• by Ross Fadner , November 16, 2004

Video game publishers will not be able to keep up with escalating production costs unless marketers increase their sponsorship of games, a panel of media buyers recently told an audience of ad industry professionals at a New York American Marketing Association event.

Dave Madden, executive vice president of sales and marketing for interactive game marketing firm WildTanget, told the audience that rising development costs leave publishers in need of another revenue source. "The business has to get to a point where there's a dual revenue stream," he said.

Others who spoke at the event last Friday agreed with Madden. "Publishers are at a point where they need advertising," said Brandon Berger, of OgilvyOne Worldwide's Next Generation Interactive unit. Berger added that sequels are proliferating in the console video game world because it's cheaper to reuse old game engines than to build new ones.

Most video games cost between $5 million and $15 million to produce, according to the market research firm Yankee Group. What's more, most games lose money, with only 10 to 20 percent breaking even, according to the organization. Publishers are also feeling competitive pressure to slash prices, Madden said in a telephone interview. Electronic Arts, the most successful third-party video game publisher in terms of both ad revenue and revenues overall, cut consumer prices for several of its most successful sports franchises.

But, while the games might need ad sponsors, marketers see many reasons why games are simply not advertiser-friendly. For one thing, there is little opportunity to adequately assess return on investment. Another problem, said Berger, is that publishers can't guarantee to advertisers in advance how many units will be sold. And developing a video game can take many months--longer than most marketers are willing to wait to roll out an ad campaign.

Some of those problems might be solved when the next generation of consoles comes out, because they will have built-in Internet functionality, which brings with it the prospect of dynamic in-game ad serving. This capability, Madden said, could eventually lead to a more TV-like business model, where games are bought and sold on measurable cost-per-thousand impressions, without the hassle of months of planning. Madden said the industry is still four to six years from this becoming reality. The panelists agreed that in the short term, online gaming and advergaming remain the most cost- effective platforms for advertisers.

The largest buyer and the fastest-growing segment of online gaming is women over the age of 35. According to Madden, the "fast food gaming" sector, as he called it, consists of two and three- dimensional puzzle games, arcade classics, and mind teasers. Global market research firm IDC expects online gaming subscription and advertising revenues to surpass $1.5 billion in 2005. Dave Evans, strategy director, integration services for ad agency GSD&M, said that advergames, or sponsored/branded video games, leverage the viral nature of the Web; he noted that consumers pass along good experiences to their friends and family. Sam Huxley, chief strategy officer for Bounce Interactive Gaming, pointed out that advergaming will only be effective for established national or global brands; consumers won't play sponsored games for brands they've never heard of, he said.