Apple: Soon to Be a Mobile Gaming Force

Watch out, Sony and Nintendo; overnight, the maker of the iPhone is making a mark on the handheld gaming industry
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I didn't expect much from games on the iPhone. I had visions of casual games, perhaps a fancy take on solitaire or a version of poker that takes advantage of the handset's touchscreen. Surely not a true mobile gaming experience.

Boy, was I wrong. For the last few days I've been sampling some of the games available from the iTunes Store on the iPod Touch, and I've been stunned at how elaborate and involved they are. On the iPod Touch I've played a version of Gameloft's Real Soccer 2009 that rivals the version of the game on the Nintendo DS, and I didn't even miss the buttons. I've seen demonstrations of Sim City, forthcoming for the iPhone and the Touch from Electronic Arts (ERTS), that look more elaborate and sophisticated than any versions I've played before on a desktop PC or console.

They're immersive, addictive fun. And it's now readily apparent to me that the iPhone and iPod Touch are well on their way to becoming an important force in handheld gaming. When you consider the ease and reach of Apple's (AAPL) online method for distributing games, Apple could do in this category what it did in online music, causing big headaches for the genre's established players, Sony (SNE) and Nintendo.

Apple's come a long way in short order. In the three months and change since the iTunes App Store opened for business, it's already home to some 1,500 games, compared with fewer than 300 titles for Sony's PlayStation Portable and about 600 for Nintendo's handheld console, the DS.

Apple's Gaming Advantages

The iPhone maker is also holding its own when it comes to units sold. Based on sales data and analysts' projections, Apple is on track to sell an easy 40 million devices or more a year that are capable of playing games.

Nintendo sold 42 million DS consoles during the 18 months from January 2007 to June 2008, according to market research firm iSuppli. So Apple is on pace to sell about as many game-capable handhelds in a single year as Nintendo, the market's current leader, has sold in the most recently reported 18 months. This suggests that Apple could be on the cusp of claiming the crown as the world's market leader in handheld gaming.

Now look at Apple's advantages over competitors. Apple already has more titles for its games than both of the other two combined. And aside from the free ones, games on the App Store sell at prices ranging up to $9.99 and sometimes a little more. Compare that with the $20 to $40 for Nintendo DS games and the $10 to $40 for games on the PSP.

And with Apple selling via iTunes, there are no costs associated with the distribution of physical media. All games are downloaded directly to the device. And in the event the game is buggy, the developer can easily issue an easy-to-download fix. The developer gets 70% of the sale and Apple keeps 30%, with no one else to get in the middle. Nintendo and Sony partners have to worry about shelf space at stores, shipping, returns, defective merchandise, and even the occasional shoplifter.

On a revenue comparison, Apple's gaming sales will be much smaller than at Sony or Nintendo because the price of individual games is so much lower. What's more, not everyone who buys an iPhone or a Touch will also buy games. But the potential game sales per iPhone user will be higher because of the price differential. In its most recent quarter, Sony sold 3.18 million PSPs and about 12 million games for an average of fewer than four games per device.

Apple's Impact on the Gaming Industry

While there's no data yet on specific iPhone game sales, users of the iPhone are heavier gamers than those of other phones. A survey by iSuppli's ConsumerTrak found that U.S. cell-phone users report spending less than 3% of phone-use time on games. But that average shoots up considerably to more than 9% on the first iPhone and 6% on the iPhone 3G. (That's still less time than iPhone owners spend on e-mail, texting, or talking.)

How big an impact can Apple have? "They're not going to put Sony or Nintendo out of business," says Van Baker, a gaming analyst at Gartner Group (IT). Both companies have strong and thriving home-console businesses.

And the iPhone and Touch aren't ideal gaming devices. They're also made for calling, Web access, and e-mail. And both lack buttons, which arguably would give players more control over complex in-game moves and maneuvers. (But the iPhone and the Touch have the multitouch screen and the accelerometer, which allow for some pretty fancy moves of their own).

Nor are Apple's newly spawned gaming devices cheap. The iPod Touch starts at $229 and the iPhone 3G starts at $199 and requires a two-year service contract. The Nintendo DS goes for $129 while the PSP goes for $170 to $200. But once you add the cost of games, and in the case of the PSP, a $30-to-$40 Memory Stick, the iPhone's price begins to look competitive. Then the iPhone also has iTunes, which includes easy access to music, movies, TV shows, and more games all the time.

It's enough to make me wonder whether Apple is on its way to conquering yet another sector of the consumer-technology business from out of nowhere. We'll certainly know more after the holiday season, but if I worked for the Sony or Nintendo handheld gaming divisions, I'd be watching the holiday sales figures closely.

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