UPDATE 2-Sony beefs up PS3 media ability with films over Web

(Adds executive's quotes, details, background)

By Kiyoshi Takenaka and Daisuke Wakabayashi

LOS ANGELES, July 15 (Reuters) - Sony Corp (6758.T) said it would rent and sell movies and TV shows over the Internet for its PlayStation 3 video game console and double the hard drive capacity of its main PS3 model in a bid to better compete with Microsoft Corp (MSFT.O) and Nintendo Co Ltd (7974.OS).

Sony dominated the global video game industry for a decade starting in the mid-1990s, but the PS3, its latest console, so far has lagged far behind Nintendo's Wii and in recent months has been fighting neck and neck with Microsoft's Xbox 360 for second place in the United States.

At a news conference at the E3 video game industry trade show on Tuesday, the company introduced a video distribution service on its PlayStation online network that allows users to rent or purchase movies or TV shows, taking aim at a stronghold of Microsoft's Xbox Live platform.

Video game machines and rival technologies are competing to become the main media hub of consumers.

The Sony service, set to become available on Tuesday, will allow users to watch movies and episodes on the PlayStation Portable handheld machine as well.

"One of the coolest parts of this new service and a huge differentiator from other services is that this content is portable," Sony Computer Entertainment America President Jack Tretton told a news conference.

"You can have it in your home, you can take it with you on the road, or both. It can be put on multiple devices at the same time."

Sony, which has its own movie division, holds high hopes for the new service as its aims to create synergy effects by having its hardware divisions and software units work closely together.

ON TRACK

On the hardware side of its game business, Sony said it plans to launch in September a PlayStation 3 game console with an 80-gigabyte hard drive for $399, the same price as the PS3 with a 40-gigabyte hard drive.

Sony plans to phase out the smaller hard-drive PS3 machine and make the 80-GB version its mainstay model as it focuses on making the console a home entertainment hub capable of storing downloaded movies and games, it said.

Sony last year launched a different version of an 80-GB PlayStation 3 for higher prices, but that model, unlike the upcoming version, was compatible with the PlayStation 2 games.

The announcement comes after Microsoft on Sunday cut the price of its best-selling Xbox 360 Pro model game console with a 20 gigabyte hard drive to $299 from $349. Microsoft also introduced a new Xbox 360 model with a 60 gigabyte hard drive.

Sony's Tretton said the PS3 is "well on its way" to reaching its goal to sell 10 million units in the year to March.