Can the iPhone eventually replace handheld gaming devices such as the Nintendo DS and Sony’s Playstation Portable? Laying out the case for the iPhone and the iPod Touch, the WSJ.com notes the two devices, with their big screens, powerful graphics processors, and accelerometers, have stirred up some serious interest from game publishers, thanks to their low cost distribution model.

Games publishers—from start-ups focused solely on the iPhone to big players such as Sega and ID Software, like the fact that they can make a profit on games even when they sell only for a few dollars, or are given away with ads—despite Apple (NSDQ: AAPL) taking a 30 percent cut on any application sold through the App Store. Sega has been crowing for a while that iPhone games are “the most profitable in terms of any of the formats we work on.” They revealed shortly after the App Store’s launch that they had sold over 500,000 copies of its $10 “Super Monkey Ball” game. For Sega, this number of sales would be considered a hit for a DS or PSP game. Plus, there’s no need for a physical retail network to distribute expensive game cartridges.

Sony (NYSE: SNE) and Nintendo have differing views over whether the iPhone is a competitor. Nintendo says yes, while Sony disagrees, with Sony PSP director of hardware marketing John Koller calling mobile gaming on the iPhone and iPod Touch “a time waster” rather than the real deal. Still, there is one downfall to the iPhone—it’s lack of physical buttons, which as ID Software game designer John Carmack tells the WSJ, means that player’s thumbs “tend to drift off” the touch screen controls, making them less effective. His verdict? The iPhone won’t displace DSs and PSPs, but create a “fairly robust market” of their own.”

Perhaps the real company that should be worried about the iPhone’s success with games is Nokia (NYSE: NOK). Its gaming effort N-Gage has been criticized by both game publishers and users a like. At Nokia’s recent gaming summit in Rome, EA Mobile declared that they make twice as much money when they sell a game for the iPhone, as they do for the same game for N-Gage. Plus, news recently surfaced that N-Gage users can only transfer their games once to another mobile phone. That means if you buy more than two Nokia phones and expect to play your N-Gage games on your third one, you won’t be able to, points out Allaboutngage.com. You’ll have to buy all of the games all over again, or stick with your second handset—surely counter intuitive for a company that makes its money selling handsets?

• Nokia Sees Overall Gaming Market “Not Growing”; EA Slams N-Gage
• iPhone Game Start-Up Ngmoco Gets Funding from Kleiner Perkins