SBJ/August 30 - September 5, 2004/SBJ In Depth

In-game advertising a growing, but not easy, sell

Game makers may need marketing assistance from the leagues to stay viable, but their ultimate success may depend on the extent to which the leagues are willing to stay out of the way of their next creative and economic endeavors.

EA’s pro golf game allows players to choose their apparel and equipment brands.
Some game makers have only been able to survive by exploring new creative arenas that at times have diminished the leagues’ brands.

Midway, for example, worked with Major League Baseball, the NBA and NHL to create arcade-style games, much simpler and cheaper to produce than the simulation games that Electronic Arts (EA) develops. The efforts have produced mixed results. For example, the NHL Hitz franchise had several solid sales years but its popularity faded.

Other stabs at creativity have been more successful but also controversial. Midway’s MLB SlugFest, one of two new licensed sports titles on the company’s 2004 lineup, incorporates hand-to-hand combat. Parents have not reacted warmly to a game that gives children the option of having Derek Jeter take out the third baseman while rounding toward home.

The outrage toward games like SlugFest and Midway’s NBA Ballers, which rewards performance with women and cars, was featured recently as part of a five-part series on gaming by ESPN.

“Unfortunately, some of the things are a little over the top,” said Howard Smith, MLB’s senior vice president of licensing. “The fact is that these guys, they’ve got to go out and uncover all sorts of opportunities.”

With the coveted demographic of males ages 18 to 34 spending more time consuming video games than any other media outlet, there is no shortage of revenue-generating opportunities in the space. The problem is figuring out how to accommodate everyone in a genre in which so many parties have a financial stake.

“Historically, the royalty revenue model has been certainly the lion’s share of the revenue we would realize from our video game partners,” said Gene Goldberg, vice president of consumer products at the NFL. “As technology changes and as opportunities present themselves, be it in-game advertising, if there’s a way to tie in NFL Shop to sell merchandise, fantasy, any type of subscription models … we’re always looking at and examining those possibilities with our partners.”

EA’s NASCAR 2005: Chase for the Cup offered a glimpse of the possibilities. Five companies — Levi’s, Mr. Clean, Old Spice, Wal-Mart and Dodge — purchased a combined $1.5 million in advertising in the game, according to Tom Goedde, senior product manager for EA Sports.

No one in the industry denies the importance of advertising as a potential revenue stream for both the licensers and licensees. Ultimately, Goedde said, advertising could provide the justification for a game publisher exploring entry into the market. “If you can generate $1.5 million in advertising from a cheap game, that’s half your development costs,” he said.

Other leagues have not been blind to the potential, but there have been hitches.

At times, publishers became frustrated because they had hustled to sign sponsorship deals, only to be told later that the league had a conflicting sponsor and could not sign off on the deal.

Such frustrations led leagues and publishers to implement better cooperation in selling valuable advertising inventory. Leagues now are in contact with licensees about which sponsorship categories the licensee is free to pursue.

Generally speaking, the game publishers control and sell the ad inventory. However, they can sell only off of the league’s list of sponsors, except in categories where the league does not have a sponsor. Leagues have the right to veto any ad secured by a publisher. Leagues generally take a small percentage of revenue from sales of in-game advertising.

Clearly, leagues will continue to benefit from the current setup even if the incremental revenue for them is marginal, because advertising revenue can help cover the high development costs and ultimately have more publishers able to compete for their business.

But the leagues and players unions do not want to get left out of what could become a huge source of revenue. Most league officials feel they can sell their partners better than anybody. And perhaps most important, league officials believe they know their fans better than anyone, and thus how to incorporate advertising without alienating them, especially while revenue for the leagues remains negligible.

“You don’t want to overwhelm your consumer,” Smith said. “If it’s strictly an EA revenue source, it doesn’t make sense for us or the [MLBPA].”

For now, league officials appear content to let the EAs of the world take the lead. But some signs of dissatisfaction foretell a shakeup as the opportunities in in-game advertising grow.

John Olshan, director of interactive entertainment for the MLB Players Association, said there is still a division between those who believe sponsors should be incorporated primarily for authenticity, and those who feel the inventory is too valuable simply to give away.

A billboard in a stadium or on a track or a piece of equipment from a manufacturer is a necessity for game makers to enhance the game’s realism. But when, if at all, do you stop giving such valuable inventory away?

Dave McCarthy, the NHL’s director of entertainment products, said that with the graphics being as good as they are, and with hockey being such an equipment-heavy sport, the NHL is missing out on many opportunities to generate revenue from equipment manufacturers’ inclusion in the games. He said the NHL’s licensees have been receptive about approaching equipment manufacturers and including them in the game, but that until now they’ve been added to enhance the games’ authenticity, not their profitability.

“We need to turn the tables a little bit and position the products smartly so that there’s value created from the user experience,” McCarthy said.

While many questions and roadblocks remain, few doubt in-game advertising’s revenue-generating potential. One thing is certain: The leagues and unions are not about to settle on a system from which they do not collect their share.

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Electronic Arts, ESPN, MLB, NBA, NFL, NHL, In-Depth

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