Why Xbox, PS3 Fell Behind Wii

Microsoft and Sony will talk up their console-centric home entertainment plans in back-to-back keynotes at CES.

Ever since the debut of the Atari 2600 in 1977, if a console vendor's gaming instincts were not clean and strong, consumers would hesitate at the moment of truth. The consoles would not sell. And console makers died.

It's now clear that lesson was lost on Microsoft (nasdaq: MSFT - news - people ) and Sony (nyse: SNE - news - people ). Expect Microsoft Chief Executive Steve Ballmer to talk a lot about the Xbox 360 at the Consumer Electronics Show in Las Vegas on Wednesday, and Sony Chief Howard Stringer to highlight the role of the PlayStation in that battle as part of his CES keynote the next day.

For now, at least, the two consoles lag far behind Nintendo's (other-otc: NTDOY.PK - news - people ) Wii, in large part because of the Wii's low price and focus on family-friendly games. As Microsoft and Sony tried to transform their gaming consoles into set-top supercomputers able to juggle any kind of home entertainment, tiny Nintendo snuck by to grab the console crown from Sony's Playstation 2.

So what went wrong? An insider-y new book, The Race for the New Game Machine, due out later this year, and reviewed by the Wall Street Journal, sheds some light on what happened.

The account, written by a pair of IBM (nyse: IBM - news - people ) engineers, documents the effort by Sony, Toshiba (other-otc: TOSBF.PK - news - people ) and IBM to create a new processor for the PlayStation 3. It now looks like Sony got taken, with Microsoft ordering a processor from IBM that took advantage of much of the work done by Sony and its partners to create the cell.

The result: The feature-laden PlayStation 3 now starts at $379, Microsoft's Xbox 360 starts at $199 and the Wii, after starting out as the cheapest of the trio, now goes for $249. "Sony almost crippled themselves pursuing Microsoft's vision because they over-engineered it," says Wedbush Morgan analyst Michael Pachter. "They were really thinking about a home media center."

All that engineering, however, has yet to pay off. According to figures released by Nielsen Media Research, Sony's old PlayStation 2 is still the most used gaming console, accounting for 31.7% of the time spent playing. The Xbox 360 was second, with 17.2%, then the Wii with 13.4%. The original Xbox still gets 9.7% play time, but Sony's latest console, Playstation 3, racked up just 7.3% of total console usage time.