Video games are a huge market. Most of the top selling apps on the App store for Apple have been games. There have been many top selling games that have been ported to the iPhone platform or gained their fame on the iPhone.
With the popularity of games on the iPhone and iPod Touch it is starting to make a dent in to the stand alone hand held and console market. Sony and Nintendo are struggling to maintain sales that they once enjoyed because the iOS environment is starting to take over. Even many popular games that were once only in the realm of dedicated consoles like the Nintendo Wii are starting to make an appearance on the iPhone.
One of the benefits of gaming on the iPhone is that you always have your phone with you. It does not require ou to carry a second device just to get in a quick game. It will be interesting to see the convergence of devices in to smart phones and see what other technology is absorbed by the smart phone. I believe Sony will one day need to offer a competitve smart phone or begin to port their games over to the dominant players in the market iOS and Android.