On a rainswept night in downtown San Fransisco a thousand videogames addicts patiently form a queue that starts outside a state -of- the art shopping mall and winds it way around several blocks. Zero hour is approaching and the mostly young male slacker crowd are in what can only be described as a state of arousal.

Some of them have been waiting in line for over twenty fours. The objects of their desire stares tantalisingly back at them from mounted glass cases bathed in cool blue light. In a few moments these bedraggled shoppers will be clutching a boxed version of the hottest new games console to emerge in years - the Sony Playstation 2.

Paul Krivda, the young punter at very front of the line, is already a media celebrity, surrounded by camera crews and only half-jokingly telling reporters to talk to his agent. When the moment comes to collect his gleaming new console from inside Sony's Metreon shopping centre - a temple of hi-tech entertainment devices- there is a frenzied atmosphere, whipped up by store staff and the media. Paul hands over 362 dollars and holds his trophy aloft as if he has just won the World Series baseball final. The crowd go wild and the PR man from Sony grins. The hype has been handed to him on a plate.

This week- about a month after the American launch - Playstation 2 hysteria hits these shores. British gamers will not even have the luxury of camping outside shops because stocks are so tight that any canny addicts who wanted the new model would have filled out an order form months ago. Due to much-publicised glitches in the production process, coupled with a duty to satisfy its home market in Japan (a million PS2 were sold in the first two days of its launch there) Sony are delivering far fewer units to the UK than they originally promised. But the hunger for the new console is as intense here as in the USA or Japan.

After all behind those two countries we have the third biggest market for videogames in the world, having already forked out more than a billion pounds on leisure software and machines. And the launch of PS2 marks the beginning of an uprecedented period of fierce competition by all the big guns in the games industry - along with the notable entry of a powerful and ruthless outsider - to win over the hearts and wallets of a booming market.

The videogames industry has mushroomed at an astonishing rate over the last twenty years. In terms of sales it is bigger than film box office takings, easily surpasses the video market and is fast approaching the scale of CD takings.

One in four British households has a games machine. Globally the market is worth some twenty billion dollars. Yet only now is it being taken seriously by the business world. According to Nick Gibson from financial analysts Dorlander this has been a serious error. "It's so poorly understood and massively under-rated. It's not a children's market as many people wrongly assume. And it's only the beginning because compared to tv, video and music players, the household penetration of games machines is relatively low. "

Sony of course are well aware of this. To date they have sold seventy five million units worldwide of Playstation 2's predecessor, grabbing sixty per cent of the market. They expect to sell at least a hundred million of the new model within the next few years, not least because apart from having vastly superior graphics and processing power, the PS2 has a DVD player attached. And when broadband technology eventually becomes widespread, the on-line games market is expected to explode, generating more profits through games sales.

It is important to note that companies like Sony, Sega and Nintendo do not make money through selling consoles - indeed it's reputed that Sony are actually losing two hundred dollars on each PS2 machine it sells. The games themselves are the big earners with the machine manufacturers cashing in by licensing games producers to use their platforms and charging a royalty rate on every game sold for that privilege. For Sony this adds up to very big bucks indeed - some forty percent of the entire corporations profits in 1998 ( the peak of Playstation 1's popularity ) came from the video games market.

I think what we really did was to pick up the baton from Sega in 1995

Alan Welsman, Sony UK Marketing

It is an astonishing achievement for a company who until five short years ago were seen as the company who made televisions and Walkmans, dwarfed in the games machine market by their Japanese rivals Sega and Nintendo. The secret of their success has been marketing their consoles towards a constituency who had previously been untargeted by the industry : twenty and even thirty-something year old men. This is a group who typically have free time and disposable income to burn and yet are notoriously fickle in how they burn it. They have been hooked by the testorene-fuelled world of shoot'em up and beat 'em up games as well as more refined football, driving and strategy game software.

"I think you can trace the changes in gaming from a kind of bedroom, spotty geek culture to a youth lifestyle activity," points out Alan Welsman, Sony's UK marketing director for Playstation. "I think what we really did was to pick up the baton from Sega in 1995 and for the last five years we have been at the forefront of campaigning for our industry to make games an acceptable entertainment culture. Now some of our research is saying that seventy per cent of youth between sixteen to thirty four years old actually game now and don't find it any different to any other entertainment form."

The genius in Sony's marketing philosophy was to attach itself to cool youth oriented events like music festivals, snowboarding and the yearly World Break-Dancing Championships and to get youth icons to play the games.

