Ads Enter the Fantasy World of Video Games

The connection allows a single title to host countless so-called real-time dynamic ads on predefined locations woven throughout the game -- including cans, clothing and buses -- or display 15-second commercials on billboards and televisions. So far, Massive has inked deals with 26 video game publishers, including Funcom, Ubisoft and Take-Two Interactive Software Inc. and more than three dozen advertisers including Best Buy Co., Paramount Pictures and Coca-Cola Co.

The company's software, according to chief marketing officer Nicholas Longano, is scheduled to be in 43 video game titles by Christmas. He contends that the ads will not only boost each title's profitability by 20% to 30%, or $1 to $2 per copy of a game, but that they will also make the games look more realistic.

"For the first time you have an advertiser's message that actually makes game play better," said Longano, whose firm has opened offices in Santa Monica and San Francisco. "It's unlike a television environment where advertising is seen as being intrusive."

A Nielsen Interactive Entertainment study commissioned by Double Fusion, a Massive competitor, found that half of 900 game players surveyed agreed that advertising makes a game more realistic, with 21% disagreeing. Double Fusion co-founder Guy Bendov said his company had struck deals with four European video game publishers and hoped to be working with publishers in this country by the end of the year.

Advertising in video games is a relatively new phenomenon fueled in part by the industry's growing popularity. U.S. video game software sales totaled $7.3 billion last year, more than doubling since 1996, according to NPD Group.

Industry observers point to the multimillion-dollar deal Electronic Arts inked with Intel Corp. and McDonald's Corp. in 2002 to incorporate their products into the Sims Online, as a watershed moment for an industry that traditionally paid licensing fees to feature companies' products in their games.

But Electronic Arts, the world's largest independent game publisher, has sold ads in only 10 of its 35 titles, and is proceeding into the advertising arena with caution to ensure that both advertisers and players are pleased with the result.

"We do continue to believe conservative projections are the best strategy," said Julie Shumaker, EA's national director of sales for video game advertising. "The hype is a bit more than the reality of it."

A key barrier to expanding the market for advertising in video games is the need for an Internet connection to refresh dynamic ads and monitor their exposure to players. Far more games are sold for consoles than personal computers and only about 6% to 7% of consoles sport Internet connections, said Yankee Group's Goodman, who added that he didn't believe video game advertising would ever rival advertising on TV.

Michael Pachter, a Wedbush Morgan Securities analyst, predicted the market would be limited to 10% of its potential until someone figured out a way to deliver ad spots to all gamers, possibly by persuading companies such as Sony Corp. and Microsoft Corp. to make their game machines download information regularly, as TiVo recording devices now do to update television programming schedules.

"There's plenty of money there," Pachter said. "The question is: Is it a hundred million bucks or is it 10 billion?"