Editor's note: This is the seventh excerpt of an e-book on Apple by Jason Schwarz, an analyst at Lone Peak Asset Management in Westlake Village, Calif. Here are Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6.

I don't think Steve Jobs is interested in jumping into the online movie distribution business. Most analysts have supposed that Apple ( AAPL) 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) 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) 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.

The other change Apple is bringing to the gaming industry is their emphasis on practical information and practical skill development for the casual gamers. Instead of idling away your time playing some fantasy science fiction game, the App Store provides you with alternatives so that your recreational time can be well spent.

You want to create music? Apple's got virtual instruments, recording and mixing. You want a personal trainer while running, cycling or hiking? iPhone's got it. How about a birth buddy to help your wife with labor contractions? iPhone's even got that.

Some other practical apps include iLingo, which can teach you a new language. Trigger helps with trigonometry, and you can find apps specializing in banking, travel, photography, shopping and social networking in the App Store. The mixing of gaming with apps might expand the platform in ways we haven't seen yet.

In the same way that Google ( GOOG) search allowed us to sort and find relevant information on the Web, the Apple App Store will help us to narrow down and choose educational pursuits of interest.

That is what phase one of Apple gaming is all about. The real job of phase one is to allow the iPhone/iPod touch platform to become an accepted medium for learning math, science, language, music, etc. That is why Apple is willing to give away the iPod touch when students purchase a Mac. They want consumers to become acclimated to the App Store.

Traditional game developers are looking to the Apple ecosystem as their distribution channel of the future. It even appears that Apple's appeal is unique among smartphones. Gameloft executive Alexandre de Rochefort was quoted by CNBC's Jim Goldman as saying, "We have significantly cut our investment in the Android platform, just like many others. It is not as neatly done as on the iPhone. Google has not been very good to entice customers to actually buy products. On Android, nobody is making significant revenue. We are selling 400 times more games on iPhone than on Android."

Another possible area where Apple may end up is 3D gaming. The most influential names in entertainment are furiously working with the latest breakthrough 3D technology, people like Academy Award winner James Cameron, U2 visionary Bono, Lord of the Rings Director Peter Jackson, and Imax co-CEOs Richard Gelfond and Bradley Wechsler.

For those of you whose only 3D experience has been watching Captain EO while wearing those paper 3D glasses, I've got news for you, this new technology will blow your mind. If you want a sneak peek, go to your local Imax Movie Screen and check out U2 in 3D.

Frank Miller, writer of Batman, 300, and Sin City, had this to say: "I saw U2 3D and I thought that the 3D effects were not just remarkable but historic." According to U2 3D executive producer Sandy Climan, "We think this is going to usher in an era of filmmaking that causes a paradigm shift not that much different than silent films to talkies, or black and white to color."

Titanic producer James Cameron agrees, "There will eventually be major titles available from all studios at some screens in almost all multiplex cinemas worldwide. I would say the horizon for this is five years ... 3D's broad acceptance at theaters will generate enough content that consumer-electronics manufacturers will make home players and monitors available.

"The technology exists now, but is not readily available as off-the-shelf products. 3D display will become a must for video and computer games. The density of information one can place on a small screen becomes much higher if it's stacked in three dimensions."

We're at the beginning of a new era in gaming as evidenced by the success of the Guitar Hero franchise -- Activision ( ATVI) and RedOctane -- as well as the success of Nintendo's Wii. Physical participation in a game brings the user experience to a new level -- a level that turns non-gamers or casual gamers into serious gamers. Imagine a physical gaming experience that was more than just a game; what if your time spent playing games was actually teaching you a new skill? Educational gaming has been tried before, but Apple might be the ones to bring it mainstream. You actually want to learn to fly a plane, to sail, to race Nascar, or to improve your golf swing? 3D Apple could bring these real life simulations to a flat screen near you. Getting caught up in some sore of holographic adventure might make it even harder for parents to get their kids to do their chores!

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At the time of publication, Schwarz was long Apple.

Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at www.economictiming.com. Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.

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