SBJ/June 27 - July 3, 2005/SBJ In Depth

Lingering challenges keep in-game advertising from reaching its potential

WildTangent Inc. sells advertising for its network of online video games. Jeep has space on the publisher’s Snowboard SuperJam game.
One of the guiding forces behind the next generation of video game hardware now occupies the eighth floor of an office building in New York City’s Greenwich Village.

There, a company called Massive Inc. has spent the last three years developing software that lets advertisers reserve space within a video game that is already on the market.

The parties with a financial stake in the licensed sports video game industry, say Massive executives, can look forward to the following scenario:

Imagine, for example, an executive at an advertising agency whose client, a Hollywood studio, has a movie about to hit theaters in Los Angeles and New York. The executive already has spent much of his budget on television, but he also knows there are several hundred thousand members of the movie’s target audience who play Electronic Arts’ Madden football four hours a week on their Web-connected Xbox 360’s and PlayStation 3’s.

So the executive calls Massive, which has a deal with EA whereby EA has set aside space for Massive on the wall behind the end zones in each of the stadiums. The ad executive strikes a deal for a virtual movie poster to appear in that space for a fixed amount of time while the game is played. When the movie hits theaters, the “Coming soon” on the sign changes to “Now playing,” and when the movie is released in additional cities, the poster will appear to game players in those markets.

Believers in companies like Massive say we might be as close as a year away from the day when advertisers will have little more difficulty embedding themselves into a popular video game than they currently have putting a banner ad on a Web site. More cautious observers say there are too many questions to answer, too many parties involved, and not enough consumers using the requisite technology to expect so much progress so soon.

Regardless, they all agree that the buzz surrounding companies like Massive, IGN Entertainment and Double Fusion, and the tens of millions of dollars in venture capital those companies have raised, offer definitive signs that the industry is finally ready to realize its potential as an advertising vehicle.

“In the overall scheme of our revenue, [advertising] is clearly just a very small drop in the bucket,” said Julie Shumaker, director of regional sales for EA, which sources said made just over $3 million in 2004 from advertising within its games. “From the perspective of do we believe in the business, and are we putting top resources against it to make sure EA is pursuing the right channels, yes, it is a priority.”

Untapped potential

Although projections and expectations vary greatly, in-game advertising remains a study in unfulfilled potential.

Companies have had an easier time advertising in non-sports titles, such as Ubisoft’s Splinter Cell shown above, because they don’t have to worry about conflicts with league sponsors.
The technology research firm Yankee Group estimates companies will spend $70 million in 2005 on in-game advertising and “advergames,” Web-based computer games that incorporate advertising messages. By 2008, that number will increase to $260 million, although only about one-third, or $92 million, is expected to come from in-game advertising, according to the Yankee Group. Interactive industry research firm DFC Intelligence predicts that total will reach $1 billion by 2008.

By any measure, these are paltry sums when considering the size of the audience and their level of engagement compared with television or the Internet, which in 2004 generated more than $9.6 billion in advertising revenue, according to the Interactive Advertising Bureau.

These figures are particularly galling to game publishers given who these games attract and for how long. Most gamers spend 40 hours overall with a title and the average player of EA’s sports titles uses the games for 60 hours per title.

“We realize we’re aggregating 20-plus million men 18-34 per year, and we’re getting a small percentage of the overall ad spends,” Shumaker said. “This isn’t a new trend. It’s just that marketers are finally waking up to that trend.”

Shumaker estimated that if the top 150 U.S. advertisers were polled, 80 percent would acknowledge that they were at least investigating video games as an option.

“We can’t not focus on it,” said Brandon Berger, a senior strategist in digital innovation at OgilvyInteractive. “Are people spending 60 hours watching a television program?”

Seeking motivation

Sports titles are uniquely positioned to capitalize on in-game advertising given the ubiquity of advertising in sports. But in some ways it is also the most difficult genre for marketers and publishers to navigate.

