Placing ads in games works really well for a narrow set of genres. In racing games, authentic sponsorships on the walls bring a feeling of realism. In certain "realistic" shooters like "Rainbow Six," any ads that might make a location like Vegas seem more authentic will be seen as a positive addition. However, in the broader spectrum of games, realism is something to be avoided.
Brand relationships between games and players are forged with brands that are authentic -- or not. As evidence of the latter trend, there's now a push for reverse product placement -- developing fictional brands that may then be launched in real life.
I mean, there's nothing like smashing a zombie with a product to create an authentic brand experience, as in this screenshot from the game "Dead Rising," one of the best sellers for the Xbox 360. It's a zombie killing free-for-all taking place in a mall. Players can dress up in about a hundred different clothes, and use about a hundred different items as weapons, from teddy bears to chainsaws. A large part of the enjoyment of the game is from the clever use of fictional brands. There's got to be a thousand possible ad units in the game, and each one is used to draw players into a fictional world parallel to our own, only with some zombies and "Shawn of the Dead" humor. Placement of "authentic" ads in this universe would be severely detracting.
Advertisers still have options for these "fantasy" games, though. While placing an ad for a real product would be sacrilegious to the players of the game, placing authentic branding would not.
Consider "Bioshock" This game is set to be a bestseller on the Xbox360 in August. It comes from a development team that dates back to some of the most innovative games from the '90s on. They've put up a gallery of some of the ads they created for their game universe. While an ad for real-life Coke would be out of place here, it would be perfectly appropriate for Coke to place an ad in a vintage style with a red and white color scheme and fluid lettering for a "Maltola" beverage. The branding elements will still work when I'm walking into the store and see Coke's red-and-white packaging.
It's high time some pioneering brands consider placement in these sorts of games. The key to success is integrating into the game universe, not invading it. Keep the essential branding elements, but apply them to a fictional product appropriate to the fictional world. The payoff will be worth it; gamers are a loyal bunch. If advertisers respect the gaming experience, it will forge some very positive brand associations.