Apple's Decade: Getting Into the Games

By Jason Schwarz 11/24/09 - 10:21 AM EST

Stock quotes in this article: AAPL , ERTS , GOOG , ATVI , SNE

I don't think Steve Jobs is interested in jumping into the online movie distribution business. Most analysts have supposed that Apple(AAPL Quote) would do to digital movies what they did to digital music. Not going to happen.

What is going to happen is that Apple will do for gaming what they did for music. The process has already begun. Remember when music labels finally woke up and realized that consumers could pick off their favorite song for 99 cents instead of purchasing the album for $19.99?

Well all of a sudden consumers can now buy Madden Football through the App Store for $9.99 instead of shelling out $49.99 for the Nintendo Wii version. On top of that huge price cut, Apple also becomes a partner with Electronic Arts(ERTS Quote) as they collect a reported 30% of the revenue. What's great for Apple might not be so great for the gaming industry. The margins on games will continue to get crunched as the App Store expands its market from iPhone to Tablet to Apple TV.

Apple has provided clear signals that it intends to take on the Nintendo DS and the Sony(SNE Quote) PSP in the handheld gaming business. In a research note, Bernstein Research analyst Toni Sacconaghi tries to put some numbers around the situation. He says that over the last 12 months, 665 million to 670 million games may have been downloaded for the iPhone and iPod Touch from the App Store. About 12% of those were paid -- or roughly 80 million to 90 million -- with an average price of about $2.50.

He figures that over the last year, Apple generated $60 million to $70 million in gaming revenue from the App Store, with developers taking another $140 million to $160 million. Sacconaghi says that iPhone and Touch together will have one-third of the total handheld-gaming installed base by 2012.

Total handheld game sales for the segment were $14.7 billion in 2008. He estimates that the average handheld gaming console generates 4.9 game title sales over the lifetime of the device, with an average selling price of $34.

The iPhone/iTouch has so far sold only 1.6-1.8 games per devices, with an average ASP of $2.51. Not a good sign for game developers. While viewed by many software vendors as an incremental revenue opportunity today, the analyst contends that over time, the iPhone/Touch platform will likely be viewed as a negative for the gaming software industry, pushing down prices and luring customers away from the PSP and DS.