Friday, October 3, 2008

In-game advertising and video games industry: trends, challenges and implications

This article - along with the other two that I will soon link to - will be the gist of our in-game advertising coverage in next Monday's Sauder eMarketronics event. In this post you will find the trends, challenges and future implications for the video game industry in regards to in-game advertising. So without further ado, here it is...

Game development costs are climbing with the ever-increasing complexity of the production process. “There are more lines of code and more development hours invested in creating really engaging video games. If I’m a publisher or developer, I’m saying,‘Where’s my new offset?’ Advertising is becoming a bigger part of that offset,” says Jay Sampson of Massive Inc, the in-game ad agency owned by Microsoft.

Justin Towsend, CEO of IGA Worldwide, puts a range on this advertised offset in an interview with Gamasutra: “We hope in-game ads will go on to support up to 15-20 percent of production costs – but nowhere near 100 percent.”

The industry-wide offset is expected to be $1 billion dollars by 2012, the total number that in-game advertising spending is going to reach. Nearly half of that spending is expected to go into web based games.

Meanwhile the in-game ad space is evolving rapidly to attract the advertisers, with development of new technologies and accumulation of experience in this field. The future of this new advertising front seems to be pretty promising, as evidenced by the big players taking positions already. One such move was Microsoft's acquisition of the in-game ad pioneer Massive Inc. With a similar move last year, Google acquired AdScape and the rumour is that an in-game version of Google AdSense is coming soon. This possibility is further reinforced by the Google Lively project, a virtual 3D world that will be providing an open platform for independent game developers.

This promising market is not without its challenges. The attractiveness of the medium largely depends on the amount of tactical flexibility it can offer to advertisers, such as fast deployment capability, real time control and reliable performance measurement. As such, creating versatile ad space within games is important for the future of this medium as an advertising platform. On the other hand this adds yet another layer of complexity to the coordination of game development efforts.

Independent sources claim that the biggest challenge so far is coming up with a reliable unit of measurement for ad effectiveness. In internet advertising market, this unit would be 'clicks.' Thus, the in-game advertising industry needs to invent its own click, a consumer response measure that is universally accepted.

Unquestionably another key component of the future is winning the consumer's acceptance for ad presence in games. Any campaign to ruin the entertainment experience would have a big chance of backfiring on both the advertiser and the publisher.

If video games imitate movies, then they should also follow the trend with in-movie advertising. Product placement in movies is evolving into a different model: incorporating brand directly into the storyline. Of all the examples, Audi and US Robotics presence in the Will Smith movie I-Robot would be the best one. An in-game application of this model would require close collaboration between the brand owners and game developers.

A traditional coping mechanism against increasing development complexity has been acquisition of game development studios by publishers. Games developed by such in-house studios are called first party titles. Considering the challenges that lay ahead for in-game advertising, it is not hard to imagine publishers increasing their preference for first party titles in order to have better control over addressing such difficulties.

For static ad placement, it is reasonable to assume that long standing franchises (such as NBA, FIFA, Sims, NHL... see a pattern here?) would offer more reliability for their high degree of predictability in terms of sales and gamer demographics. On a similar line, video game genres or franchises can develop portfolios of brand categories that can be supported in their games. A portfolio loyalty, in turn, could limit the availability of creative directions.

In-house game development, coupled with choices in favour of predictability, may turn the industry into a closed loop system where fresh and innovative ideas would have a hard time penetrating in. This means a risk of value decay and loss of entrepreneurial responsiveness.

As a result of increasing demand towards dynamic ad control, online gameplay technologies will probably see an emphasis greater than ever before. General marketing efforts can also be expected to intensify in driving the consumers towards online gameplay.

The question of where the in-game ad revenues will end up is another important one. If they are used as an offset for reducing the prices of games, the result could be increased sales and extended reach for advertisements (which could create a positive feedback loop), not to mention a boost to the consumer acceptance of ads. Revenues going straight to the bottomline, however, could upset the balance between what consumer wants to see and what the publishers are willing to invest in. The end result of such an imbalance could be stagnation in sales, which in turn could reduce the attractiveness of the medium for advertisers.

Although the exact direction can be argued, it is almost certain that advertising will have a profound effect on the future of gaming. Whether this will be good or bad depends on the industry's ability to understand the dynamics between ad and entertainment content, and to create a mutually supportive business model out of them.

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