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The Trend Causing Shockwaves Among Gaming Industry Giants

Watch out Sony (NYSE: SNE), Microsoft(Nasdaq: MSFT) and Nintendo.

Thanks to the burgeoning mobile industry, more consumers are getting their video game fix on the go.

Consider this: Digi-Capital estimates that the market for mobile and online gaming could hit $44 billion by 2014, or more than half of the entire video game market.

But how exactly are mobile and online game developers poised to outpace the biggest names in the industry?

Simple. By giving away apps for free.

Let me explain…

Who Knew That Free Stuff Could Be So Profitable?

You see, more developers are abandoning premium applications in favor of the “freemium” model. They’re offering free applications with the option to purchase virtual goods within the app.

Take Zynga, for instance. Its mega-popular social game, FarmVille, allows you to use real money to support your virtual farm. So if you can’t wait to pick up an extra $25 in Farm Cash, just link up your PayPal account and shell out $5.

Now, if spending actual cash to buy a cloud-based cow sounds ridiculous to you, you’re not alone. Generally, less than 6% of gamers actually make in-app purchases.

But with 60 million people signing onto Zynga’s games daily, the company is selling 38,000 virtual items… every second.

In dollar terms, the company’s revenue jumped from $122 million in 2009 to $598 million in 2010. And of that total, 96% or $575 million came from in-app purchases. Seriously.

In fact, thanks to the success of the freemium business model, Zynga is now worth over $14 billion and recently filed for an IPO.

But Zynga’s not the only game developer taking advantage of the trend.

Do You Know How to Play This “Most Dominating Business Model?”

Apple’s (Nasdaq: AAPL) App Store has seen a huge uptick in revenue generated from freemium games recently. Mobile analytics firm, Flurry, reports that 65% of the revenue generated from the store’s top 100 grossing games came from freemium applications. That’s up from 39% just six months ago.

As Flurry puts it, freemium is “the single most dominating business model in the mobile apps industry today… If you’re a game studio, you simply need to understand how to take advantage of this game-changing opportunity.”

The same goes for investors. And these aren’t the only companies reshaping this industry.

My colleague, Louis Basenese, sniffed out ways to play the freemium app boom way before talk of Zynga’s upcoming IPO got Wall Street hot and bothered about the trend. And he recommended one standout performer back in the February issue of The White Cap Report.

Since then, its shares have charged 57% higher. And we expect more gains to come. To get the name of the company – plus all of our latest investment analysis and recommendations, check out The White Cap Report.

Good investing,

Justin Fritz

Justin Fritz

, Executive Editor

View More By Justin Fritz