From mobile video games to location-based services (LBS) that help you find the nearest café, consumers are downloading mobile applications in astounding numbers. And there are several software developers in this growing area worth keeping an eye on.

Smartphones — such as the iPhone, from Cupertino, Calif.-based Apple Inc. ; the BlackBerry, from Waterloo, Ont.-based Re-search In Motion Ltd.; and others produced by Finland-based Nokia Corp. and Taiwan-based HTC Corp. — have opened the floodgates to the mobile “apps” market. That’s because these phones are essentially computers running on complete operating systems that provide a standardized platform for mobile-app developers.

Entire systems through which consumers can download such applications have also been created. Apple’s App Store, for example, has been an overwhelming success; more than a billion apps have been downloaded since its launch in July 2008.

The apps most poised to skyrocket in North America are LBS, which use global positioning system receivers to pinpoint places or people geographically, says Tuong Huy Nguyen, principal research analyst of mobile devices with Stamford, Conn.-based Gartner Inc. in Richmond, Va. He cites Purchase, N.Y.-based MasterCard Worldwide’s ATM Hunter, which allows users to locate automated teller machines; and Boston-based uLocate Communications Inc.’s Buddy Beacon, which locates friends on the go.

“Everyone is making moves in [the LBS market],” says Nguyen, “whether it is operators such as Verizon Communications Inc. or handset manufacturers such as Nokia.”

Gartner forecasts that North American consumers will spend about US$2.2 billion on LBS apps by 2011, up considerably from the US$860 million projected for 2009.

“These programs make great sense for people who travel a lot,” says Robert Kozinets, associate professor of marketing at York University’s Schulich School of Business in Toronto, “[who] need to find amenities in a new city.”

Companies that specialize in LBS tend to have multiple revenue streams, Kozinets adds. Developers typically make their money on the share they receive from an online distributor, such as Apple’s App Store, for which developers are paid 70% of their app’s download price. However, LBS developers can also make money from corporate sponsors, who pay developers to have their name associated with an app.

The majority of LBS developers are independent, but more public companies, including Olathe, Kan.-based Garmin International Inc., are getting in the game. In addition to its existing business of manufacturing GPS-based devices, Garmin publishes various apps under the Garmin Mobile banner. The apps allow GPS-enabled smartphones to function as full GPS navigators.

Garmin reported revenue for the year ended Dec. 27, 2008, of US$3.5 billion, an increase from US$3.2 billion in fiscal 2007. Although the company’s net income fell to US$773 million from US$855 million in the same period, the revenue generated from its automotive and mobile business, of which mobile apps are a small portion, increased by 8% to US$2.5 billion.

Following LBS, mobile gaming is the next biggest category in the mobile-apps sector, says Nguyen: “Faster processors, bigger screens and high-speed access on handsets allow for more robust games.”

According to a Gartner report, North American mobile gaming app sales grew to US$845 million in 2008, from US$746 million in 2007; the report predicts that mobile gaming will be US$1.2 billion by 2011.

Two notables in this arena are Redwood City, Calif.-based Electronic Arts Inc. and Paris-based Gameloft SA. Both develop and publish interactive games for mobile handsets and other platforms such as video-game consoles. Both firms also partner with media companies to develop mobile games. For instance, Gameloft has partnered with New York-based NBC Universal Inc. to develop and publish Heroes: The Mobile Game, fashioned after the hit TV show.

It may be too early to see the impact of Gameloft’s strategy on its revenue. In 2008, mobile games accounted for 93% of sales, or 110.3 million euros, a 15% increase from 96.1 million euros in the previous year. Gameloft posted a net loss of 1.8 million euros in 2008, an improvement from a loss of 4.1 million euros in 2007.

However, as Gameloft develops games for new platforms such as the iPhone, earnings will rise, says a March 20 report from Edward Williams and Thomas Andrews, analysts with Toronto-based BMO Capital Markets Corp. in New York.

As for EA, it published more than 30 cellphone games in the fiscal year ended March 31, 2008. In the nine months ended Dec. 31, 2008, the firm saw revenue for all its mobile and console businesses rise to US$3.4 billion, up from US$2.5 billion in the same period in 2007. Revenue from wireless mobile gaming — at US$140 million in the nine months — represents a small part of the total picture. Overall, EA posted a loss of US$1.1 billion in the nine months, a significant increase from a US$361-million loss in the same period in 2007.

@page_break@At first glance, EA’s losses are troubling. However, those losses include a one-time expense of US$368 million for goodwill impairment because of economic conditions, and a hefty acquisition expense of US$1 billion for technology.

Part of the challenge in making profits on mobile games is that developers are battling “porting” costs, which are incurred when games are adapted to different handsets. Says Nguyen: “You might have to adjust the screen size for a game from one phone to another; also, different handsets have different keyboards. It’s a constant struggle.” Porting costs can run as high as 80% of a game’s overall profitability.

On the flip side, sales are increasing. Apple’s App store can be thanked for this, Nguyen says: “It has raised the awareness for consumers for buying applications, in general. It’s not that [buying opportunities weren’t] there before, but Apple did such a great marketing job.”

Given the popularity of Apple’s App Store, competitors such as RIM have launched their own app stores. Nguyen says this is all good news for developers, as more online distribution will increase the number of direct sales to consumers.

Public companies will be in the best position to provide software for these virtual marketplaces, says Kevin Restivo, senior research analyst, software, with Toronto-based research firm IDC Canada Ltd. “It’s an arms race right now. There are more developers vying for people’s dollars,” he says. “And the more cash and the more developers you have, the greater your chance is of offering a popular application. It’s not a guaranteed success, but there are advantages. You can lay more bets on more platforms.”

But there’s one caveat, he adds: “If you don’t have the right talent, it won’t matter how big you are.”

And there’s also the problem of persuading those talented app developers to join the team. With Apple’s and RIM’s app stores offering developers a massive percentage on the price of each app purchased, there’s no real incentive for a developer operating out of his or her basement to join a firm.

“Independent developers can now reach end-users more easily,” Restivo says, “whereas before, it was harder to get those applications into people’s hands.”

Those apps will be getting into more and more people’s hands if smartphone sales continue to increase, as the Gartner report predicts. It forecasts that by 2013, 45% of the 1.5 billion handsets sold worldwide will be smartphones — a jump from the 11.4% share of the 1.2 billion handsets sold in 2008. IE