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The primary reason is that leagues and players are bound by licensing agreements and sponsorships that limit the advertisers to whom publishers can sell. Publishers in recent years have been frustrated when they sought advertising and product-placement deals within their games, only to be told by licensers that they could not do the deal because the league had a competing sponsor in that category.

“You’ve got a lot of hands in the pie,” said Michael Dowling, general manager of Nielsen Interactive Entertainment, which is developing a system of measuring the reach and effectiveness of advertising in video games.

Furthermore, game publishers don’t charge for advertising that is on stadiums, arenas or other facilities re-created in a game because the publishers are motivated primarily by the need to provide realism and authenticity. That leaves minimal inventory for publishers to sell.

“This is not as exciting a space if you’re doing a pro sports league story,” said Steve Allison, chief marketing officer of Midway Games.

But the events of the past year have helped shift the overall approach, principally because nothing motivates a league to help its licensees make money quite like a check for several hundred million dollars.

Take-Two Interactive late last year agreed to pay more than $300 million over seven years to Major League Baseball, the MLB Players Association and MLB Advanced Media combined for exclusive third-party rights to publish licensed MLB video games beginning in 2006. That deal followed an agreement by EA to pay the NFL and NFL Players Association an estimated $300 million over five years for the exclusive publishing rights to the NFL. More recently, the NBA signed lucrative publishing agreements with EA, Take-Two, Sony Computer Entertainment America, Midway and Atari.

On top of the astronomical costs of doing business with sports leagues, the cost of developing a simulation sports game can be as high as $15 million.

“The cost of developing games is increasing exponentially every year,” said Christian Phillips, director of sports business development for Sony Computer Entertainment America. “Over the last 12 months, as an industry, there’s been a major effort to begin to understand how we can leverage the [advertising] opportunity.”

So it should come as no surprise that at the NFL’s sponsorship summit in Florida in May, officials from the league and from EA devoted time to address league sponsors about the opportunities for integration into the Madden game. And executives from MLB Properties are organizing a powwow this summer for many of its licensees and sponsors to go to New York and discuss with the league and with Take-Two opportunities to embed their brand in games.

“They just paid us a bloody fortune,” MLB senior vice president of licensing Howard Smith said of Take-Two. “Once you sign up, we’re not going to hold you up for more money. It’s incumbent on us to integrate.”

Understanding the options

One of the key questions is what form this integration will take.

The first model of in-game advertising, already familiar to most game players, is best illustrated in the partnership between Sony Ericsson Mobile Communications and publisher Ubisoft Entertainment. In Ubisoft’s Splinter Cell, in which the gamer plays a government agent trained to eliminate terrorists, the agent has to use a branded cell phone to get out of trouble.

Levi’s has advertised in EA’s NASCAR games and is expanding its presence in the 2006 title.
Perhaps the most effective implementation of this strategy in the sports category was EA’s work with sponsors in developing NASCAR 2005: Chase for the Cup, which generated $1.5 million in revenue from a list of sponsors that included Levi’s, Mr. Clean, Wal-Mart, Old Spice and Dodge.

The career mode of that game lets the player assume the identity of a driver rising through the NASCAR ranks and requires that the gamer deal with on- and off-track issues facing real-life drivers. For example, good performance is rewarded with additional sponsorship opportunities with companies such as Levi Strauss.

Blake Davidson, NASCAR’s managing director of licensed products, said the sponsor integration in that game led to a number of calls from NASCAR sponsors inquiring about similar opportunities.

“A lot of them, when last year’s game came out, didn’t know the opportunity existed,” said Davidson, who declined to say who contacted him. “That’s changed. I think EA’s having a little easier time talking to [advertisers] and getting them to return their phone calls.”

Shumaker said she could not disclose which advertisers had signed on for the 2006 NASCAR game, which comes out in August, but she said most of last year’s sponsors are returning and that the 2006 game will generate more sponsorship revenue than last year’s.

