European Leisure Software Publishers' Association points out that in the three months leading up to Christmas, sales of consoles and games tend to rise by 140 per cent, which is likely to make this Britain's first year with annual games sales over £1bn.

For the console makers, the competition is not simply about a slice of those seasonal sales. The machines themselves are sold for only a tiny profit because Sony, Nintendo and Microsoft make their margins by selling licences to the companies that make the games. The consoles' struggle at this point in the year is to gain that crucial foothold below the television set. Industry experts from City analysts to games magazines have devoted themselves to the question of which of the three will emerge victorious. A slim majority believe Nintendo and Microsoft won't have the muscle to knock the PS2 off its perch, though all point out that it only takes one "killer game", restricted to use on one console only, to turn the whole situation on its head.

The three-way tussle for the top has had an unexpected effect. Logic would suggest that the sales drive by the console makers would have been great news for the software makers, which now have more formats on which to sell their wares and more potential customers. So far, however, it does not appear to be working like that. The huge choice of games on offer from Sony, Nintendo and Microsoft has meant that all but a few leading titles are selling less well, and that in many cases development costs have not been recouped. The merger two weeks ago of the Japanese giants Square and Enix is seen by senior sector analysts as a sign that, rather than flourishing, the software houses are having to resort to defensive mer- gers. More may follow.

Sony is certainly relying on a handful of "must have" titles to cement its position at the top of the console charts, but has the added advantage of having been around for much longer than its rivals. The PS2 was on UK shelves last Christmas and has had nearly two years to establish a global base of owners running into the tens of millions. Sony also took the shrewd step of allowing the PS2 to play games made for the original PlayStation – a convincing selling point for those who had invested heavily in their games collection.

Sony has made a virtue of embracing games titles explicitly aimed at an age group with a relatively higher disposable income – the 21- to 35-year-olds who frequently impulse-buy games priced at around £40. This year's best-selling title, released three weeks ago, is expected to be Grand Theft Auto: Vice City, which carries an "18" certificate and has been roundly criticised for its violent content.

The overall Sony strategy, however, is deadly simple: to swamp the market with games. "Our strongest aspect is the fact that there is such a wide choice of titles," says Darren Carter, Sony's director of UK marketing. "Whether you're a hardcore or a casual gamer, there's a type of game to suit everybody in every category."

All is not quite so well with Nintendo. The Japanese company is reeling from a mighty €149m (£95m) fine dished out by the EU on antitrust grounds and is beating off rumours that it has fallen behind the Xbox over the past few weeks. Its approach has been to stick to the formula that ensured its dominance of the games scene in the 1980s and early 1990s, with beefed-up titles featuring famous characters like Super Mario and Zelda, who are popular with children.

This Christmas is something of a last chance for Nintendo. Its old rival Sega bowed out of the console market after its Dreamcast machine flopped, but has successfully reinvented itself as a software producer. Rumours abound that Nintendo may do likewise if the GameCube fails to make a yuletide impact.

The bosses at Xbox, Microsoft's first effort to get into the games market, are also hoping that sheer weight of titles will be enough to steal the show. It has something of an uphill struggle ahead. When the machine launched in the UK earlier this year, its makers stunned the market with a pair of swift price cuts that smacked to most of outright desperation. "What is not in any doubt is Bill Gates' commitment to the machine," said one senior City games analyst, "which means that money will be thrown at it until it either works or goes down in flames."

Much of that money will be directed at Xbox Live!, a scheme to pitch the console as the favourite portal for online gaming – an area Microsoft is clearly hoping to dominate in its formative years.

Whether the promise of future online tournaments will be enough to steer buyers away from the PS2 this side of 2003 is a question both the games makers and the analysts are straining to answer. As history shows, share prices rise and fall on Christmas performance. But all the players agree on one thing: too much is at stake for this sales war to be a game.