This past week we saw the glory of E3 come and go. E3 is the grand carnival of digital entertainment, where companies like Infrogrames (now going by the name Atari) and Bungie display their cornucopia of gaming greatness.

While we are caught in the glare of marketing madness, the ooohh’s and aawwww’s as we watch game demo after game demo, and PR people extol why their game will be the next big one, we forget one very important fact.

E3 is awash with an undercurrent of a major battle. While Bungie, Eidos, Atari, and UbiSoft are seen on the front lines, they are just willing participants in a grander game of chess going on in the shadows, like a game-master directing a story in a real life Dungeons and Dragons.

What I am talking about is the video game ground war between Sony and Microsoft.

E3 is nothing more than a pretty face on a brutal war - a corporate mélange of King of the Hill. Personally, I hope neither wins.

It’s a true battle of the titans, too. Sony makes billions in other markets, like movies, music and TV. Microsoft also makes billions in countless other areas as well, cable TV, software, and many others. That leaves them both with the ability to spend, and loose, hundreds of millions on the video game market while they fight for any ounce of my time, and your time, they can get.

And losing money is exactly what they are doing. Microsoft announced that its Home and Entertainment division, which is responsible for the Xbox, lost $190 million compared with a loss of $97 million a year earlier. Sony made no claims of its loss and gains, but I’d bet they are in a similar situation.

So, what’s the pay off? Market share in a $30 billion per year industry. The pay off in the long run is enormous. Sony or Microsoft could double their annual yield based solely on this one industry. That’s quite a high stakes competition.

And in the face of announcing large money losses, Microsoft dropped the price of the Xbox to $179 from $199. Dropping the price of your products in the face of red ink is not standard practice, but that goes to show to what extent they will go to win. Sony, two days later, announced they would also drop the price of the PS2 to $179. Are we far from a $99 Xbox 2, or a PS3?

But herein lies the rub — I hope this battle rages for a long time, with market share hard to gain, and profits hard earned. Why? Because then the gamer will win and win HUGE.

To their credit, Bungie, Eidos, Atari, UbiSoft, Digital Anvil and companies like them are taking advantage of the battle also. They are being encouraged to crank out games at a furious rate. And not just any games, big games that everyone will have to buy. They are all trying to make the next Halo, then next Splinter Cell, the modern day equivalent to Super Mario Brothers.

Notice I have yet to mention Nintendo’s GameCube? Nintendo is a non-player in this market. I predict that by Christmas the GameCube will be remembered with other consoles like Sega’s DreamCast. They will only play a role in the niche market of hand-held gaming like the Gameboy.

While they are not directly on the front lines of this war, Sony and Microsoft are relying on these third-party companies to make the killer apps, the games that will make you want to buy one system over the other. This is odd strategy for Microsoft considering they usually eventually buy the third-party company to make sure they have control. That is what Microsoft did with Bungie when they purchased them in 2000, and Digital Anvil whom they purchased last year.

But the industry is to large for Microsoft to purchase all these third-party companies. They did make some smart strategic buys, like purchasing Bungie and essentially taking Halo off the market for Sony and the Playstation 2. Halo became THE game of the Xbox in 2001.

But with the main front of this battle being out of the hands of Sony and Microsoft and in the hands of third-party companies, the gamer is going to win big.

The hobbyist gamer can look forward to games being pushed to their limits on the console, similar to what we will see with Brute Force when it’s released in late May. Right now gamers demands will be met by Sony and Microsoft because they want our eyes (and our money). But when one of the two companies gets market share, we’ll be less and less important to the overall picture.

Take for example the operating system market. Microsoft has had the market share for a long time and hence most of the changes are cosmetic and not technological. Imagine if there was a raging battle going on in the OS arena. Operating systems would be real tools instead of the how they are now, where everyone is just happy we can now put animated backgrounds on our desktop.

So as long as this battle progresses with slow gains, hard-fought profits and remains at a 50-50 market share, the gamer is king. As the next round of games comes to market, the games we just saw at E3 like Halo 2 and Gran Turismo 4, we will be treated to some of the best gaming experiences to be found. And if that knocks your socks off, imagine what it will be like in 2005 when Xbox 2 and the Playstation 3 hit the market.

Enjoy is while it lasts, gamers. We are in a golden age.