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By Isabelle Sender

There's a New Game in Town -- With Ads

S&P says the face of advertising is changing. Young people are turning away from TV to online games, so marketers must follow

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When Coca-Cola (KO; S&P investment rank, 4 STARS, buy) wants to showcase beverages to kids, or Honda (HMC; 3 STARS, hold) wants to make sure the first car or motorbike teens drive bears the Japanese auto maker's marque, the two companies are increasingly sidestepping Madison Avenue to direct their ad-buying dollars elsewhere. And they're not the only big-name marketers doing so. S&P believes that some technology and entertainment companies that recognize this trend stand to benefit.

For marketers who seek to influence the purchasing habits of growing numbers of young, tech-savvy types with disposable incomes, product placement in video games is the new way to advertise.

Coke and Honda reportedly have contracts with privately held Massive, widely considered a pioneer in video game ad and product placement. The Wall Street Journal reported on Apr. 26 that Microsoft (MSFT; 5 STARS) is looking to buy Massive for $200 million to $400 million. This report was not confirmed by either Microsoft or Massive (see BW Online, 4/28/06, "Microsoft's Strange Spending Splurge").

RELATED BUSINESS.  If this rumored deal were to take place, it would help position Microsoft as the Madison Avenue of online video gaming, according to Standard & Poor's Equity Research. Microsoft is already entrenched in the video game business through its software and hardware technology.

S&P equity analyst Scott Kessler says that it makes sense for a company like Microsoft to leverage its many Web and game-related businesses. Microsoft, which already runs an ad business through its MSN Internet unit, reaches millions of worldwide end-users through its technology and has forged relationships among creators of online games.

For advertisers, Kessler sees value in a package of digital advertising solutions that includes a real-time gaming component. For Microsoft, that ad-buying plan could extend to gaming consoles, such as Microsoft's Xbox or the PlayStation from Sony (SNE; 4 STARS).

UP TO DATE.  "I think Microsoft is well aware of the different business perspectives that video gaming and the Internet present. They're acutely aware of the unique opportunities and scale of online gaming," he says, adding that most gamers agree that the game experience becomes more compelling and lifelike when the games include real-time advertising for real-life products.

That's exactly what Massive does. When players log into a game on the Net, the company's network dynamically updates the games to show the latest "brand messaging." Advertisers can buy the space on which their ad is shown and choose the length of time they want their message to run.

S&P pegs current video game ad spending at less than 9% of all Internet ad spending. S&P equity analyst James Peters covers advertising companies and believes video game ad spending represents a very small market at present, relative to total advertising.

ACROSS MEDIA.  Yankee Group, a market research outfit, states that video games are the next frontier for advertisers, and projects that the real-time online video game industry's ad sales will reach $732 million by 2010. Yankee estimates that in 2005, advertisers spent about $56 million placing ads in video games, a 65% year-over-year rise.

"I believe the proliferation of advertising across new media is a plus for advertising agencies," Peters says of companies in his coverage universe, which includes Interpublic Group (IPG; 3 STARS), Omnicom (OMC; 3 STARS), and WPP Group (WPPGY; 4 STARS).

Peters says that while tech companies may benefit over the longer term from placing ads in software, "it is still the ad agencies that will be trusted by clients to tell them whether or not advertising in video games is more effective in reaching their target audience." He believes that's a big difference between the ad agencies and tech companies, such as Microsoft.

TARGET AUDIENCE.  "Ad agencies are also likely to benefit by involvement in the creative side whereby they create a billboard of some type that they think is most likely to generate a response within a video game," he says, adding that media planners get paid to buy this inventory for their clients.

If companies are beginning to spend more on digital ads, that's because they are following their ideal demographic group. Recent studies suggest that 18- to 25-year-olds are increasingly turning away from TV, magazines, and movies, where ad buyers and product placement have traditionally turned in the hopes of communicating their product message. Even though Internet viewing of entertainment is up among all age groups, the digital generation is the world's youth. That's a growing and valuable age group for many advertisers.

That's why Microsoft is not alone in its quest to garner revenue from the growing market of young people. On Apr. 24, Viacom (VIA.B; 3 STARS), the parent of MTV and Comedy Central, among others, said it had acquired privately held Xfire for $102 million. Xfire's programs facilitate communication and enable community between online gamers. They also allow game sellers to market to people playing similar games.

TIME TO MOVE.  This acquisition, Viacom says, extends its ability to attract the attention of gamers. Last fall it acquired GameTrailers.com. Viacom also owns Neopets, which is a gaming concern for smaller children.

Viacom's move was preceded in October by rival News Corp.'s (NWS; 3 STARS) purchase of IGN Entertainment for $650 million in an effort to increase its Internet presence and expand its online entertainment portfolio. While online gamers blast aliens or race cars to amass points, marketers and media concerns are making strategic moves of their own to grab a piece of this growing market.

Sender is a reporter for Standard & Poor's Global Editorial Operations

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