• by Jason Katz , March 10, 2011

The headline of a recent article in London's The Independent asked: "Is it game over for the virtual ad?" According to the author, in-game advertising's "star has waned."

Without question, in-game advertising is in the "lull" phase of its life cycle, which is a necessary period for all new media technology. Online advertising went through a similar period after an early explosion of interest.

In 1999, e-commerce was going to take over the entire business world, until everyone realized that we weren't "quite there" yet. Mark Cuban's Broadcast.com was going to replace TV with Internet video, but the bandwidth was not available and the business model was not yet ripe.

It's the same situation now with in-game advertising. The initial hype has died down and there are diminished expectations, but now the infrastructure is being built to provide a friendly ecosystem for brands in gaming.

Video games were not originally designed to support advertising. Many traditional game genres are inherently hostile to in-game ads, such as MMORPGs (like "World of Warcraft"). During the brief history of in-game advertising, the presence of brands has been relevant, appropriate, and welcome in only a few categories of games -- primarily sports and racing titles, where a billboard makes sense in the context of the game. This is a fairly limited slice of the gaming world.

There are also a few stubborn structural impediments to successful in-game brand placement. Beyond ads per se, in-game brand presence can take the form of product placement and plot placement, which require much higher levels of creativity and much longer lead times in planning. The expertise to create effective in-game placement for brands is rare because:

(a) most agency folks are not well-versed in game development (since it's a completely separate industry);

(b) most brands don't plan sufficiently in advance to take advantage of the really juicy placement opportunities (10-24 months);

(c) many of the publishers who cut the ad deals with brands are reluctant to "interfere" with early-phase game development. At that point, developers have a high level of creative control, and consequently, more power. A sharp warning from a developer that a particular brand placement will "not work" for players is frequently enough to make a publisher back off. To score big wins, brands should be able to work flexibly with the developers while they are in their creative process and gain their trust (not an easy task);

(d) publishers of AAA games stand to make huge profits from a successful title. Since bad word-of-mouth among players can kill sales quickly and clumsy brand placement disgusts gamers, publishers are loath to take big risks for relatively little revenue from a brand.

The good news is there are at least three trends that bode well for in-game advertising.

First, the industry is rapidly embracing a free-to-play (or freemium) model, where players pay microtransactions in order to access deeper levels of games and to equip their characters with cool stuff. This Asian economic model is much more open to brands.

For example, brands can sponsor entire levels of a game and those levels can be added after the release of the initial title, which means a brand will not have to get on board so early and players will be grateful to the brand for providing additional content. Sponsoring downloadable content (DLC) for games is a sweet spot for brands and the freemium model provides an abundance of opportunities for brands to play in a relevant gaming space.

Sony, Microsoft, EA, Warner Bros., and other publishers are wheeling toward the freemium model as we speak. Blizzard is the staunch holdout, with more than $1 billion per year in subscription revenue from "World of Warcraft," but it's likely that even Blizzard will shift to a freemium model within a few years (at most).

Second, while traditional console game sales have been relatively flat since 2009, casual PC games (e.g., Beweled), Facebook games (e.g., Cityville), and mobile game apps on smartphones and tablets (e.g., Angry Birds) have exploded and now are the primary drivers of growth in the gaming industry.

The recent tsunami of casual, social, and mobile games is a big opportunity for brands to create their own unique custom branded games, which is a "fourth way" to meld brands to games. This approach also opens up the female gamer market, since these games are much more popular with women than traditional console titles. Who needs in-game ads when the game itself is an ad?

Ironically, branded games have an advantage in the marketplace because they don't need to be monetized. Unless, of course, your company has tasked your marketing department with directly generating revenue. In this case, you have bigger problems than figuring out a gaming strategy.

Third, the gaming industry is in the process of a seismic shift from physical media to digital media distribution. This will create many more opportunities for brands to play in the digital download space, which barely existed a few years ago.

Clearly, this is a complex subject and there are many other dimensions to the conversation, but in-game ads are not "over." To paraphrase Winston Churchill, this is not the beginning of the end of in-game advertising ... but it is the end of the beginning.