Next year should be a pivotal one for the gaming industry, with all three of the hardware heavy-hitters unveiling their much-hyped new consoles and gearing up to duke it out for market dominance once again. This next generation of gaming systems will herald a new era of on-line and mobile connectivity, and it’s predicted to spur the industry to a record total market value of US$35 billion by 2008, according to a recent report by market analyst Juniper Research.

In this generation, Sony is the clear leader in the console war, with the PS2 cornering most of the market. With that kind of dominance going into the race, the next incarnations of Microsoft’s Xbox and Nintendo’s GameCube will have to work hard to cut in on Sony’s action. Juniper game specialist Keri Allan predicts the competition will be fierce in 2005 and into 2006, though at this point all three manufacturers remain tight-lipped about the features and selling points of their new consoles.

Sony took its first steps in the direction of convergence when it unveiled the PSX in Japan last December. Expected to hit North American shelves later this year, the system combines the capabilities of a PlayStation 2 with a TV tuner, DVD recorder and 120 gigabyte hard disk. When Sony unveils the PS3 in 2005, it may offer different levels of convergence at varying price points.

On-line gaming should also have a huge impact on the market, with Juniper estimating that as many as 28 million consumers will be regular users by 2008. U.S. retail sales of on-line-compatible console video games exceeded US$1 billion in 2003, a 167% increase over 2002, according to industry tracker The NPD Group. Adding credibility to Juniper’s long-term growth forecast, research results from NPD’s consumer panel reveal that more than half of on-line console gamers are under the age of 17 – young enough to drive the market for several years to come. Sports games currently dominate the on-line gaming arena with a 51% market share, followed by first-person shooter games (22%).

Juniper also pegs connectivity between different types of platforms as a key growth area for the next five years, with consumers buying single titles designed to play across handheld and console systems. This is already proving true: The top-selling game in February 2004, according to NPD, was Final Fantasy: Crystal Chronicles, a GameCube title that connects to the Game Boy Advance.

New handheld consoles are also poised to flood the market, with Sony planning to release its PSP in early 2005, and smaller companies like Tapwave (with Zodiac) and Gamepark (with GP32) creating PDA/game system combos. Next-generation handheld hardware revenues are forecast to reach US$25 billion by 2008, and Allan predicts that GBA will maintain its iron grip on the lion’s share of the market. But backed by Sony’s technology, marketing muscle and connectivity to the PS2, the PSP will likely take the biggest bite out of Nintendo’s monopoly.

With Nokia’s phone-cum-gaming device N-Gage leading the way, mobile phone gaming should make some serious gains in the near future. Over the next five years, more handset manufacturers are likely to bring out game-friendly phones, and downloadable games – of both the simple-text and media-rich variety – should become more popular. While the demand for games on phones is growing, it’s been viewed as simply an extra function until now. Gaming companies are eager to jump in, but Allan says they are waiting for a less fragmented market in which standards and uniform technologies are in place.

Naturally, as hardware becomes more advanced, gamers will expect that sophistication to be mirrored in the software market. And while they’re happy to see increased pixels on the screen, they’re also looking for realistic animation and physics, as well as near photo-realistic rendering. Allan predicts that better middleware technology for character animation will soon result in more life-like game avatars.