Tapulous is set to break the million-download milestone for its Tap Tap Revenge iPhone game over the weekend, and it wants the world to know about it. The company is blogging about its race to a million digital deliveries of its popular rhythmic tapping game. The developer is giving away an album every 10 minutes leading up to the mark. Its website's landing page is even overrun by a giant odometer, ticking higher with every wave of downloads.

Forget for a moment that the game is a rudimentary stab at cashing in on the success of guitar-strumming console games like Viacom's (NYSE:VIA) Rock Band and Activision's (NASDAQ:ATVID) Guitar Hero. Forget for a moment that the game is actually a free download on Apple's (NASDAQ:AAPL) Apps Store, for use on its revolutionary smartphone.

A million is still a ton of downloads.

Sure, it's no Grand Theft Auto IV. Take-Two Interactive (NASDAQ:TTWO) set a video game industry record earlier this year, moving 6 million copies during its first week on the market. However, for an obscure developer like Tapulous -- catering a game exclusively for a year-old cell-phone platform with a user base in the millions -- moving a million virtual copies in less than a month is a head-turning event.

Will the iPhone thrive as a gaming device? Is it a threat to other portable players? What are the investing implications for investors? These are big questions, and I'll take a shot at answering them.

The limitations of the iPhone
I haven't fallen prey to the hype machine just yet. When Forbes' Brian Caulfield wrote an industry-rattling piece entitled "Why Apple Could Kill Nintendo DS," I called him out.

"The iPod touch and the cell phone contract-shackled iPhone are too costly to justify as gaming gadgetry for kids, even if the convergence of portable appliances makes a catchall unit appealing," I wrote at the time.

Another thing that will get in the way of the iPhone whacking Nintendo (OTC BB: NTDOY.PK) is the lack of buttons necessary to play most conventional games. The iPhone touch screen can only get you so far. The tilt-sensitive features are great for physics-based games, but that is just a small niche in gaming circles.

The first wave of games for the iPhone generally consists of either physics-based arcade games or table games like poker and mah-jongg. That sure beats the old snake games in the early-generation Nokia (NYSE:NOK) handsets, but it's not going to replace an industry.

Nintendo and PSP-pimping Sony (NYSE:SNE) can rest easy, for now. We're still far removed from the day when the iconic iPhone's screen will be smeared by greasy, pudgy, pre-teen fingers pounding their way through a game.

Apple will still change the gaming landscape
However, Apple doesn't need to topple the DS or PSP to alter the landscape. The one area where the growing number of free -- or dirt cheap -- games can disrupt the market is in pricing.

Giving its game away is actually a smart move for Tapulous. When the time comes, it will be able to turn on the spigot to incorporate ads in its games or charge users for premium downloads or future installments. Even if it doesn't go that route, Tapulous is making the most of its popularity by driving consumers to its website.

Giving away free music is just one potential carrot. The Tapulous website is hosting a music competition, where aspiring musicians have submitted original tracks they want to see in the game, with winners chosen by the community. Monetized carefully, you can make a mint by giving away a game if you have the ability to cash in through sponsorships.

The clincher here is that the iPhone is still young. By this time next year, how many more Tapulous-esque companies will be singing about lapping the million-download mark (or more)? If that trend takes off, even mainstream developers may need to lower prices and come up with ad-supported gravy.

The video game industry loves to usher in a new generation of gaming systems, because it typically accompanies higher software-title prices, but that trend may have topped out. I've played a dozen different iPhone games, and only one of them was an actual purchase.

Games will remain a rich medium, but there are plenty of revenue streams out there to channel through. Get paddling.    

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Take-Two Interactive Software is a Motley Fool Rule Breakers recommendation. Nintendo, Activision, and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz still feels that even some of the $4.99 iPhone games are overpriced relative to some of the better free ones available. Rick does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it could beat "Jordan" in Expert mode if it had to.