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BTFeather55 said:

Software sales don't drive console sales for the short term.

 Look at the PS1 and PS2. Their sales were totally driven by their software. It's quality and amount.

The PSP had the best selling game in Japan in 2008 with Monster Hunter which sold 2.4 million copies and there the turnaround started when the slim released as you indicated but it was also due to Crisis Core: Final Fantasy VII releasing at almost the same time.  Crisis Core has sold 2 million copies worldwide and introduced to the Japanese the idea that the PSP was a game system as viable as any other.

Of course, Monster Hunter and Crisis Core and their sales have led to the appearance of many more big games coming to the PSP in Japan over the last year. Dragon Quest IX will be huge, but so will Final Fantasy XIII Agito and the two Kingdom Hearts games coming to the PSP. And unlike many Square games that appear on DS that are remakes, the ones coming to the PSP are brand new games developed exclusively for PSP

System sales drive the quanity and quality of software on a system.  The top system usually will get the best titles.  Factors such as price, distribution, and other marketing factors.  At the core, a system has to be superior in key areas that consumers want to get in this position, and then deliver on software of sufficient quality.  This goes all the way back to Atari 2600 days:

1. Atari 2600 was top dog.  It has the most arcade games for it, and arcade games mattered.  Atari was the maker of most of them.

2. The NES was top dog.  It ended up producing the right mix of arcade quality graphics (at the time) at the right price point, and had the third-party software model worked out so that it was profitable, and maintained quality.

3. The Genesis was top dog a bit, then the SNES eventually won.  Nintendo hit the RPG and graphics right, and got the last hurrah of arcades done right here.  It was able to do a superior Street Fighter II, complete with better music and sound.

4. The Playstation (original) ended up top dog, because it did one thing the best: pump polygons.  This was the polygon era, and Sony won it.

5. The Playstation 2 won.  It was the first with a DVD player in it.  This counted.  Then throw in Sony's marketing muscle, and you had the winner.

6. The Wii is winning now.  Nintendo guessed right that having an accessible controller best suited for interactivity (the waggle) was what people were longing for.  So Nintendo came up with the Will controller, which can be used for a lot of games like this.  It does what people want.  It wasn't graphics.

And you can look at the handheld market also, into why consoles win.  Nintendo got the killer app in Pokemon, but also said battery life was king.  and they were right.  Now they are, with the DSi, spectulating camera interface.  Will see how it goes.

As for the other question on "threatened by PS3".  It is more like, "Annoyed by Sony".  Sony ends up doing a $600 system and presumes everyone will buy it, just because Sony's name is on it.  All this arrogance (right down to Riiidge Raaacer), burns in people's mind, as was seen ing E3 2005.  No company has a right to be top dog, or presume it.  Sony taking a beating and coming back humbled is what a lot of people want to see.  This at least tends to flush annoying Sony fanboys out of the system.