Game on: Console makers in three-way shoot-out

As the Chistmas season approaches Nintendo has been winning market share from rivals Sony and Microsoft by targeting consumers outside the hard-core market. By Nic Fildes

The balance of power in the Japanese electronics industry has tipped further towards Nintendo and away from former bellwether Sony after the phenomenal success of the Wii gaming console helped the Kyoto-based company almost triple its profits in the first half of the year.

Both Nintendo and Sony reported results yesterday and heading into the crucial Christmas trading period, the contrast between the fortunes of two companies could hardly be more stark. Nintendo, which overtook Sony in terms of market valuation in May, has continued its upward march after increasing its forecast for the number of Wii and DS devices it will sell this year. The games company behind classic characters such as Super Mario, Donkey Kong and Zelda, is now the second most valuable company in Japan, trailing only the automotive giant Toyota. Meanwhile, shares in Sony, which has lost almost 30 per cent of its market value since May, slipped further after the company admitted that it could miss its sales target for its flagship PlayStation 3 console.

The reversal of fortunes within the games console sector has been stunning and highly unexpected given Nintendo's Wii was tipped to struggle to compete with its competitors. Sony – which had achieved unparalleled success with the first two incarnations of its PlayStation mach-ine – and Microsoft were widely expected to dominate the market for next-generation consoles with state-of-the-art machines. With Nintendo's GameCube spectacularly flopping only four years ago, many observers wondered whether it had a future in the console market and whether it should instead focus its energy on handheld devices, due to the success of its GameBoy series, and on developing more hit games around Mario and his adventures.

The failure of the GameCube – which went head to head with Sony's PlayStation 2 and the original Xbox – triggered headlines proclaiming that Mario – the animated plumber that symbolised Nintendo's dominance of the computer games market in the 1980s – had finally run out of tricks and the company's valuation collapsed as analysts fretted that Micro-soft's entry into the video games sector may have been terminal for the Japanese company. Nintendo's demise was attributed to a serious strategic error as analysts derided its attempts to target older gamers and a more mainstream audience at a time when sales of violent action games such as Halo and Grand Theft Auto were all the rage.

Yet Nintendo stuck to its guns and despite concerns that the Wii would be another also-ran compared with the top-end Play-Station 3 and Xbox 360, the console has sold like wildfire and proved the doubters wrong. It has outsold the PS3 three-to-one in the Japanese market and five-to-one in the US and has taken the PS2's mantle as the fastest selling console in history in the UK after shifting 1 million machines in just eight months.

The Wii has reinvigorated the video games sector by appealing to consumers outside the "hard-core" gaming market, particularly female gamers and families. While titles such as the ultra-violent Grand Theft Auto: San Andreas and Resident Evil sold well to traditional fans who lust after eye-boggling graphics and more complex adventures, Nintendo recognised that there was a vast untapped market of people who wanted more simple and fun games. The Wii's motion-sensor-based controllers revolutionised the market by allowing consumers to physically play simple games such as tennis and ten-pin bowling on the screen. The games are far more basic than the likes of Halo 3 that boast the best graphics, but that has not deterred consumers from outside the traditional video games audience.

David Yarnton, managing director of Nintendo UK, said the decision to target non-traditional gamers with the Wii has led to household penetration of consoles rising for the first time in 25 years. "Nintendo has identified that the computer gaming market had started to stagnate and despite increasing sales, the household penetration of consoles had remained flat at around 30 per cent for many years. We were selling more as an industry, but we were selling more to the same narrow audience of committed gamers," he said.

Mr Yarnton said the complexity of controls and the amount of time and dedication that most games demand act as barriers to many potential players who simply do not have the time every day to devote to finish a game. He said that by making the controls of the Wii, and the handheld DS console, more simple and allowing "snack-style" play sessions, a style of game play had been created that better fits with people's lifestyles.

Michael Gartenberg, an analyst with Jupiter Research, said: "Nintendo has redefined the notion of how video games are played and, more importantly, who plays them. It went back to the drawing board and said 'it's not about graphics – it's about fun'. It's been a wake-up call for the whole industry."

