By Jennifer Tan and Kiyoshi Takenaka
SINGAPORE/TOKYO (Reuters) - If 2006 was the year of the Xbox 360 and 2007 was the year of the Wii, 2008 is shaping up to be PlayStation 3's turn in the spotlight, as it stokes demand in the $19 billion computer gaming industry with some hotly awaited game titles.
Nintendo Co Ltd's Wii outsold Sony Corp's more expensive PS3 console 4-to-1 in Japan this month, but the PS3's maiden victory over the Wii last November showed that under the right conditions, the tables could turn.
Exclusive PS3 titles like puzzle-solving, community-based game "LittleBigPlanet", production improvements that will give Sony room to cut prices, and the recent victory of its Blu-ray technology in the high-definition DVD format war, should drive demand for the games console.
"2008 will be a turning year for the PS3," said iSuppli analyst Pamela Tufegdzic. "Sony is offering a better forthcoming software pipeline with blockbuster titles like "Gran Turismo 5", which will boost PS3 sales this year."
The Japanese electronics conglomerate ruled the global video game industry for a decade from the mid-1990s with PlayStation and PlayStation 2 -- both of which sold more than 100 million units -- but was a year behind Microsoft Corp in releasing its latest console.
The PS3 has also been hampered by its higher price and a lack of must-have game titles.
"We anticipate Sony will have another price slash on the PS3 this year, and come Christmas, consumers who originally bought the Wii will likely purchase the PS3," Tufegdzic said.
"The battle over consoles ultimately boils down to price."
Sony cut U.S. prices for its PS3 in November to $400-$500, compared with $250 for the Wii, and $280-$450 for the Xbox.
The company loses money on each PS3 it sells. Each machine offers the Blu-ray optical disc player and the "Cell" microprocessor that provides life-like graphics for hardcore gamers, driving up production costs.
But Sony expects manufacturing costs to fall below selling prices in the second half of next fiscal year, as it boosts production efficiency and component prices fall. This will give it flexibility to cut prices without incurring hefty losses.
Its game division is set to post an operating loss of more than 100 billion yen ($925 million) in the year to end-March, but aims to return to profit in the year to March 2009.
"The year of the PlayStation 3 started in fall 2007, I think it will be an extended year, we are feeling positive momentum," Scott Steinberg, vice president of product marketing for Sony Computer Entertainment America, told Reuters.
Meanwhile, at $400, the PS3 is the cheapest Blu-ray machine available, and may see spill-over demand from DVD player buyers.
Earlier this month, Sony's Blu-ray technology emerged victorious from a long-running battle to set the standard for next-generation DVDs, as rival Toshiba Corp pulled the plug on its HD DVD format after losing support of studios and big retailers.
"People may buy the PS3 not only for their gaming needs, but for video as well, which gives the PS3 a unique competitive edge over the Wii and Xbox 360 well into the longer term," said Tufegdzic.
Another boost will come from expected blockbuster titles like military combat game "Metal Gear Solid 4", due in the June quarter, and street racing game Gran Turismo 5 -- another PS3 exclusive -- which could come out later this year.
Sales of acclaimed alien shooter game "Halo 3", exclusive to the Xbox released in late September, were important in helping Microsoft's money-losing entertainment unit turn a corner.
Electronic Arts Inc, the world's largest independent games publisher, is banking on a PS3 growth spurt this year, forecasting sales of 9.5-11.5 million units, versus 6-8 million for the Xbox 360.
But Sony still faces significant hurdles.
Its Home network to compete with Microsoft's Xbox Live was delayed, while shipping dates for some major game titles have slipped. Microsoft and Nintendo are also well-placed to match any of Sony's price cuts.
ISuppli's Tufegdzic expects the PS3 to lead the market only in 2011, as the Wii continues to gain momentum after the release of its new home fitness game this year.
Nintendo will launch the popular "Wii Fit" in overseas markets in the June quarter, after unit sales topped 1.2 million in the nine weeks since its release in Japan.
The new game features a weight-and-motion sensing mat, which looks like a set of bathroom scales, and enables players to head virtual soccer balls or experience ski jumping on a TV screen.
With the Wii's launch in late 2006, Nintendo has broadened the market to women and the elderly by offering easy-to-learn games and breaking new ground with motion-sensing controllers that allow players on-screen play, such as swinging a tennis racket.
This has helped its stock surge more than five-fold in the last two years to end-2007, making Nintendo Japan's third-most valuable company.
It might also be too soon to write off the Xbox 360.
Earlier this month, Microsoft said it expected to overtake PS3 sales in the U.S. as it boosts Xbox supply in the coming weeks, after being hit by shortages on robust post-holiday demand.
"Microsoft could gain on Nintendo and run on-par in 2009 if it can boost product reliability, improve the on-line experience and get more titles," said Peter King, analyst at Strategy Analytics. (Additional reporting by Scott Hillis in SAN FRANCISCO; Editing by Peter Henderson and Louise Heavens)