By Michael Cohn

Sales of Sony’s PlayStation 3 video game console could fall short by as much as 25 percent, predicted one analyst Monday, spelling bad news for the entertainment giant as it fends off competition from Microsoft’s Xbox 360 and Nintendo’s Wii consoles.

Nomura Securities analyst Eiichi Katayama wrote in a report that he was lowering the firm’s shipment assumption for the Tokyo-based company’s fiscal third quarter of 2008. He said he now thinks that “shipments of the PS3 are unlikely to approach the figure of 20 million units seen for the PS2 during its heyday.”

Nomura is lowering its shipment assumption to 10 million units, from 16 million previously, for Sony’s fiscal year ending in March, and downwardly revising its expectations for software sales.

The Japanese financial firm had previously estimated Sony’s games business would report operating losses of ¥40 billion ($332 million) in the fiscal third quarter of 2008 but is now predicting losses of ¥124 billion ($1.03 billion) and expects the business to remain in the red for the fiscal third quarter of 2009 and beyond.

Sony has some high bets riding on the PS3. The game console, which suffered delays because of its Blu-ray high-definition DVD technology, lost ground to the Xbox 360 when Microsoft managed to get it on the market in time for the 2005 holiday season.

By the time Sony managed to get the PS3 out the door last November, it faced competition from not only the Xbox but from Nintendo’s Wii console, which was released in the U.S. only a few days after the PS3 (see Sony Launches PS3 in U.S. and Wii Launches Sans Melee).

However, last week both Sony and Microsoft said they hit their sales targets, with Sony shipping 1 million PS3 consoles to North America by the end of 2006, but only by diverting consoles from Japan. According to Enterbrain, Sony sold only 470,000 PS3 consoles in Japan.

Nintendo too cited strong sales of the Wii console and raised its profit outlook last week (see Nintendo Raises Outlook … Again).

Penalty on the Goal

Sony said last month it was on target to meet its sales goal of 2 million consoles worldwide by the end of 2006 and 6 million by the end of March 2007 (see Sony: On Target for 2M PS3s).

But Nomura sees trouble for Sony and cut its target for the number of PS3 consoles shipped during the fiscal year ending in March to 4.5 million. For next year, it’s cutting the forecast to 10 million from 16 million, and for the following year it’s reducing the estimate to 11 million from 18 million.

“We think management needs to correct as soon as possible the discrepancies we see in the PS3 business model, namely the gap between consumer expectations and the company’s views on the product, and by doing so to bring losses at the games business to a more tolerable level,” wrote Mr. Katayama.

Despite the problems, his firm is maintaining a neutral rating on Sony stock since it predicts that large-screen Sony TV sales in North America will be strong and that Sony will do well from its joint venture with Ericsson in the mobile phone market.

Sony spokesperson Kimberly Otzman said that despite recent sales figures cited by the NPD Group, Sony has met its goal of selling 1 million PS3 consoles in North America and 1 million in Japan. She said the NPD numbers did not include shipments in Canada.