Mr Yarnton said that these factors have led to titles such as Brain Training and Nintendogs, which has sold 5 million copies across Europe, selling well to women, an audience that has been traditionally hard to reach for games companies. "The balance of DS users in the UK is now split evenly between men and women, something we couldn't have imagined two years ago," he said.

The success of the Wii and the DS was evident in Nintendo's first-half results, with the Kyoto-based company reporting a net profit of £506m, almost three times higher than at this stage last year. It sold more than 7 million Wii consoles and more than 13 million DS devices in the first six months of the year, and upped its forecasts for shipments over the whole year for the second time. It now expects to sell 17.5 million Wiis and 28 million DS units this year and analysts argue that the only thing that appears to be able to slow the company down is keeping up with demand.

Nintendo's resurgence proved to be bad news for Sony, which has spent years gearing up the market for the launch of the PlayStation 3 – the most advanced games console ever developed. The machine also contains a Blu-Ray high-definition DVD player and microprocessor that has been described as a "supercomputer on a chip" that offers the most advanced graphics.

However, the cost of building in such leading-edge technology meant the PS3 was launched at more than twice the price of the Wii and despite the advanced nature of the machine it has failed to keep pace with its rival. Sony's figures yesterday showed that a loss of 97bn yen related to the PS3 was much wider than analysts had pencilled in. Sony was also forced to admit that it may not hit its 11 million sales target for the console this year.

Both Sony and Microsoft have slashed the price of their consoles over recent months to boost sales of their respective products, but Nintendo denied it would lower the price of the Wii as a result. Even after factoring in the price cuts, Sony expects the new PlayStation to break even next year. Howard String-er, the chairman of Sony, has denied that the PS3 has proved unappealing to consumers. He attributes the console's slow growth to a lack of games that utilise the machine's improved functionality on launch, a problem set to be solved with around 200 titles now available. Yet heading into the Christmas period, analysts were pessimistic about Sony's chances of making up some of the lost ground. While Microsoft has kick-started sales of the Xbox 360 with the launch of Halo 3 – a must-have game that achieved sales of $300m in its first week – Sony has yet to convincingly detail how it intends boost sales of the PS3 over Christmas.

Carl Gressum, a senior analyst with Ovum, said the PS3 desperately needs exclusive games that attract the mainstream audience and that the company should start to highlight the Blu-ray player embedded in the machine by bundling in copies of hit films such as Spiderman 3 that are developed by Sony's film division. He added that Sony could also look to use its successful PS2 model to push more basic games, targeting social gamers with titles such as SingStar.

Mr Gressum said Nintendo and Microsoft will probably have very strong Christmas trading seasons. "The wildcard is Sony. It will be very interesting to see if they can increase sales – but they will need great content," he said.

For Sony, this is perhaps the first Christmas in a long time that it will be considered the underdog in the video games market. Yet for now, it seems Mario has prevailed and set a new high score for the sector.

Fitness titles to beat the festive flab

It's not just the consoles that will fly off the shelves this Christmas... the games themselves will also do a healthy trade as more and more consumers look in their stockings hoping for the latest shoot-'em-up, or in the case of the Wii, fitness titles. Microsoft's Halo 3 has stolen the headlines in recent weeks, achieving sales of $300m in one week. But gory alien capers will only appeal to certain gamers and a wide array of sports, problem-solving and fun games like the SingStar karaoke title will appeal to non-traditional video games users. Game titles have proved something of a bane for Sony as its developers have struggled to come up with a killer title exclusive to the console that shows off the machine's superior graphics capability. The Wii's success has led some independent development companies to consider developing hit games exclusively for Nintendo.Yet perhaps the most intriguing title to hit the shelves in time for Christmas will be the Wii Fit, left, which works in tandem with a balance board that detects a player's movement while they exercise by virtually nodding footballs or practising yoga. An exercise game could prove a huge seller in the wake of Christmas overindulgence.