Last week, I was in Japan talking to video game companies and developers of video games. I have long had a proposal knocking around PBS for a show about the history of video games. This was my chance to see if Japan, where video games really come from, would support my effort to do such a show. If they wouldn't talk to me, what would be the point? Well, they did talk. In fact, they seem determined to talk and would be talking still if I hadn't hopped a plane home to write this column. And while we talked mainly about the past, I came away with a perspective on where things are going, too. The short version of this story says the future looks bad for Sony, possibly good for Microsoft, and very, very good for an old stalwart, Mario, the once and future plumber.

Look for the second coming of Nintendo.

Leadership in the game business seems to change with every hardware generation. Atari was replaced by Nintendo, which was succeeded by Sega, which was toppled by Sony, bringing us up to today. Atari is no longer a factor, nor is Sega, which recently pulled out of the game console business, but Sony and Nintendo are still at it, vying for dominance of the fifth generation gaming platform. And there is a new player entering the business, Microsoft.

The game business is enormous, but it is also very polarized. The games played by Americans and Europeans are very different from the games played by the Japanese and other Asian countries. It is almost like there are two game worlds that have only their hardware in common. And while most of that hardware is built in Asia, many of the internal components come from the USA. Success often comes down to a single game — the video game version of a killer app. Would the Sony PlayStation really have become so dominant in the 1990s without a blockbuster game like Final Fantasy? No. So the relations between the makers of game consoles and the developers of games to run on those consoles is important — crucially important as we will shortly see.

Sony's rise in the video game business came at the expense of the Sega Saturn and Nintendo 64 because Sony realized it was the game developers who were driving the success of those platforms. If Sony could make it cheaper and easier for developers to write new games, perhaps those games would appear first on a Sony machine. So they came up with a development platform that wasPC-based. Sony's development system cost about $10,000 per seat, including the Code Warrior software application. This was both easier to use and far cheaper than the systems offered at the time by both Sega and Nintendo. The Sega development system had to be leased from the manufacturer and Nintendo's system required a very expensive SGI computer. Neither system was especially easy to use.

Either Nintendo or Sega should have been able to learn from this defeat and come back even stronger in the next generation, but both companies had major problems to deal with. For Sega, the trouble lay mainly in the executive suite, where infighting between the management of Research and Development and that of the company as a whole led to a number of missteps. So while Sega was the first to market with a powerful fifth-generation machine, the Dreamcast, internal turmoil kept the company from being able to take advantage of this lead.

For Nintendo, the problem was different. The Nintendo 64 had been designed in close partnership with Silicon Graphics (SGI). Nearly all the hardware was designed by SGI, as was the development system used to write games. Given that SGI had no real background in video games, this was probably already a bad idea, but then it got worse. There was an internal battle at SGI over whether to even continue its association with Nintendo. SGI founder and then-chairman Jim Clarke wanted to continue the Nintendo alliance, which had made SGI's MIPS processors more numerous even than Intel's. But SGI's management saw Nintendo as a distraction from its real business of high-end graphical computing, so SGI walked out of the Nintendo deal, leaving the game company with no plan for future games. Clarke then left in disgust to start Netscape. SGI's precipitous action is what kept Nintendo from having a fifth-generation game for so long.

This left the console market pretty much in the hands of Sony, which has been willing to buy market share by selling its game consoles below cost and making the money back on game royalties. So Sony's success is real, but the economic impact hasn't been as positive for the company as one might guess. Trying to improve the profit picture, Sony has recently made a number of its own mistakes, primarily by crossing the very game developers who are responsible for the platform's success.

Sony said that they would not develop their own modem or network peripherals for the PlayStation2, yet that is exactly what the company is now doing. It's a small market and people found out. Also, Sony Computer Entertainment (the PlayStation division) is now micro-managing thegame and peripherals developers so they can find all the profitable business opportunities and control them. Sony did a lot of game promoting for original PlayStation, and as a result, companies like Capcom, Hudson, Konami,Namco, and Square enjoyed good sales. When the PS-2 was launched, the emphasis was on the platform, not the titles. The tail is wagging the dog. As a result, game companies that invested millions of dollars per title for the PS-2 are now losing money. So while the PlayStation2 is a big success, its support among developers is thin.

Enter Nintendo, late to the party with its GameCube console, due later this year. Nintendo has diligently been promoting games for the N64 and is enjoying a loyal following from consumers and now, developers. IF the GameCube has comparable performance to the PlayStation2, Nintendo has a shot at stealing from Sony the very developers who have made the PlayStation and PlayStation2 successful. Well, last week I got to see Nintendo's GameCube and it is every bit as good as the PlayStation2, maybe better. The graphics and special video effects are breathtaking. Given that Nintendo actually makes a profit from its game consoles, momentum could quickly switch from Sony to Mario.

Don't forget Microsoft, whose X-Box will be launched later this year with the most expensive product introduction in the history of commerce. X-Box, which will launch with 26 games, is also as good or better than the PS-2, but X-Box is aimed at a different market segment than Nintendo's GameCube. X-Box users will be older, generally in their 20s and 30s, and drawn primarily from the ranks of PC gamers. This group is also a prime target for Sony, since their greater disposable income means they can buy more — and more expensive — games. This means Sony will be in a war on two fronts, something both Napoleon and Hitler learned is not a good position in which to be.

Given the resources and legendary determination of Microsoft, the game library and youth loyalty of Nintendo, and the fact that Sony has ticked-off its game developers, the future is looking grim for the PlayStation2 even as it enjoys record U.S. sales.

But that's why you read this column, right, to look into the future?

And what about Sega? The company says it will become a game publisher, targeting its games at the very platforms with which it used to compete. How Sega handles this could have a significant impact on which platform becomes the eventual leader. If Sega aligns itself with X-Box, for example, it could help attract a younger audience to the Microsoft platform. But this could be perceived as disloyalty by Japanese game developers. And an alliance with Sega would have to come at some expense to Microsoft's relationship with U.S. developers.

If all this seems frivolous and rather silly, remember that the U.S. video game industry is bigger than the U.S. film industry and it steals viewers directly from the U.S. television industry. This is small stuff, but big business, and the only sure thing right now is that Sony, the industry leader, is in trouble.