Nick Williams, OTX Research

On how recent economic setbacks could affect Microsoft and Sony's respective consoles...

While video games remain a growth industry, the overall drop in consumer spending during the last several months has constricted the rate of expansion that you would expect at this point in the console cycle.

That said, the PS2's continued success more than eight years after launch suggests that Sony is thinking long term with the PS3. If Sony can continue to bring down hardware manufacturing costs, it seems likely that it will offer a price cut by the end of Summer 2009.

The launch of God of War III in late 2009/early 2010 will mark a pivotal moment for Sony. But in order to ensure that this game is a hardware sales driver, the cost of the base-level PS3 will need to be in the same ballpark as the Xbox 360 and Wii.

According to our latest consumer tracking study, only two in three people who plan to purchase God of War III currently own a PS3.

Microsoft faces a different set of challenges. The Xbox 360 is now the de facto leader in connected consoles, and Xbox Live is the leading edge for new experiments with downloadable content.

In order to stay a few steps ahead of Sony in the online space, Microsoft needs to continue refining Xbox Live as a valuable medium for both consumers and publishers. During a time when consumers are doing less shopping, an impulse buy on Xbox Live is going to be a lot easier to swallow than a drive to the local store.

On how layoffs and downsizing could affect game development output...

For the majority of publishers, the conventional wisdom is to stick with the tried-and-true franchises that yield a more predictable return on investment. Everyone knows that it is not possible to create a five million unit blockbuster with every new IP investment, but gaming audiences have always been receptive to creative new ideas.

In an age of hyper-connectivity, word-of-mouth now spreads like wildfire, and there is no better example of this than Valve's Left 4 Dead, as distributed by EA Partners.

Of the hundreds of 2008 holiday titles, Left 4 Dead was one of the few titles that experienced a significant lift in purchase intent and positive buzz after the game launched. New ideas can make it to the top with the right mix of game quality, originality, and marketing.

On whether there could be more layoffs, mergers, buyouts, etc....

The video game industry has been heading towards the consolidated movie studio model for quite some time now, and the recession will only accelerate this process. Game stocks have dropped dramatically in recent months, and as a result, there are some bargains to be had for the major publishers and outside players looking to get in the game.

There has been a glut of activity, with Midway filing for bankruptcy, Square Enix bidding for Eidos, and Namco Bandai looking to acquire D3 Publisher. So, yes, until the economy turns around, you can expect to see more mergers and buyouts.

With Warner Bros. and Disney both announcing significant new investment in the games sector, it is worth noting that the movie industry appears eager to capitalize on the synergies between the film and gaming industries in order to stay relevant with a young, connected audience.

Most of the major movie studios already own gaming companies, and it would not be surprising if there were some additional acquisitions in the next year.