• by Shankar Gupta , April 27, 2006

Microsoft, which has established its presence in the gaming market with the Xbox and Xbox 360 gaming platforms, is now reportedly in the market for in-game advertising as well--having agreed to purchase in-game ad firm Massive Incorporated, according to press reports.

Initially reported Wednesday by The Wall Street Journal, the sale is pegged at between $200 and $400 million, but both companies declined to comment on the reports.

James Belcher, senior analyst with eMarketer, said the biggest application of a Massive-Microsoft alliance would be to monetize Xbox Live, Microsoft's online gaming network, with dynamic advertisements. But, he said, the deal could extend well beyond that. "That's the immediate impact you've got, but Massive is not limited to consoles, either," he said. "It's my understanding that they can also do PC online game ad serving, and I'm sure they have mobile gaming in mind at some point."

Microsoft has also entered the game development space, with purchases of highly regarded game studios Bungie, makers of the immensely popular Halo and Halo 2, and Lionshead, home of celebrity game designer Peter Molyneux.

Belcher said that advertising could also be used to mitigate the rising cost of developing a blockbuster game. "Although there can be a wide range of production costs, the bottom line is that the really big games are pricey," he said. "If you get advertising, then that hedges the bet to an extent--and it can do so in an ongoing manner, with the type of advertising that Massive's other in-game advertising networks offer, because they can update the ads over time."

In-game advertising is a burgeoning market, expected to grow to $732 million by 2010--up from $56 million at the end of 2005, according to a report released last week by the Yankee Group.