Microsoft entered the games market knowing that it would take time, talent and money to get into a competitive position with Sony. Sony had a near-impregnable hold on the market. But in this market Microsoft performed ahead of expectations. It is giving Sony a good run for its money—having paid $billions just to get into the market.

The games market has significant barriers to entry, chief of which is that games consoles are typically sold at a loss, with revenue being recouped from royalties on games. Establishing a popular console means building a good inventory of titles, which is chicken-and-egg. But Microsoft did this. It did it partly by doing something it does well: nursing a developer network. It was also fortunate that Halo, a “must-have” game, quickly emerged for the XBox.

Microsoft deserves credit for the elegant design of the XBox 360 and for its success in promoting the use of its gaming network: 60% of its gaming customers use it. Most of the other positives about the XBox are negatives about Sony. While Sony was promising to release the PS3 not long after the XBox 360, delays prevented it. In fact, Sony almost missed the holiday season games bonanza completely, as it was unable to meet the demand. In the meantime, XBox 360 was the only games machine in town and sold in the millions.

Sony was set to wrong-foot Microsoft with its use of the Cell chip which provides more sophisticated graphics than XBox 360 and its introduction of Blu ray optical disk, which Microsoft does not support. But Sony blew it. Not only was the console massively delayed, but the cost of the console (nearly twice the cost of Xbox 360) was forced up by the cost of Blu ray. And while it once seemed that Sony would be able to establish Blu ray as the optical disk standard (for movies and games disks), this is no longer a “given”. The consequence was that Microsoft stole a march on Sony and the PS3 may not sell as extensively as it would have.

But then came Nintendo with its Wii. There is now no doubt that the Wii is the games success of the holiday season and Nintendo has not been embarrassed by the supply problems that Sony has had. Remarkably Nintendo shipped 1 million Wii consoles in just 10 days. Wii has fast become a gaming phenomenon and it now looks like there are three titans fighting for dominance of the games market, with Nintendo now looking as though it will show both Microsoft and Sony its heels.