By targetting "opinion-formers" and cutting -edge lifestyle the corporation gave it's product a status that many other companies would die for. And that's reflected in the success of spin-offs like their websites and the official Playstation publication which ranks just behind FHM and Loaded in the men's magazine best-seller lists. "We've certainly worked very hard to gain credibility in this audience, " says Welsman. "The way you gain credibility is not by being a label sponsor if you like but helping to actually create events and evolve events that are on the edge rather than just standard events. Now Playstation's almost a republic outside of the Sony empire in that it is regarded as something a little bit more cutting edge and a little bit more youth culture centred.

With the advent of PS2, Sony's policy is now to use it as a conduit to give consumers access to the broadband network world. In other words, to utilise the internet connectivity of the new console as a means of getting people to tap into online movies and music as well as games. Playstation 2 will essentially be a trojan horse working it's way into your living room.

That's the theory but many industry experts are scratching their heads, saying it's a risky policy because people may well not want a games machine to become an all purpose home entertainment device. And they point out that there will be stiff competition from companies who are coming up with other new intelligent consumer appliances like digital video recorders and handheld gadgets like cellphones. They too will have internet connectivity and the ability to play DVD's and CD's.

Of even greater concern to Sony will be the rumblings from a rival monolithic empire on the west coast of America. Software giants Microsoft have announced they are taking a step out of the office and into the living room with the launch next year of the futuristic-sounding Xbox console.

Blessed with a half a billion dollar marketing budget, deals tied up with over 150 of the worlds' top games developers and far superior technical capabilities, the Xbox and a certain Mr Bill Gates are entering the games arena with all guns blazing. The industry is bracing itself for the mother of all shoot-em up battles.

Second place is the first loser

J.Allard, Microsoft

About an hour' drive outside Seattle at Microsoft's vast campus, a team of computer whizzkids are diverting their expertise in PC technology to making the Xbox into the must-have console for real gamesplayers. Led by the 31 year old multi-millionaire J.Allard, Microsoft are determined to seize dominance of the videogames market from Sony. Allard, a charismatic games and skateboard buff with bleached hair and a nice personal collection of Ferraris, is the man who persuaded Gates to get into the Internet.

In spite of his surf-boy appearance, a shy,shuffling gait and occasional bouts of otherworldliness - he told me he couldn't understand why his car was attacked by rioters during the recent Seattle demonstrations against the World Trade Organisation - he is an articulate championof Microsoft's business philosophy and what's more he is unaccustomed to losing.

" We are an incredibly competitive bunch of people and we have a saying that second place is the first loser, "says Allard. " The Xbox is critical to Microsoft- the company is taking itself a little too seriously these days and it's time for us to break out and be a little more fun. "

But will the consumer be able to disassociate Microsoft from its geeky office-based image and buy into the idea that it can produce cool, cutting edge games machines? Image is all-important in this industry and critics say that the public perception of Microsoft is a major stumbling block.

The company's response to this is to firstly try and separate the new brand from it's owner, pushing Bill Gates into the wings in the process. Secondly it is trying to emphasise the Xbox's appeal to the real gaming fraternity by extolling its technical strengths over Playstation 2.

"One major difference between Sony's Xbox's strategy and ours is that fundamentally Xbox is all about games and our research shows that's all consumers care about," asserts Allard. " Sony talk about PS2 being a medium through which you can edit digital videos, use colour printers, digital cameras, downloading videos and downloading music. They're trying to be a general purpose device. We think that's wrong and we are focussed on creating a more specific laser-sharp device that provides the best quality gaming experience."

Basically the strategy now is all about gaining credibility amongst the hardcore gaming community. Microsoft's gamble is that this highly influential group will get frustrated with Sony trying to spread themselves too thinly and then desert them for a superior machine that concentrates on moving up to the next level.

In Microsoft's favour the brief history of the videogames industry has shown that dominance of the market runs in five year cycles. Atari was replaced by Sega, Sega nudged out by Nintendo and Nintendo blown out of the water by a company that had never produced a games box : Sony. Microsoft are banking on the chances that Playstation's time is now up.

What is certain is that the next few years will be a period of tremendous turmoil in the industry. It's predicted that gaming through the internet will make up twenty five per cent of the market within three four years and completely change the shape of gaming from being an individual activity to a shared, interactive experience. This also opens up huge opportunites for advertising and e-commerce revenue.

Technology is developing so rapidly that soon playing games will be more like directing your own blockbuster movie in which you and your friends are also the lead characters and scriptwriters. There's a whole untapped market to woo in the shape of women who have been understandably reluctant to get involved with a very aggressive maleculture. Inevitably this will change as the games become more emotionally involving. Billions of pounds are at stake here as well as the reputations and fortunes of some of the most powerful multinational corporations in the world. Inevitably some will be destroyed.

Never again will the games console be dismissed as a silly little toy. And never again will the business world dismiss videogames players as a bunch of silly little boys. Quite simply, it can't afford to.
Rajan Datar