And as the holiday shopping season approaches, Sony and Microsoft are preparing to launch virtual communities. Sony has delayed its Home virtual world for the PS3 twice already, but company officials said it will be launched later this year. Microsoft plans to start its New Xbox Experience virtual world on Nov. 19.

Both companies are hoping their virtual worlds will capture gamers who have been visiting Linden Lab's Second Life in droves. Second Life features a cyber universe where players create digital versions of themselves, called avatars, and then build relationships, attend social gatherings, and even do business.

The Xbox Experience

With the new Xbox 360 experience, gamers can personalize their entertainment by creating their own avatar and jumping into a party with friends from around the world. Some of the biggest names in entertainment, including Netflix, NBC Universal, Universal Studios Home Entertainment, the SCI FI Channel, USA Network, Constantin and MGM, are bringing their content to Xbox 360.

"We're entering a new age in entertainment, and Xbox 360 is uniquely positioned to become the heart of the living room," said Don Mattrick, senior vice president for the interactive entertainment business at Microsoft. "The new Xbox experience offers more content than you can find from any device that connects to the television. That convergence of entertainment and gaming will bring new people and more families to the category, driving a record year for the games industry."

Sony's Home will let PS3 owners create their own avatars and explore a real-time virtual community as if they were playing a detailed 3-D game for PS3. The free community was supposed to launch this fall to allow PS3 users to interact, communicate, join online games, shop, share private content, and even build and show off their personal spaces.

And the Winner Is ...

Sony's virtual world is much more sophisticated than Microsoft's, according to Michael Cai, a video-game analyst at Parks Associates. Sony has been working on Home for years, and it's a more complex offering. While Cai doesn't think the virtual-world component will rise to become a major competitive differentiator over the short term, that could change.

"Because Sony took a step further with Home, the graphics are so advanced and you can do much more than just create an avatar for yourself," Cai said. "You can roam around, you can go into different theaters and rooms to experiment with new game demos or watch movie trailers, or you can go into a lobby and play with some other avatars to warm up a little bit before you make new friends."

Long-term, both Sony and Microsoft could find themselves competing against other set-top entertainment boxes as much as they compete against each other. With these next-generation consoles, gamers can do more than play games. They can watch movies, listen to music, and navigate virtual environments, thanks to broadband connections.

"If you turn on your PS3 every day and you go into the virtual environment, you can not only say hi to your real friends with a virtual avatar but also go into other environments and play games or watch a movie together," Cai said. "It's definitely going to appeal to a lot of people."