A massive 188-page report from Wedbush Morgan Securities analysts Michael Pachter and Edward Woo details why they think the Xbox 360 will retain its first-mover advantage -- for two years, anyway -- and how Sony is more interested in the HD format wars than the console battle.

WMS says that the primary driver of next generation hardware sales will no longer be the amount or quality of videogame titles per console, but rather consumers' willingness to adopt new high definition DVD formats.

If this theory proves true, the next console cycle wouldn't be the first time video playback capabilities played a factor in console sales. The PS2 served many as a cheap DVD player in the console's early days, although the launch of DVD happened 3 1/2 years before the PS2 launch. The PS3 and its high-def format are launching closer together (after what Pachter implies was a well-planned console "delay"), indicating that Sony is targeting movie fanatics with its Blu-ray enabled console that just happens to play really nice-looking videogames.

"We expect the dominant console at the end of the next cycle to be the Sony PlayStation 3 (PS3), primarily due to our assessment that Sony will win the high definition DVD format war," the report explains. "However, we expect Microsoft’s Xbox 360 to enjoy a first mover advantage for the next two years, capturing approximately 42 percent of US and European combined next generation hardware unit sales through 2007."

The firm believes that the PS3 will capture 39 percent of the US and European market, with the Wii claiming 19 percent during the same two-year period. For the same two regions, WMS expects that "As consumers begin to purchase a second console, we think that market shares will normalize, with Sony capturing around 45 percent of the total market, Microsoft capturing 35 percent, and Nintendo capturing 20 percent."

As for Japan, the Xbox 360 is expected to remain a moot point in the country, with Sony and Nintendo claiming 65 percent and 25 percent of the market through 2010.

Of course, the PS3 will be the only console capable of playing high-definition movies (Blu-ray) out of the box, although Microsoft is expecting to release an HD DVD add-on for the Xbox 360 later this year. Nintendo chose to forego high-definition capabilities for its Wii altogether. Clearly, if high-definition video playback is the key to the console war, Sony has a definite advantage.

Pachter and Woo also anticipate that third party publishers won't be as motivated to offer exclusive titles for the PS3 and Xbox 360, because of their similarities. This is where the Wii's distinctiveness could come into play, possibly driving hardware sales to exceed those of the GameCube.

We believe that the Xbox 360 and the PS3 are far more similar than their predecessors were, and believe that the economics of game development will serve as a disincentive to third party publishers to offer exclusive content for either console. As a result, we think that Nintendo’s Wii, backed by the company’s deep library of high quality content, may surprise many by gaining a greater share of the market than did its predecessor, the GameCube."

Also of note was WMS' belief that revenue streams associated with online gaming won't become a significant source of revenue "until penetration of the next generation consoles exceeds 50 percent of the ultimate installed base", which the firm expects to occur in late 2008 or early 2009.