EA and other publishers have not been quite as active with sponsor integration in other sports titles, although part of the reason seems to be the lack of awareness from marketers.

Executives at Millsport, a division of the Marketing Arm, were first introduced to the opportunity when one of their younger staffers noticed last year that EA’s NASCAR game was still using Union 76 signs even after Marketing Arm client Sunoco had become the official fuel of NASCAR. So they called EA to make sure Sunoco had a presence in the latest version of the game, which EA did at no cost to Sunoco, Millsport Chairman Bob Basche said.

Now Millsport is studying ways to get client and MLB sponsor Taco Bell integrated into the next generation of MLB games, this time at a deeper level that probably would come at a cost, Basche said.

For their part, publishers and licensers still seem to be toying with different methods of advertising that make the brand part of the game’s story line, or that at least integrate seamlessly without detracting from the gamer’s experience.

For example, EA’s NBA Street Vol. 3 not only gives Reebok product placement but also gives the game player the option of “virtually” purchasing sneakers and other licensed apparel.

“What we try to do is not always do product placement that may be objectionable,” said Greg Lassen, the NBA’s senior director of interactive and electronic licensing.

2K Sports, Take-Two’s sports game label, has agreed to a deal with PowerBar that will allow players in NBA 2K6, which comes out in the fall, to boost their energy and stats by unlocking PowerBars, 2K Sports’ director of public relations Matt Atwood said.

Levi’s in the 2005 Chase for the Cup had its Levi’s Signature brand on a fictional track, and the race results of one level of the game. For the 2006 title, Levi’s is working with EA to expand its presence in the game to include sponsorship of the autograph sessions that sometimes follow a player’s performance, said Amy Ferris, marketing manager for the Signature brand.

Even integrating sponsors for enhanced realism — deals that don’t cost the sponsors — can bring additional advantages to publishers. Sony signed a deal with New Era Cap Co. that puts New Era on all dugouts and scoreboards where they have a real-life presence in Sony’s MLB 2006. In exchange, everyone who buys a copy of MLB 2006 will get a coupon they can redeem for a cap of their choice, Sony’s Phillips said.

Still, this kind of collaboration, while extremely effective, requires that the advertiser be involved early in the development of the game, which starts as long as a year before the game hits the market.

Shumaker said in order to get a brand integrated into the hard copy of a game, the advertiser has to begin working with EA at least six months before the game’s release.

Gene Goldberg, the NFL’s vice president of consumer products, said by the time the league’s deal with EA was completed and it had gathered all of its sponsors in the spring, EA was too far along in the development of Madden 2006 to do anything meaningful with NFL sponsors.

“We talked about the opportunities and what they represented,” Goldberg said of the sponsor summit. “But the reality is although the sponsors are juiced, we sort of ran out of time this year.”

A dynamic future?

The Massives and IGNs of the world point out that they eliminate the need to consider such issues because they can deliver in-game ads in a matter of days. Those companies make deals with publishers to open up certain spaces inside of their games, and they have nationwide sales forces that sell the inventory subject to approval by the publisher. Then they have to customize the ad for the particular game, which will take anywhere from a few days to a few weeks.

Of course, their product also is reachable by only a fraction of console gamers because its delivery requires online connectivity. By last count, 1.4 million Xbox owners had the Xbox Live service, which connects gamers via the Internet. About 2.1 million PlayStation 2 users have online connectivity, although Sony executives said that number is growing by about 100,000 people a month. So even by generous estimates that as many as 10 percent of console gamers are connected to the Internet, for a game that sold 1 million units, no more than 100,000 at any given time will be reachable via dynamic advertising.

“We’d like to think it’s the next marketing medium, but it’s going to take time to boost that connectivity,” said David Tokheim, IGN’s vice president of marketing.

Game publishers have incorporated brands to add realism to their titles, but hefty rights fees and rising development costs have pressured them to get companies to pay for the exposure.
Microsoft’s Xbox 360 hits the market later this year, and Microsoft officials project as high as 40 percent online connectivity, which would make the dynamic advertising option much more attractive to publishers and advertisers.

