Wow, if this Joystiq report is correct (sourced from the BBC), then Sony missed a huge window - Christmas 2005. Now, that might matter less if it weren't for two things:

• The PS3 won't have backward compatibility with the PS2 (and PS1)
• The XBox 360 will be out for Christmas this year

The GameCube system is the third player here, and Nintendo has already announced that their new console will be backward compatible. In fact, you'll be able to download old NES games (although the old cartridges won't work). The XBox 360 is a new system, with no back compatibility, like the PS3. What that means is that early on, the new XBox and the new PS3 were going to be fighting for market share in a "from scratch" situation - including the all important "get games written" race.

Well - if this is true, then Microsoft gets at least a year of free time to establish a lead on Sony. Which means, I think, that Sony is going to have to do a serious rethink on the backwards compatibility issue. Here's the relevant bit from the report:

The PS3 is delayed until 2007, the decision for this came about through the failure of the initial hardware the PS3 Development Team created. Apparently, 300 PS3 Units were created and sent to various software developers to begin creating games for the new system. However, design flaws in the PS3 (Specifically, not enough coolant) caused the systems to overheat and meltdown after moderate use by the developers.

According to my DM (District Manager), Sony went and fired the entirety of the PS3 Development Team for this flaw. In short, from what I’ve heard, if Sony gained anything from this experience, it’s minor technical knowledge on what the PS3 can handle, but for the most part they were sent to square one.

Sounds a little over the top to me, but if the basics are right - that problems with the PS3 are going to delay the launch - then MS just got a huge market boost for free.