Commentary: IPhone will be major game platform, but business model is tricky
AAPL 126.61, -1.33, -1.0%) , with its new initiatives for the iPhone, reminds me of this guy.
The company released a software developers' kit, or SDK, for the iPhone and has set up a distribution system for all the cool little programs that the company expects to be created for the little machine.
This sounds good on the surface and the community is certainly enthusiastic about it, but when you dig deeper, you find that almost all of these applications are going to be games. Yes, there are some real programs, but when you start to read the forums and listen to the podcasts, everyone in unison is saying the same thing: The iPhone and its sibling the iPod touch are potentially great game platforms.
At first I was thinking this idea is crazy, until I realized that Nintendo in particular has made a fortune with its little Game Boy and Game Boy Advanced and DS. If you compare the NDS in particular to the iPhone, the iPhone has more potential. It's about the same size, networks like a computer and includes a phone, as well as a bigger, more-spectacular screen.
Of course, the screen is a touch screen that has infinite possibilities for handheld games. Nintendo's DS has shown that people love this capability.
Apple's small devices are bound to become major game machines, to the point where it will impinge on Nintendo's business. So why am I down on the idea? It's the business model that concerns me.
Nintendo and all of the game-centric companies work on the so-called razor-blade concept of making money. You release a device at cost or at a loss, and make all your profits from selling blades -- the games.
How does this model work with Apple? The company is not going to develop the games as Nintendo does, but instead is going to let third parties do all the work. Perhaps this will sell more-expensive phones as a novel way of making money in the game business, but nobody has ever made this backwards methodology work.
The problem is you do not have control of the games. A new platform could come along and everyone would flock there. Nintendo does the best job of preventing this by doing as much in-house as possible. There are third-party games for the Nintendo platforms (many from Capcom), but the games that define the devices are Nintendo's.
If you think that Apple might consider getting into the game-design business, don't hold your breath. It never has shown any inclination to even embrace games, and I'm not even sure that Apple is aware of the fact that the hot applications for the iPhone will be games.
The only thing that saves the company might be the fact that all the applications will be sold through a special iTunes-like Apple store, where it can rake off a piece of the action and manage overall quality control.
There is also some indication that Apple wants to prevent various porn applications from emerging on the platform.
The bad news is that at least one hack of the SDK limitations already has emerged, and it is quite likely that a secondary channel for unapproved programs could emerge and bypass the Apple-store system.
The recent announcement that the powerful VC firm of Kleiner Perkins Caufield & Byers will put up $100 million for iPhone-app development will assure there are bypass mechanisms as the platform becomes more powerful. That is not good news for Apple.
I hate to throw a wet blanket on this party, but until I see real and positive financial results from this idea I'm not going to be to enthusiastic about the stock. When my kids demand I buy them an iPhone, I'll rethink my position.[Source: http://www.marketwatch.com/news/story/iphone-game-platform-business-model/story.aspx?guid=%7B81D55A49-DE7B-4C86-B9BF-2BDAD6D67D82%7D]
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