But where a more traditional in-game advertisement requires the approval only of the publisher, dynamic advertising requires the approval and cooperation of the console maker that is creating the online experience.

Sony’s Phillips and Kevin Brown, Microsoft’s general manager of new media and franchise development, both said they were in constant communication with companies like Massive. But they, along with several other industry sources, indicated it was possible that Microsoft and Sony would utilize their own extensive technological capabilities to develop their own advertising offerings. Ultimately, though, the EAs of the world will decide who delivers these ads.

“We listen to our publishers,” Brown said. “So I think we’ll look in the next year to try to work out deals with them to see what can happen.”

Shumaker said EA has decided that for now, it does not yet want to deploy the technological resources to serve dynamic ads and will instead focus on building relationships with marketers and integrating advertising during game development.

Measuring success

Neither method of in-game advertising addresses what many regard as the primary obstacle to gaming’s growth as an advertising vehicle: Figuring out what the inventory is worth.

To help bridge the gap between the advertising and gaming communities, Nielsen Interactive Entertainment recently conducted an eight-week trial with several game publishers and console makers, including Microsoft, Sony, EA and Ubisoft. Following up that study, Nielsen contracted with Massive to develop a means of measuring the effectiveness of Massive’s dynamic ads.

Nielsen executives said they hope by later this year to unveil a framework for measuring the size and demographics of the gaming audience, as well as a ratings system akin to what’s used in television. The first completed measurement period will be the third fiscal quarter of 2005. That data will be made public in early 2006 and after that Nielsen will provide quarterly ratings.

“In order for this to be a true opportunity and one that is a legitimate business, there needs to be standards,” said Dowling, the general manager of Nielsen Interactive. “Part of the need right now is to have standard metrics so that the advertisers know what they’re getting and the publishers know what they’re selling. It provides that currency.”

While the need for a clearer system of measurement is undisputed, Nielsen’s ability to gain wide acceptance for its system is very much in doubt, largely because there is so much division about how video games are consumed and what modes of brand integration will prevail.

Most publishers currently selling inventory offer advertisers fixed space within a game, and they determine a fee based on the number of units they expect to sell. EA, for example, was able to charge large advertisers like Procter & Gamble and Wal-Mart several hundred thousand dollars apiece for access to a guaranteed hit like Chase for the Cup.

But even those deals are undervalued, some argue, because they don’t always account for the time spent playing the game, the number of people who will play, rentals, and the extent to which the advertiser is integrated into the game. Also, the projected reach comes from the publisher and not from an independent party.

Meanwhile, publishers and ad buyers do not appear ready to embrace a system so similar to television, in which advertising is delivered and measured in 15- or 30-second impressions.

Midway’s Allison said people consume video games in too many different ways for traditional media metrics to be an effective measurement tool. He said the most logical path for the industry is to maintain the status quo for the proven titles and to charge a smaller buy-in fee for an unproven game with up-charges based on how it sells.

“I don’t think it should be [priced] like TV,” Ogilvy’s Berger said, “because there are multiple ways you can look at value. I think it’s going to have to become a hybrid.”

Uncertainty and promise

While everyone else debates the future of an area whose future even the experts cannot predict, Massive executives continue to develop a product they say not only will work but will change the economic model of the industry.

Massive chief marketing officer Nicholas Longano said a publisher ultimately will be able to make $5 to $6 for each game sold on advertising in a top-selling title, offering a safety net for an industry that until now has survived and thrived without one.

“This is the only entertainment industry that doesn’t have a secondary revenue stream,” Longano said. “How are you going to make up revenue when a title slips? Titles slip all the time.”

There is less certainty outside Massive’s walls, but no less optimism.

“I think people see it as a true gold mine opportunity once people understand it, embrace it and see it,” the NFL’s Goldberg said. “Nobody’s quite sure how to embrace it at this point. But it will come.”

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