Video Game Advertising: Closing In on a Billion Bucks

Advertising inside video games will near the US$1 billion mark by the beginning of the next decade, according to a report released by a technology research firm.

In-game advertising will grow from $77.7 million in 2006 to $971.3 million in 2011, the Yankee Group report predicted.

As the advertising pot swells, so will the average ad buy for a game, the report reasoned. The average buy in 2006 was $30,000 to $40,000. In 2007, the report forecast it would be $200,000 to $600,000 and in 2008, $1 million.

“As consumers increasingly turn toward alternative channels for news, information and entertainment,” the report noted, “brands are questioning the value of large expenditures on traditional advertising mediums (e.g., television, magazines, newspapers, radio).”

“As a result,” it continued, “they are starting to shift more of their advertising and marketing spending to emerging mediums such as the Internet, blogs, Internet video, mobile advertising in video games.”

Chasing Eyeballs

The report contends that new media are eclipsing traditional advertising media in terms of real dollars.

Citing industry figures, it said advertising expenditures on television, magazines, newspapers and radio in the United States grew $3.6 billion from 2005 to 2006, from $130.4 billion to $134 billion. During the same period, spending on new media grew $4.3 billion, from $12.5 billion to $16.8 billion.

“Overall,” it reported, “targeted digital media now accounts for seven percent of total advertising expenditures in the U.S.”

“Advertisers want to be where the eyeballs are,” said Michael Goodman, Yankee’s director for digital entertainment and the author of the report. “People are spending more time online, they’re spending more time playing video games; and if you’re an advertiser, you need to be where the people are.”

Dynamism Rules

A driving force behind the explosive growth in in-game advertising has been the ability to place “dynamic” ads within the entertainment form.

Before the arrival of dynamic advertising, ads had to be hard-coded into a game, Goodman explained.

The potential for that form of advertising was limited, he asserted, because it required a lot of lead time and its measuring capabilities were limited.

“There’s no reporting capabilities of who’s actually seen the advertisement, so there’s no ability to measure return on investment (ROI),” he told the E-Commerce Times.

Dynamic ads can be changed in a game on the fly, he noted.

“When I play the game today, I see one ad,” he said, “and when I play the game three weeks from now, there’s a completely different set of ads in the game.”

Tipping Point

The one caveat to this rosy advertising scenario, however, is that whatever device the game is running on has to be capable of Internet connectivity so the ads can be served up to the game.

“The tipping point has been broadband to dynamically update the ads,” observed Jay Sampson, vice president for North American and Asian Pacific Sales for Massive, a gaming advertising network based in Los Angeles.

“There have been ads in games for a long time,” he told the E-Commerce Times. “They’ve either been static or product placed and unable to be dynamically updated. For a marketer to be able to dynamically update their messages is really important.”

$2 Billion Market

Dynamic ads will increasingly dominate the in-game advertising market, according to a report released last month by Parks Associates, a research firm in Dallas.

Dynamic ads will grow from 27 percent of the in-game market in 2006 to 84 percent in 2012.

Parks’ estimates for the market are less than Yankee’s. It predicts that the market will reach $800 million by 2012.

It also forecasts that the total market for all game advertising — which includes portal display ads, advergames, virtual worlds marketing, game tournaments and sponsored game sessions — will be more than $2 billion by 2012.

Developers’ Woes

That’s good news for game producers who are seeing their development costs increasing as gaming hardware gains sophistication.

“New generation consoles like the PS3 [Sony PlayStation 3] can be very challenging for developers,” Parks report author, Yuanzhe (Michael) Cai, told the E-Commerce Times. “It can easily cost $30 million to develop a single game.”

When distribution and marketing costs are wiped from the bottom line, game producers are making $6 to $7 in profits per game, estimates Chris Morf, director of corporate development for IGA Worldwide, a gaming advertising network based in New York City. Advertising can add another $1 to $2 to that.

“From a profit perspective, it’s adding a considerable amount,” he said.

“And if we keep this a premium medium and don’t allow it to become commodities like online advertising,” he added, “we will be able to double that on a per-title basis.”