First there was Atari 2600 vs. Intellivision. Later it was SuperNES vs. Sega Genesis. Next came Nintendo64 vs. PlayStation. And now we have the three way battle of Playstation2 vs. GameCube vs. Xbox. You've seen all the ads and heard all the hype -- so how are things really shaping up in this latest war of the video game consoles?

Battle of the consoles: PlayStation2 vs. GameCube vs. Xbox.

The first thing to understand about console wars is this: Hardware loses money; software makes money. Just like Gillette practically gives away razors so that consumers will buy the replacement blades, console manufacturers are in the business of getting hardware into your homes in order to sell high profit games.

Any of the modern consoles is a marvel of technical specifications, which may lead you to wonder -- how come this sophisticated little computer costs only $200 - $300? Well the truth is, the console manufacturers sell them at a loss. Some estimate that it costs around $350 for Microsoft to build an Xbox, which retails for $299.

However, games are another matter. While Sony, Nintendo and Microsoft each have a different take on licensing, the basic mechanism is the same for all three: If a third-party publisher wants to sell a game for, say, Nintendo GameCube, they must pay a royalty and other fees to Nintendo. Since Nintendo controls the software duplication plants, all GameCube compatible software generates income for Nintendo. The profit margins and royalty systems of games are the spoils of the console wars.

And what a war it is. According to a recent NPD Group report, in 2001, consoles, peripherals and games accounted for $9.4 billion in sales. This is a 43% increase over year 2000 sales. To put this into perspective, movie box office ticket sales for 2001 were around $8.4 billion.