• by Ross Fadner , May 26, 2006

"Tired, lacking innovation--an industry driven by marketers and financiers whose only concern is the bottom line and shareholder value." Sound like Hollywood? Wrong. That's eMarketer's recent report on the state of video games, a retail-driven industry that's endured four flat years of sales hovering between $11-$12 billion.

Meanwhile, per-game production costs have crept steadily upward: A typical game costs around $10 million to create, says Michael Goodman, a Yankee Group senior analyst, while a paltry 10 percent break even or better.

In other industries, rising production costs and flat revenues or worse create an environment of alarm and urgency among shareholders, but industry investors aren't pushing any panic buttons yet. Why not? Because video games still offer a massive untapped opportunity in the form of advertising revenue, thanks in part to the Internet.

The online gaming sector encompasses a much broader spectrum of game types and reaches a wider audience base than pc-based and console-based video games. Gaming can be broken down into three broad buckets: casual games, advergames, and online console-based games.

Casual Gaming

A casual game is any game that doesn't require a significant time investment. This includes puzzle, word, and card games, or slightly more involved arcade classics and side-scrollers where a player controls a hero. Casual games represent the biggest and broadest category.

They're attractive to marketers because they're inexpensive to make and license, they're addictive, and they have mass appeal. The majority of casual game play comes from the games channels on Yahoo, AOL, and MSN. An ad buy on one of these major portals is effectively no different than buying run-of-network inventory.

Network providers like Atom Shockwave and Wild Tangent offer smaller, more involved audiences. Both Atom and Wild Tangent sell 15-second pre-roll video ads that appear before games load. They also sell around-game banners, in-game network placements (not unlike Massive and Double Fusion), and advergames.

For advertisers, the main benefit of buying casual games is the diversity of the audience. In fact, women 25 and older happen to be the most active demographic: A recent study from the Consumer Electronics Association reports that 65 percent of women between age 25 and 34 play games, versus 35 percent of men in the same age group.

Atom Shockwave, which reels in 40 million unique visitors per month at its portals Shockwave.com and AddictingGames.com, says 4 million of its monthly users are women over the age of 21. Lee Uniake, Atom Entertainment's vice president of sales, reports that one of the heaviest usage times for this demo is just after dinner, during prime TV viewing hours. "That's three hours of her time the major networks used to have five years ago," he says.

But advertisers have largely failed to notice, Uniake says. Shockwave's biggest advertisers  Nike, Sony, Fox, Chrysler, Ford, General Motors, and Unilever's axe body spray  tend to target 18- to 34-year-old males. Dave Madden, executive vice president, Wild Tangent, likewise says women over 35 are the company's most loyal user base but that advertisers haven't caught on.

Advergames Lure Big Brands

How would you like your brand to star in its very own game for $20,000? That's the price for a product along the lines of "Pac-Man," but if you want something closer to, say, "Grand Theft Auto," plan on spending somewhere between $500,000 and $1 million. Advergames, designed by game developers for advertisers, allow marketers to play a more hands-on role in developing the brand-user experience.

For example, a game developed for M&Ms by Blockdot, an agency specializing in advergames, was played 60 million times for a total of 25 million hours played  an extraordinary return for a $20,000 price tag.

Skyworks, another developer, last fall produced "Miller Beer Run," an advergame for Miller Lite in which the user overcomes obstacles in a mad dash to buy beer before the end of halftime. The game, integrated into a larger campaign based on Miller's "Beer Runner" spot, ran for eight weeks on Yahoo Games, receiving 1.2 million unique users and more than 3 million total plays.

But for every advergame success story, there are several more that fail. Poor planning is usually to blame. Some marketers think advergames are a casual in-and-out, but, as Wild Tangent's Madden says, "To do them well takes research and synergies between developers, publishers, and especially advertisers."

Garry Kitchen, CEO of Skyworks, which produced "Miller Beer Run," says a sound distribution strategy is crucial. The most common mistake, he says, is to throw an advergame on a corporate or campaign Web site and hope people find it. To achieve scale, marketers must secure distribution deals and spend dollars on marketing the game as a product like any other.

Not Fully Baked

Video game advertising is little more than a $56 million industry, according to the Yankee Group, and in-game advertising represents an even smaller percentage of that. So where's the beef?

Consider the following demographics: Of 100 million video game consoles in u.s. households (according to The NPD Group), the largest audience segment is 18- to 34-year-olds, at 40 percent of the market, followed by 35-plus and 13- to 17-year-olds, both at 18 percent. Perhaps the most surprising statistic is that while 82 percent of games are bought by or for men, the total console gaming audience is actually 43 percent female and 57 percent male.

Advertising opportunities in video games include in-game ads, dynamic video ads, and hard-coded or integrated product placements. The latter form is similar to a TV product placement in that pricing depends on the level of brand integration with the story. This type of advertising also requires longer lead times (six-plus months) and close cooperation with game developers.

As Saneel Radia, director of innovation at SMG Play, a Publicis Groupe unit specializing in video game advertising, sees it, the most valuable opportunity for marketers in the near term resides in static product integrations. "Anything dynamically served will always be less interactive than something hard-coded," Radia says. "People lose sight of the fact that in-game is a single, simple way to buy ads  basically virtual out-of-home ads," he adds.

While the press has trumpeted in-game as the great white hope for video game advertising, some industry experts say online console gaming could remain a niche market. Michael Pachter, a stock market analyst for the firm Wedbush Morgan, points out that only about half of Microsoft's Xbox 360 user base has registered to use the console online. As of the Electronic Entertainment Expo in May, Microsoft's Xbox Live network had about 3 million subscribers.

With nearly 6 million units sold, still a small percentage of the console's projected user base, Pachter says Microsoft has "missed the boat," as those units represent early adopters. The software giant can't possibly hope to maintain a 50 percent online penetration among mainstream users; Pachter thinks 20 percent is more likely.

As the medium evolves, you can be sure that Microsoft, Sony, and Nintendo will evolve their respective ad-serving capabilities. Some analysts believe that Nintendo and Sony will follow in Microsoft's footsteps: In May, Microsoft acquired Massive, an in-game ad network. Now that Nintendo has announced plans for Wii, and Sony has put a date and a price tag on the PlayStation 3, you can be certain the dilemma of whether to build or buy an in-game network has become top of mind.