Historically, the video game industry had hardware and software. You would buy an expensive machine from Microsoft, Sony, or Nintendo. And then you would buy expensive software games from names like Activision Blizzard (ATVI) or Ubisoft. And then you would have fun.

This all changed in 2007 when the iPhone hit the market. Now Apple (AAPL 1.67%) is the dominant gaming platform on the hardware side. My iPhone is filled with simple and free video games. My favorite mobile game actually cost a few bucks -- it's Clue, from Hasbro. While my family owns some of the old-school video gaming stocks, most of the strongest stock investments in gaming are on the mobile side. Specifically, I love Sea (SE -2.65%) and Unity Software (U -1.05%). Sea is the creator of the most popular mobile game in the world, Free Fire. And Unity is the game engine that software developers often use to create those simple games for the iPhone.

Animated drawing of a sea monster.

Image source: Splinterlands.

How has mobile play shifted the industry? And where will the next shift take us? Let's dive in.

1. Mobile gaming is almost a separate industry

iPhone play has some advantages and disadvantages for gaming companies. One big disadvantage is the screen is smaller. So software companies have to rethink and reimagine what a video game looks like. A lot of video games for your smartphone are visually simple games. Many of them look cheap. Indeed, the way the market has developed, consumers expect free games. We skip over the games that cost money, because there are so many free games that are fun to play.

Activision Blizzard saw the writing on the wall, and a few years ago the company acquired King Digital for almost $6 billion. King is the maker of simple -- some would say childish -- video games like Candy Crush and Farm Heroes Saga. The games are fun and free to download from the App Store.

Activision didn't just want to acquire the games, in my opinion. It also wanted to acquire the target company's mobile know-how. Activision's plan was to introduce Call of Duty (its premier video game) to mobile audiences. How do you redesign Call of Duty for a much smaller screen? And how do you make money off a free game? 

It took a couple of years, but in 2019 Activision Blizzard finally released a free mobile version of Call of Duty. Over the next few weeks, 100 million players downloaded the game. Boom! And many of those free players would happily spend money as they try to win the game. How has that "free" game done for the bottom line? Here's what Chief Operating Officer Daniel Alegre said on the most recent earnings report:

Our Call of Duty free-to-play Warzone and mobile experiences have transformed the franchise, more than tripling the number of monthly players over the last two years and adding over $1 billion of operating income to Activision segment results last year.    

2. Free games will morph again into money-making opportunities for players

The way "free" games make money for companies is that players make in-game purchases, buying assets that help them win the game. In the future, players will still make those in-game purchases. But they will also own those assets outright, and they can buy, sell, or trade them on online markets. And the assets in popular games will dramatically appreciate in value. 

In some corners of the internet, the future is now. My favorite video game right now is Splinterlands, a free game on the Hive blockchain. I started playing in 2019. It's a virtual card-playing battle game featuring various monsters, demons, ghosts, and dragons. It's free to play and highly addictive.

Animation cel of a giant squid.

Image source: Splinterlands.

After playing for a while -- and running into strange and powerful monsters I'd never seen before -- I decided to pay the $10 fee to buy the Summoner's Spellbook and unlock the full game. 

What happens when you do that is pretty amazing. As I played the game, I would win monster cards. Or I'd win some of the game currency, DEC, that you can use to buy monster cards. DEC sounds like Monopoly money, and it is very similar to Monopoly money, with one major exception -- it has a real dollar value. DEC is used to buy the monster cards, which are actually non-fungible tokens (NFTs) on the blockchain. You own the cards outright, and you can sell them on third-party marketplaces. 

Animation cel of a monster wizard.

Image source: Splinterlands.

So these cards are rather like baseball cards or comic books, in that they have value to people according to the laws of supply and demand. Splinterlands, the flagship game from the company of the same name, has a marketplace where you can buy, sell, or rent these cards in real time, over the internet. I'm constantly buying and selling cards (using DEC, not cash) to improve my game performance. Meanwhile, back in the real world, the value of these cards has dramatically spiked. 

After paying $10 to access this level of the game, I've played for free ever since. And the cards I've won are now worth about $2,000. In stock terms, we'd call that a 200-bagger. 

Splinterlands is a private company, so I have no idea what its financials are like. But it seems to me this company is riding the wave of the future. If you're curious about blockchain and NFTs, you might want to take a peek at the game and play a few rounds. I think the future of gaming will be highly profitable for players. And this will cause a demand shift -- as we saw with free games on smartphones -- and the video game companies that anticipate this trend will thrive.