LAS VEGAS -(Dow Jones)- Mobile games are poised to move up a level this year.

Gaming hasn't gotten as much attention as other wireless data services, such as text messaging and ringtones, but 2008 could mark a turning point where it goes beyond the gadget geek to more casual consumers. That's because people are snapping up better handsets that offer a faster connection to the network.

The industry recently pulled back its over-ambitious expectations on gaming, but many believe there remains a lot of growth potential in the area.

"The mobile gaming market was in its infancy before, so it's not going to double itself again," said Tuong Nguyen, an analyst at Gartner Inc. "People are being more rational with where the market is going. You still see a lot of interest of usage and intended usage of mobile games."

The mobile gaming business is a tough one, but the rewards are there. Analysts point to opportunities overseas and, in particular, the emerging markets, while the lower cost of production and distribution may make it a potentially more profitable than the console business.

Mobile games provide a quick distraction - mostly through casual games - rather than the more involving experience found on the console. That distinction has made it a tricky endeavor for the major game developers.

Electronic Arts Inc. (ERTS) is one of the few that have successfully straddled both mobile and console worlds, and only did so through its acquisition of Jamdat Mobile and its flagship games bowling, Bejeweled and Tetris.

Other major players include Glu Mobile Inc. (GLUU) and Gameloft (7960.FR), both of which are solely focused on mobile games.

Glu Mobile hit a snag in November after reporting disappointing third-quarter results and providing muted expectations, citing slower growth in Europe. While the company posted improved results and set a brighter tone in the subsequent quarter last month, the setback illustrates the previously high growth expectations Wall Street had built into the business.

"It's not as robust as previously thought," Nguyen said.

Despite the tempered expectations, many remain optimistic.

"It's quite a good market for us," said Travis Boatman, an EA executive who develops mobile games. Tuesday, the company announced that many of its most popular games - such as Tetris and Bejeweled - are now available for smartphones.

Nonetheless, it remains a small one, even for EA, which is the largest player in the category. In fiscal 2007, EA's mobile division contributed $140 million in sales to the company's total revenue of $3.03 billion.

The total industry market in North America this year will be worth $998.9 million, while the Western European market will be worth $1.53 billion and the Asian market will be worth $2.58 billion, according to Gartner Inc. Nguyen said he expects growth in the mid-teens this year and continuing into mid-to-low double digits through 2011.

Phones, Gamers Getting Smarter

The main driver for gaming growth is the increasing number of smartphones in the market. Almost all in the industry point to Apple Inc.'s (AAPL) iPhone as a key catalyst.

The device has taught consumers that a cellphone is more than just a device for phone calls and text messaging. Apple's recent high-profile debut of its software development kit, which allows third-party developers to create programs and games for the iPhone, will bring further attention to mobile gaming, analysts say.

Beyond the noise, the iPhone, among other smartphones, feature bigger and brighter screens, better user controls such as a touchscreen or scroll ball, and faster graphics capabilities - all of which improves the experience.

"The base mobile game business will continue to grow," said Greg Ballard, chief executive of Glu Mobile. "You'll see better handsets, especially as competition between handset makers heats up. You'll start to see more high power phones offered for free."

Nokia Corp. (NOK) attempted to sell a video game device nearly five years ago, called the N-Gage, which received a cool reception. More recently, the company has pushed N-Gage as more of a gaming platform that rides on top of its high-end smartphones.

Both the N-Gage and iPhone SDK platforms will spur development and adoption of games, Boatman said.

"They match our vision of how we bring mobile games to customers," he said.

Global Reach

While the mobile game makers have focused on the more developed countries, the emerging markets may yield more opportunities.

In poorer countries, few people can afford computers or expensive video game consoles, but handset makers have been driving down the price of cellphones and aggressively selling them in these regions.

That gives mobile game makers a base of potential customers.

"Relatively speaking, you have this form of entertainment that is much cheaper," Nguyen said. "Almost everyone is getting their hands on a phone. You already have the hardware."

Because everyone has a cellphone, Boatman said he believes mobile gaming will eventually takeover handheld consoles such as the Playstation Portable or Nintendo Co. Ltd.'s (NTDOY) DS.

The delivery of games, meanwhile, is easier and more efficient than the traditional console business. Games are transmitted over the air through the phone, rather than on a disc or cartridge. As a result, there is no need for manufacturing facilities to publish games.

Because the games are simpler, they cost less to develop. A typical mobile game costs $250,000 to develop, while a high-profile console game could costs $5 million to $15 million to create, Ballard said.

The mobile game developers, however, have to deal with ensuring their games are compatible with hundreds of different phones, rather than three consoles or the PC. That remains one of the biggest obstacles.

"It's challenging to be profitable," said Scott Zerby, vice president of THQ Inc.'s (THQI) wireless business.

Still, THQ said at the CTIA Wireless trade show in Las Vegas that it plans to set up a new mobile gaming headquarters in San Diego to tap into the local talent. Despite the challenges, it sees the opportunity.

"I really think it will be a watershed year," Zerby said.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

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  04-01-08 1337ET
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