Microsoft's game play to spark buying frenzy

GAMING: Tech giant's move on Massive jolts $10.5 billion industry

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Microsoft's purchase of Massive, an in-game advertising company, for a reported $200 million to $400 million could trigger a buying and partnering frenzy for gaming companies, while also issuing a longer-term challenge to online-gaming networks such as Sony, Yahoo and AOL to answer with in-game ad solutions of their own.

"I really hadn't expected anything to happen for another 12 to 18 months," said Michael Goodman, a Yankee group analyst who predicted in early April that big players such as Microsoft, Sony and Electronic Arts would bring in-game advertising in-house. "But it makes sense that, if it doesn't require an immediate return on investment-and the market just isn't there yet, maybe in two or three years, but not yet-[potential acquirers] could move before the market is ready to get the pick of the litter."

Within the already hot $10.5 billion video-game-ad industry, Massive is the largest and most visible player, with some 120 games under contract through 2007. It's also the biggest in the most buzzed-about segment known as dynamic advertising, though players in other sectors are also being snapped up by media companies looking to cash in on game advertising: Online-gaming-community site Xfire was purchased by MTV Networks for $102 million and News Corp.'s bought IGN for $650 million.

In the dynamic space, Massive and competitors like Double Fusion, Adscape and IGA Worldwide (see box, at right), have built technology platforms that allow them to serve changeable ad units into video games. Unlike the static "hard-coded" or product-placement type ads that have peppered video games for several years, dynamic ads can be added late in the life cycle of game development or even after the game is done. (Hard-coded ads need to be integrated from six months to 18 months before the game is released.) Dynamic ads also represent an additional opportunity for creativity as ads can be changed frequently through an online connection.

Massive's "knowledge of the gaming industry and what works for gamers vs. what doesn't is important to Microsoft, especially as the next-generation consoles from Sony and Nintendo launch later this year," said David Riley, senior marketing manager at NPD Group. "[All] will ship with online capabilities, making knowledge of in-game advertising essential when looking for additional sources of revenue."

Today, dynamic in-game ads account for less than one-seventh of video game revenue, estimated Pacific Crest Securities analyst Evan Wilson. But that percentage is expected to grow through the decade as the technology matures and opportunities increase. The total in-game ad market was about $56 million in 2005, but that is expected to double this year, and total more some $732 million by 2010, according to Mr. Goodman's research. Other estimates put that end-of-decade figure at more than $1 billion; Massive itself pegged revenues at an exuberant $3 billion globally by 2010.

record numbers

Indeed, marketers have been embracing gaming ads in record numbers, from Puma, Honda and Red Bull to American Express, McDonald's and Burger King. "The smart brands are playing with it all right now," Double Fusion board member Jonathan Epstein said.

Regardless of the exact revenue, most industry insiders can agree that everyone-from the big players in both video gaming and ad serving, along with marketers and game publishers-is watching. Mr. Epstein said, "There's definitely lots of big companies looking around, but that's all I can really say about that." Double Fusion inked a deal with game publisher Midway in February to serve dynamic ads into upcoming titles; the first titles are expected in the fall.

"I'm really curious to see how dynamic in-game advertising fares this fall, that's when the market should become real," said Sarah McIlroy, Midway director of in-game advertising and promotions.

The exact fallout from a Microsoft purchase of Massive remains unclear as details have yet to surface, especially whether Microsoft will integrate the technology in-house or use it to continue to support third-party publishers. Mr. Goodman said the answer should be clear within a few weeks.

The resounding cautionary note is one of perspective. Even though studies have shown 18-to-34-year-old males play more video games than watch TV, and video-game advertising is an exciting emerging medium, it is still only one part of a media plan.

Saneel Radia, group director at Play, the dedicated online-gaming practice inside Publicis Groupe's Denuo division, likened in-game ad serving in the virtual world to out-of-home advertising in the real world, adding, "It gets something done for you, but rarely is it the entire answer."
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