(By Bob Blandeburgo) Thousands of video game industry insiders are gathering at the Los Angeles Convention Center this week for the Electronic Entertainment Expo (E3), the industry’s annual trade show, and each year the stakes get higher among the sector’s "Big Three:" Nintendo Co. (ADR OTC: NTDOY), Microsoft Corp. (Nasdaq: MSFT), and Sony Corp. (NYSE: SNE).

In the past, companies would typically announce new video game systems in the fourth year of the existing system on the market, but at this year’s E3, there were no new systems announced. Instead, all three console manufacturers announced peripherals that would evolve and extend the life of their current systems.

That’s good news for the sales of software publishers in what has become a $22 billion industry.

And it could also be good news for investors in the last half of the year, industry analysts and market-research firms say.

Video-game sales plummeted 17% in April and hardware sales dropped 8% on a year-over-year basis, according to NPD Group Inc. But here’s the wild card: U.S. consumers still spent roughly $10 billion on games and related hardware in the year’s first four months, and surveys suggest shoppers aren’t likely to cut their game-related spending in the months to come, The Seattle Times reported this week.

And several companies are positioned for second-half rebounds, industry insiders say.

Nintendo Goes the Software Route

Nintendo changed everything when it debuted its Wii console more than two years ago. The motion-sensing controllers offered users an entirely new way to interact with games, and Nintendo gained the lead in the industry for the first time in more than 10 years. The company had an installed base of more than 50 million Wiis as of March.

This year’s E3 is less about hardware and more about the games that transformed Nintendo into the player it is in the industry today. To that end, the company unveiled new titles based on some of its most beloved properties. Nintendo revealed it is working on "New Super Mario Bros." and "Super Mario Galaxy 2," both based on Nintendo’s Mario character.

The Japan-based game maker is also developing "Metroid: Other M" and a new "Legend of Zelda" (working title) for its Wii system.

But even though the company is revisiting many of its classic titles, Nintendo is still moving down a path of innovation. One of its biggest successes has been its "Wii Fit," which takes users off the couch and puts them on the Wii Balance Board for a variety of exercise activities and games. As of March, "Wii Fit" has sold in excess of 18 million units worldwide.

The company said at E3 this week it is developing a sequel - "Wii Fit Plus" - due on shelves in the fourth quarter.

While Wii captures most of the headlines, Nintendo’s DS handheld game system - which has sold more than 100 million units worldwide since its 2004 launch - will also get more games based on these key characters.

Microsoft Puts its Backfield in Motion

Redmond, Wash.-based Microsoft announced a slew of ambitious projects for its Xbox 360 console at E3.

Not content with being No. 2 in a three-horse race, Microsoft’s message was clear: It’s going to do motion-sensing controls better than Wii, and it will do so using its existing Xbox 360 console and a camera/microphone peripheral code-named Project Natal.

Instead of relying on a controller to track movements, Natal will track the movement of the actual user, not unlike the motion-capture technology that is used for animation of many of today’s games. For instance, to swing a baseball bat in a game, a player will hold their hands and arms in the correct position and mimic the motion they would make if they were to swing a real bat.

While the technology is garnering plenty of attention, Microsoft has not revealed when the product will be in stores, nor has it specified any compatible games yet.

Microsoft will update the Xbox 360’s proprietary operating system-called the dashboard-this fall with several new features in an attempt to further separate its console from those of its competitors.

Perhaps the most notable feature will be the integration of Facebook Inc.’s wildly popular social network. Using this new feature, any user will be able to link their Xbox Live account to their Facebook account. Once the accounts are linked, users will be able to see their friends’ Facebook accounts on their TVs.