Sony on Monday unveiled the PlayStation 4, its first new console in seven years, taking the battle to Microsoft with a lower-priced machine, original content and fresh titles as it targets a return to video-game dominance.

The PS4 will cost $399 in the U.S., 20 percent less than Microsoft’s Xbox One, Sony executives said  at the Electronic Entertainment Expo in Los Angeles. The machine, with sharp edges and blue highlights, allows unlimited used-game sales and doesn’t require an Internet connection, a contrast to two unpopular Microsoft features.

The console is crucial to Chief Executive Officer Kazuo Hirai’s plan to turn around Tokyo-based Sony’s electronics business. A successful PS4 would bolster Hirai’s financial resources as he focuses on making television manufacturing profitable after nine years of losses. Sony won Round 1, according to Michael Pachter, an analyst with Wedbush Securities, who called the pricing strategy “genius.”

“Microsoft made a mistake at $499,” Pachter said. “They priced at 100 pounds and euros and dollars too high. Sony exploited that and priced about right. Right now, I think most consumers think they’re buying a PS4.”

To expand sales, Sony and Microsoft are looking to broaden their audiences beyond gamers by adding music, films and TV shows, with some of that content exclusive. The challenge for both companies is to capture mainstream consumers, who would otherwise play on smartphones or tablets, without alienating serious gamers.

Movies, Originals

Sony will bring original programming to the PlayStation Network and PlayStation 4, Sony’s U.S. CEO, Michael Lynton, said from the stage at E3. The device will feature movie services like Time Warner Inc.’s Flixster and Redbox Instant, from Verizon Communications Inc. and Coinstar Inc. Sony also said it would tailor programming to gamers as the company squares off against Microsoft to re-establish hardware dominance.

The PS4 will go on sale in the U.S. and Europe before the year-end holidays, Sony said. It will cost 399 euros ($530) in Europe and 349 pounds ($544) in the U.K. The machine has 30 titles in development, with 20 slated for sale the first year, Sony executives said, showing titles including “The Order: 1886,” “Infamous: Second Son” and Activision Blizzard Inc.’s “Destiny.”

U.S. retail spending on video games, including used games and rentals, fell 9 percent to $1.37 billion in the first quarter from a year earlier, according to industry researcher NPD Group. Digitally delivered content rose 8 percent to $1.59 billion.

Entertainment Mandate

Microsoft, which has led console sales in the past couple of years with the Xbox 360, yesterday introduced the $499 Xbox One, which goes on sale in November. It will cost 429 pounds in the U.K. and 499 euros, the company said. Nintendo Co. debuted its Wii U console in November starting at about $300.

Microsoft, based in Redmond, Washington, is positioning its new console as the center of living-room entertainment. Exclusives, TV shows and features like Skype video calling, along with accessories such as the Kinect controller and SmartGlass mobile second-screen application, justify a premium price, Don Mattrick, president of Microsoft’s interactive entertainment business, said in an interview.

“We’re overdelivering value against other choices,” Mattrick said. “Any modern product these days, when you look at it, $499 isn’t a ridiculous price point.”

Xbox Subsidies?

Subsidies could become an important factor in competition between the Xbox and PS4, Pachter said in a Twitter posting. Internet service providers are expected to subsidize the Xbox, lowering the sticker price for consumers, he said.

At E3, Sony was looking to dent some of Microsoft’s perceived advantages. Sony touted its $49.99-a-year PlayStation Plus service, which has lagged behind the popular Xbox Live. It works on all PlayStation devices, and members will receive one free game a month.
Sony also said it will fully support used-game sales and won’t require players to log in to the Internet to play, drawing a distinction from Microsoft, which has set limits on reuse and requires all games to be authenticated once every 24 hours.

“Microsoft really convinced themselves of the value proposition, and they wanted to make money on the box,” Pachter said. “The Microsoft multimedia features have a ton of value, but I’m not sure Microsoft really demonstrated that it’s worth the extra money.”

The PS4 could factor into a background drama playing out at Sony. Billionaire investor Daniel Loeb is pressuring Hirai to restructure the company by selling at least part of the entertainment unit in an initial public offering. Sony’s board is considering the proposal.

Lost Lead

Film and television generated 26 percent of Sony’s operating income in the fiscal year ended March 31, while music, featuring Adele and Bruce Springsteen, represented 20 percent, according to data compiled by Bloomberg. The company wants to use the PS4 to digitally deliver movies and music to the home, which, if successful, would underscore the rationale for keeping the company together.

Under Hirai’s direct leadership, the PlayStation was a profit center for Sony consumer electronics. The company lost its lead in the last generation of consoles while remaining an important launchpad for the company’s technology and services, including DVD and Blu-ray players, and its online video and music stores.

Nintendo’s original Wii sold the most units in the last console generation, and Xbox has sold the most in the past two years or so. The Wii U has generated disappointing sales, and analyst Doug Creutz at Cowen Securities LLC predicted a possible price cut.

Entertainment Ties

Sony has set a target of generating 70 percent of revenue and 85 percent of operating profit in the electronics unit from games, digital imaging and mobile devices by March 2015. The troubled TV business, the world’s third-largest, is being squeezed between Samsung Electronics Co.’s efficient manufacturing and Chinese set-makers’ lower prices.

Sony rose 3.1 percent to 2,041 yen at 2:15 p.m. in Tokyo trading, extending its gain for the year to 113 percent. The benchmark Nikkei 225 Stock Average declined 1 percent.

The company’s American Depositary Receipts rose 2.8 percent to $20.11 yesterday in New York. The shares have advanced 80 percent this year. Microsoft fell 0.6 percent to $35.47 in New York and is up 33 percent for 2013.

Microsoft and Sony have struggled at times to get the messaging right for the two consoles, which will have similar PC-based architectures and capacities. While Sony’s February presentation was heavy on games, Microsoft’s was seen as too focused on other entertainment. At E3, their goals were reversed, said Michael Pachter, an analyst at Wedbush Securities in Los Angeles.

“Sony needed to talk about everything else the box will do, and Microsoft needed to talk about games,” Pachter said. “The two companies are going to end up in the same place, which is delivering great games and other content.”