Sony (NYSE: SNE) and EU tech giant Ericsson (NASDAQ: ERIC) now have a strategy in place to corner the video game sector of the smartphone market. Tech blog Engadget revealed the Playstation Phone from Sony Ericsson last night, reporting not just the device’s specifications but also showing off images of a prototype of the gaming-centric smartphone. The new report follows an August report from Engadget detailing the handheld and the images now confirm many of the device’s features. While the Playstation Phone appears to be a capable contender in the smartphone space regardless of its emphasis on video game functionality, can it compete with Apple (NASDAQ: AAPL), Research in Motion (NASDAQ: RIMM), and Nokia (NYSE: NOK)?

The Playstation Phone will at least be able to compete favorably against Motorola (NYSE: MOT). Like that company’s Droid X line of smartphones, the Playstation Phone will also run using Google‘s (NASDAQ: GOOG) Android operating system. Unlike the Droid X, however, the Playstation Phone will run on the upcoming Android 2.3, nicknamed Gingerbread, Android update. Android Gingerbread is rumored to bring with it a new Android Market music storefront, Google TV functionality, video calls, and 3D gaming support. Even with the device expected to ship in early 2011 rather than by the end of 2010 as was previously reported, the new Android update should give the Playstation Phone an advantage over its competitors, however brief that lead may be.

App makers and downloadable media sales will also have double the access to users on the Playstation Phone. In addition to the Android Market, the new smartphone from Sony Ericsson will also include a custom Sony market specific to the phone, one that will likely share branding and access with the Playstation Network Store already supported by the company’s devoted gaming consoles, the Playstation 3 and PSP. The Playstation Network features downloadable retail games in addition to the smaller, cheaper games that typify the Apple App Store and Android Market, as well as movie and television rentals. Given their existing partnership on the Playstation 3 and past support of Android phones, it should also be expected that the Playstation Phone will include a Netflix (NASDAQ: NFLX) streaming video app.

Unconfirmed in the new report is whether the Playstation Phone will support PSP software. It was previously thought that the new smartphone would share branding of both Sony’s existing portable gaming machine and the Sony Ericsson Xperia line of smartphones, but it now appears that the phone will only bear the Playstation name. It was expected that the Playstation Phone would forego the Playstation Portable’s physical media drive and its attendant UMD format but it would still run downloadable versions of existing games on the system, much like Sony’s failed PSPGo model. The original report claimed that the smartphone would feature software from Sony’s successful game franchises like Little Big Planet and God of War in addition to third-party publisher support from Electronic Arts (NASDAQ: ERTS) and Activision Blizzard (NASDAQ: ATVI) in the form of new Madden NFL and Call of Duty: Modern Warfare games. If the Playstation Phone does not support PSP software, it’s questionable whether third-party publishers would devote resources to developing unique software for the platform and should be expected instead to port games from the iPhone 4 and other competitors.

The Playstation Phone may backfire against Sony Ericsson. If it doesn’t distinguish itself with other smartphone functionality beyond gaming, it will likely be overlooked in favor of more popular smartphones like the iPhone and Droid lines. If its gaming features don’t distinguish themselves, it will likely be ignored in favor of Nintendo‘s (PINK: NTDOY) new Nintendo 3DS next spring, not to mention Sony’s own new Playstation Portable 2, which is going to be a wholly separate device from the Playstation Phone. Sony Computer Entertainment declined to comment on Engadget‘s report but didn’t offer deny its existence either, lending some validity to the smartphone’s existence, but between now and its official debut on the market, Sony Ericsson had better make sure their device is unique beyond special control inputs. Otherwise, investors are going to get burned.

As of this writing, Anthony Agnello did not own a position in any of the stocks named here.