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Apple looks to bring its 'A' game to mobile gaming

The website for CrossFire, an online game developed by SmileGate Holdings and published by Tencent Holdings Ltd. in China, is displayed on an Apple Inc. iPad, bottom, and iPhone 5c in an arranged photograph in Hong Kong,
Brent Lewin | Bloomberg | Getty Images
The website for CrossFire, an online game developed by SmileGate Holdings and published by Tencent Holdings Ltd. in China, is displayed on an Apple Inc. iPad, bottom, and iPhone 5c in an arranged photograph in Hong Kong,

Apple's footprint in the video game world is getting bigger. And that could be good news for the company's bottom line.

Gaming makes up the lion's share of the mobile software world, with consumers buying games more frequently than any other type of app. And with the recent launch of the large screen iPhone 6 Plus and Thursday's expected introduction of a souped-up iPad, Apple could become an even larger player in the category.

"[Gaming] is more important than people realize," said Ben Schachter, an analyst at Macquarie Securities. "We think that apps are an incredible business for Apple over the long term. It's the fastest growing and highest margin business for Apple today."

In the fourth quarter of 2013, games made up more than 75 percent of all app spending, according to analytics service App Annie. And in the second quarter of 2014, mobile gaming revenue in the iOS App Store was up 70 percent versus the comparable 2013 figures.

Schachter estimates Apple sold $7.5 billion worth of app-based games in 2013and expects the category to be growing at between 40 and 50 percent this year. But the increased processing and graphical power of the iPad and the iPhone (along with growing screen sizes) could send that number much higher in the years to come.

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"By and large, those were pretty lousy games on small screens," he said. "And as phones get better and processors improve, the quality is only going to improve."

Game publishers are equally excited about the future of gaming on Apple's devices. Frank Gibeau, executive vice president of EA Mobile, said he is especially excited about the features of the iPhone 6 Plus.

"One key takeaway is that with the retina display and the improved processor, combined with the Metal [graphics] capabilities and 128 GB of memory, that gets you to a device that's on part with next generation consoles," he said. "That's moving perfectly into our strike zone."

Legacy publishers in the video game industry have been a bit slow to fully embrace mobile gaming. But as the numbers climb, Schachter said he expects that to change their minds.

He points to Activision-Blizzard , which has historically stood on the sidelines of mobile until earlier this year, when it launched "Hearthstone: Heroes of Warcraft" for the iPad on Apple's app store.

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The company had initially guided for $100 million in revenue from the game, but it could surpass that.

"Hearthstone has been exceeding all of our expectations," said Michael Morhaime, president and CEO of Blizzard Entertainment on an earnings call in August. "We're not ready to provide a new specific number but we're very excited about the long-term prospects."

That success could be an impetus for the company to invest more heavily in mobile.

EA Mobile's Gibeau, for his part, said mobile is, in many ways, the future of EA.

"If you look at the market ... mobile has a strong growth path in front of it," he said. "Then you've got wearables on top of that. At EA, we look at it as an especially powerful strategic path for us. We've been a premium businessand we've been changing the company from the ground up to become a services business. We have an optimistic and profoundly bright view of the future because of this platform expansion in mobile."

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The growth in gaming is especially beneficial for Apple, given the slump in tablet sales for the past year. Shipments of iPads fell nearly 14 percent in the first half of this year, according to sales figures from research firm International Data Corporation.

The success of the iPhone 6 and 6 Plus will boost the company's hardware sales, but even an upgraded iPad comes with question marks. Since the tablet hasn't taken any big evolutionary leaps since its introduction, many current owners don't feel a pressing need to buy a new one.

But if software sales continue to accelerate at their current pace, said Schachter, Apple can be a bit more relaxed about the hardware sales numbers.

"Even as hardware sales have slowed, software sale continue to be strong," he said. "You don't have to count on Apple or Google to create all the innovation. They set up the platform and benefit from the success of both the proverbial kid in his garage or GE making a medical app."