Apple rumored to be eyeing video game market

A recent series of checks by Prudential analyst Jesse Tortora indicate that Apple Computer has hired video game designers and may have aspirations of entering the video game market in long-term.

"We think the video game market represents a distinct possibility for Apple, especially considering that it recently announced the availability of video games for its iPod through its iTunes store," the analyst told clients in a research note on Monday.

Tortora said Apple's design superiority, along with its well-recognized brand name, is sure to provide the company an advantage should it decide to enter the market. He said the company could approach the video game sector in one of two ways — via a home game console or a handheld device.

"The game console device could be morphed out of some combination of the MacMini and iTV, while the handheld player could be developed as an enhancement to a future version of the widescreen iPod," the analyst explained.

Still, Tortora said such a move "would introduce a complex set of market conditions" for Apple, which has traditionally made its real money through hardware sales. "The video game console market is notorious for subsidizing hardware to sell profitable games," he wrote. "Apple would then have to either rely on the sales of its games and downloadable movies to make enough profit to cover losses on hardware or figure out a strategy to make profits on hardware itself."

Given the challenges presented by the video game market, Tortora believes the company's decision to enter the video game market could depend on its need to defend its position against the competition in the battle over the digital home. He noted that Microsoft recently introduced a video download feature to its Xbox 360 gaming system and said he expects Sony will follow.

"There are no technical limitations to this capability, and Microsoft is already aggressively wooing the movie studios," he wrote. "This could adversely impact Apple’s iTunes Movie download business longer-term, along with its iTV and video iPod sales."

The analysts believes Apple will ultimately have to decide "whether to accept this challenge head-on" by entering the gaming market, or conclude that Microsoft and Sony pose little risk to its business and continue on with its current strategy.

In his note to clients, Tortora said Apple has recently hired game developers at both the software and hardware levels.