The holiday shopping outlook for the $10 billion video game market appears rosy – despite the nation being a year into the worst recession in two decades.

Wall Street industry analysts said they expect the leading console and software makers such as Nintendo (NYDOY), Microsoft (MSFT), Electronic Arts (ERTS) and Activision Blizzard (AVTI) to do well. But there is concern that second-tier publishing houses and console makers might take it on the chin.

“We’re still going to see fourth quarter sales growth in the double digits from last year,” said Eric Holder, an analyst with Barclay’s Capital. “The problem is that the earnings growth is going to be a lot less than people are expecting, and fewer companies are going to benefit.”

The video game industry is still growing, with software sales in October up 35% from a year ago and combined console sales up more than 45% in the same time period, according to industry research figures.

But like any industry, clear leaders and losers have emerged. Analysts said they expect cash-strapped consumers to buy only the top titles for the holiday season, titles such as Activision’s Call of Duty 4, Micrsoft’s Gears of War, Nintendo’s Mario franchise, or Take Two Interactive’s (TTWO) Grand Theft Auto.

This will make it tougher for the smaller software houses such as THQ (THQI), which makes Nickelodeon and Disney-related titles, or possibly Sega, which released a new title for its iconic Sonic the Hedgehog franchise last month, to get shelf space and sell titles.

And fewer titles are getting sold. According to industry figures, the industry has sold 30 million consoles, but only about 200 million software titles – a ratio of about 6.6 titles per console instead of the usual 8 to 10 per console.

“We’re seeing a bifurcated market,” Holder said. “Only the biggest, largest name titles are selling. Further, retailers don’t want to put up shelf space for the middle market titles or older catalogue titles.”

On the hardware side of the industry, both Nintendo and Microsoft are expected to do well this season. Nintendo’s popular Wii is once again in short supply, and the $249 price tag, which includes Wii Sports, isn't expected to frighten off consumers.

Analysts also expect Microsoft’s Xbox to do well. With the Wii in short supply, and the Xbox now priced as low as $199, there’s a possibility that if consumers can't find the Wii the Xbox could emerge as the top seller this season by default.

Holder said if Nintendo "cannot get the Wii into stores, then they’re going to lose a lot of those potential customers to the Xbox.”

It’s hard to see the media giant Sony (SNE) as a second-tier console maker, but it’s certainly looking like it. The company’s PlayStation 3 console has yet to break six million units, according industry research figures. That’s compared to Nintendo’s 14 million Wiis and Microsoft’s 11 million Xbox 360s sold in the same time period.

Barclay’s Eric Holder and Cowen & Co’s Doug Cruetz said Sony’s $400 console isn’t priced right for the current economic downturn.

“Sony continues to put out their box at a self-destructive price point,” Cruetz said. “I am shocked they haven’t cut their console’s price at all.”

One reason Sony probably hasn’t cut the price is the performance of the Japanese Yen, which has made Sony’s products more expensive to export in recent months, analysts said. Sony is also marketing the PS3 as a video game console and BluRay disc combo player.

But overall, the industry is expected to better than its other retail peers, analysts said. The industry’s primary demographic – 25 to 40-year-old males – usually have the disposable income to spend on video games. More importantly, the entertainment value per hour for a video game is high, analysts said.

“You’re still getting a great value for a game on a cost per hour basis,” Holder said. “And with the consumer staying home, video games certainly look attractive this season.”