Nokia is shutting down N-Gage, its beleaguered, two-year-old mobile games service. The company will still sell N-Gage games through the end of September 2010, and players will still be able to interact via the N-Gage Arena, but after that the service will go dark. Instead, the company will focus on funneling gamers through to its Ovi Store.

This is a huge blow to Nokia (NYSE: NOK). Though Marco Argenti, the company’s VP of media, hinted that Nokia planned to streamline its mobile content offerings into a “single distribution channel” back in March, the Finnish mobile giant has invested millions in staffing and promoting N-Gage.

In the meantime, Nokia has been losing money on both handset and service sales—posting a $1.3 billion loss for Q3—and Comes With Music, its other mobile content add-on, has struggled to gain traction. But two major factors have contributed the most to N-Gage’s demise: lack of developer buy-in, and competition from the iPhone.

—Lack of developer support: N-Gage’s biggest problem was that developers didn’t like working with the platform. They called the N-Gage app development process a “time-consuming and expensive endeavor”—partly because they had to create different versions of games for Nokia’s myriad handsets, but also because of the complex approval process. Apple (NSDQ: AAPL) too, has a bad rep when it comes to getting apps approved, but developers seem to actually like creating games for the iPhone. With N-Gage, that wasn’t the case.

—iPhone competition: And then, there’s the consumer appeal of the iPhone and the App Store. Access to games and apps was integrated into the iPhone from the start; in contrast, it took Nokia a year to start selling a high volume of handsets with N-Gage pre-installed. iPhone games also launched with cool features like motion-control from the onset; N-Gage games only started making real use of handsets’ accelerometers this year. It also didn’t help that the same games often cost much less on the iPhone than N-Gage.

Moving forward, Nokia will be able to devote more resources to gaining developer support and traction for the Ovi Store. In July, the company closed its Vancouver-based in-house N-Gage development studio, and a Seattle-based content-development shop in May. We’ve put in a request for details on whether there will be more layoffs tied to the full N-Gage shutdown.

• Nokia Closes Canadian N-Gage Game Studio; Relocates Some Jobs To Finland
• Nokia To Keep N-Gage Store—For Now