This month`s E3 event, the video games industry's biggest trade show, will provide the first glimpses of the upcoming struggle between Microsoft and Sony in the battle for the video games stakes. It is expected to be a brutal two-way fight. For, after a difficult start, Microsoft has now established itself as Sony's main rival, and is gaining momentum. While Microsoft is focusing on software, Sony is emphasising hardware innovation for its PlayStation 3. Its plan, which it has yet to describe fully, is to use a new kind of chip, called Cell, as the basis for both the PlayStation 3 and its consumer-electronics devices, such as DVD players. But its radical new architecture will require games programmers to start from scratch.

Microsoft senses an opportunity. It is widely expected to steal a march on Sony by launching the Xbox 2 towards the end of next year, kicking off the next round before Sony is ready. “Microsoft has taken the gloves off,” says an industry insider. The PlayStation 3 is not expected until early 2006, and even then only in Japan; analysts do not expect the worldwide launch until late 2006. (Nintendo's successor to the GameCube is also expected in 2006.) Last time around, Sony's 18-month head start and Microsoft's status as the industry's newcomer meant that the Xbox never had a chance of catching up with PlayStation 2; it was always going to be just a trial run for Microsoft. But now Sony and Microsoft look evenly matched—and the battle can begin in earnest.

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