The games industry is in a slump, and the European Computer Trade Show, held in London recently, was the dullest event for years. But the future looks good.

Nintendo sent Mr Shigeru Miyamoto, its Japanese superstar game designer, to show off its next generation Gamecube; Sony mounted a huge display around the PlayStation 2; and Microsoft had its two top games gurus rounding up developers to work for the forthcoming Xbox games console. The games console business is cyclical, and everyone expects a boom to follow the bust. In fact, Mr Ray Maguire, British managing director of Sony Computer Entertainment, says he expects the business to come back bigger than ever, as it has after previous turns of the technology wheel.

Gaming is evolving from a niche market to a mainstream activity, "blending computer technology, DVD and music into one experience", he explains. "That's where we're going with the PlayStation 2." Mr David Gardner, managing director of Electronic Arts Europe, agrees that the PlayStation 2's ability to deliver close-to-TV-quality graphics should make the games industry "bigger than it has ever been, because you don't have to imagine it, you can see it. That's the big win we've been waiting 20 years for, and it's finally coming this Christmas". The problem is that it's not here yet, so gamers are less keen to buy current machines that may have a limited life-span, and they want to pay lower prices for the games that run on them. This has reduced the games industry's income, and led to the current trough.

But while owners of next-generation consoles will no doubt be prepared to pay high prices for great new games, it will take years before there are enough of them to replace more than 70 million PlayStation owners, and more than 100 million Game Boy owners. Transitions take time. Things will start to change on November 24, when Sony ships the PlayStation 2 to Ireland and Britain, but Microsoft's Xbox is not due for another year, even if it arrives on schedule. (Both console hardware and Microsoft software are usually late, so I wouldn't bet on Microsoft shipping a console on time.)

Nintendo's Gamecube, codenamed Dolphin, may be even later. It is expected to go on sale in Japan in March, and in the US in October 2001, but European buyers will probably have to wait until 2002. Worse, even the arrival of the PlayStation 2 may not give the software business the fillip it needs. Reports from Japan suggest that sales of PlayStation 2 games are relatively low, either because Japanese buyers are using their consoles as DVD movie players, or because the first games have been lacklustre.

It normally takes at least 18 months to develop a great game, and the PlayStation 2 is reputedly very hard to program, so some software houses may have cut corners in the rush to market. Either way, the PlayStation 2's problems have given Sony's rivals angles for attack. In London for the European Computer Trade Show, Nintendo's Mr Miyamoto - the creator of Mario, Zelda and other characters - argued that the Gamecube was a better platform. "We software people have been fooled in the past by claims from the hardware people" who didn't deliver what they promised, he said. The Gamecube, however, "is compatible with creating games: it's close to be being the ideal piece of hardware".

Microsoft's primary strategy is to beat PlayStation 2 with better technology, and Peter Molyneux, Britain's leading games designer, says: "The Xbox is unquestionably the most powerful of the next generation machines." But Microsoft is also stressing that it is by far the easiest to program, because the base technology - 733MHz Intel processor, Nvidia NV20-equivalent graphics chip, a stripped-down version of Microsoft Windows 2000, DirectX 8 multimedia interface, hard drive, DVD player - is already familiar. Both Sony and Microsoft recognise that they are on a collision course, but neither seems too concerned, and Molyneux says the competition will be good for consumers. Separately both Sony and Microsoft seem to agree. Maguire says that Microsoft and Nintendo putting "more energy into the marketplace" will increase interest in gaming, "so in one way they'll take market share, but they'll help grow a bigger market overall.". Sega has staked its claim on the Internet, by including a modem with its Dreamcast console, and by launching an online service, Dreamarena. This enables Dreamcast owners to play online games and send electronic mail.

It also allows Sega to think about changing the way it makes money from games: perhaps it could charge for online play-time instead of for disc-based software that is subject to piracy and theft. Sega's problem is that the Internet has yet to arrive as a mass market for pay-to-play services, and the services that do exist are dominated by PCs. The Dreamcast may be able to get online, but it provides a relatively poor Internet experience, partly because of the low resolution of TV screens that cannot display websites with anything like the quality of a computer monitor.

Sony's ambitions for the PlayStation2 are also wellknown: it is intended to become a well-connected home entertainment centre. But as Gardner points out: "Right now, the games consoles don't have the sophistication of PCs for online use, so the PC market will continue to grow." Even J Allard - who was the first Microsoft employee to run a server on the net, and who registered Microsoft.com - thinks the time is not ripe. He's launching a console using the tried and trusted methods developed by Atari and other companies 20 years ago, and that have been most successfully copied by Sony. As he said at the Xbox's unveiling in March: "We are not confused: this is a single-function device entirely focused on the games market. We have to focus on creating great games."

In the long term, however, Mr Allard says: "the Internet is ultra-important, it's critical". He describes how frustrated he became when catching up with his e-mail on the plane to London, because so many messages included links to websites: "It drove me crazy that I wasn't connected." That would not have been the case four or five years ago, and Mr Allard reckons that eventually "the same thing will be true of gaming. "It's just a question of when that time will come. I think the Xbox platform is best suited to catalyse that shift, and I think we'll be instrumental in leading that charge," says Mr Allard. "Are we pinning the success of Xbox on that? Absolutely not. Do we think gaming is going to go that way and never look back? You bet."

One of the interesting things about the cycles of the console industry, with its regular peaks and troughs, is that so far every generation has brought a different company to the top. Thus Atari (VCS) was followed by Nintendo (NES), Sega (MegaDrive/Genesis) and then Sony (PlayStation). Sony must be the bookies' favourite to break the pattern and win two rounds in a row. But look ahead to the next cycle, where Microsoft's strength on the Internet could tip the balance, and there might be a new champion. It's not Game Over yet.