Product placement, while popular in the movie industry, simply doesn't work with every movie. The same goes for in-game ads, currently touted as a way for video game developers to mitigate the rapidly skyrocketing costs of producing the next big thing--Halo 2 cost $20 million to produce--by providing another revenue stream beyond sales.
The problem is, much like movies, in-game ads simply can't be placed in every game; fantasy, and sometimes even sci-fi settings, make product placement impractical and even offensive to gamers--and gamers are a constituency that get angry easily. It would be problematic to include modern products or advertisement in-game in many of the top 20 games by sales as of mid-March--including Elder Scrolls IV: Oblivion, Metriod Prime: The Hunters, and Animal Crossing: Wild World.
So, what are gaming companies and in-game ad companies going to do to get around this wrinkle? A hint can be seen from Microsoft and Viacom. The Redmond software giant recently bought the in-game ad company Massive Incorporated, while Viacom bought Xfire, a video-game focused messaging program and online game matchmaking service. Microsoft explicitly stated after the purchase that Massive's technology would be used to monetize Xbox Live, their online gaming service. Viacom will certainly use Xfire to expand its advertising reach into the young male audience--the service is being included under the MTV Networks umbrella.
Regardless of a game's subject matter or setting--which can affect that games advertising cache--any multiplayer game can be monetized by placing ads in the places where players wait and chat while waiting to set up an online match--on services like Xfire and Xbox Live. It's similar to the idea of ads and product placement in the theater where movies are shown: not especially intrusive, since the moviegoers are only in contact with ads before and after they see the show, but nonetheless valuable--especially if they advertise products that the audience is already considering, such as a brand of soda or snack.
Putting ads in games where they don't belong will only serve to tick gamers off--and if you or your client ruins the latest, greatest installment of a game franchise, the fans of that franchise may never forgive you. But there are plenty of other ways to reach gamers beyond simply product placement, such as monetizing properties that gamers use while they're at play, and the smart money is already headed there.