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Nokia's Game for a New Challenge

The company's push into video gaming holds promise -- but is it too far-fetched to bring big rewards?

Nokia (NOK) - Get Report is beefing up its game plans.

The Finnish handset king has added a couple big-name suppliers to bolster its push into the entertainment business. The company is preparing to make a big splash in

Nintendo

nation with its new game phone gadget, due out this fall.

In the past two weeks, the world's leading cell-phone maker has rung up deals with top videogame developers

Sega

and

Electronic Arts

(ERTS)

to provide services and games for its upcoming N-Gage phone. The company has not disclosed the terms of the deals, and observers expect more announcements as Nokia seeks to broaden its game selection.

The N-Gage phone, which by no coincidence resembles fancy version of the beloved Nintendo GameBoy, is expected to get a major advertising push going into the holiday gift-buying season. The company is expected to unveil the phone Oct. 7.

To Nokia fans, the gaming strategy is a brilliant attack on an obvious opportunity. Adding new features such as cameras and MP3 players to phones has certainly goosed a sluggish handset upgrade cycle. And Nokia investors certainly hope it will also help prop up average phone prices. For Nokia, that means sustained 24% profit margins.

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But to skeptics, a venture in gaming is merely further evidence that the big Finn is desperately groping niche markets on the odd chance it can find new sales now that growth has ended.

There's a lot of truth to both positions, say analysts.

For one, Nokia's aim is to make phones of interest to everyone. And since nearly all trends point to so-called converged devices -- gadgets that combine features like music, video, computing, gaming -- it's hardly surprising that the company would use its ample resources to explore every corner of the market.

Of course, this has also been a year of

disappointment for the mighty Nokia, which is facing its second consecutive year of revenue declines.

Game consoles seem to be just the stimulus for sagging sales, say Nokia bulls. This year's success of Nintendo's GameBoy and particularly its new GameBoy Advance is often cited as evidence that gamers are flocking to portables. Nokia's phone would be a big jump, technologically for the game box. N-Gage users will be able to download games on the handset and even play against others via wireless connections.

But critics question whether the success of a long-standing favorite with a $100 price tag can easily be imitated by a gaming upstart hoping to get between $300 and $500 per device.

And Nokia isn't the only handset maker offering downloadable games. Both LG and Sanyo have models already out in the market. PlayStation-maker

Sony

is expected to release a portable gaming device that may or may not include a phone.

While the opportunity may be great, it may take more than the upcoming holiday season to gauge its success.

One day we'll have converged devices, says a New York tech fund manager, but N-Gage will be "meaningless in the near term."