In the Disney Extreme Skate game, the colors are ultrabright and the buildings immaculate. But even in this virtual world, where the characters constantly zoom around on skateboards, they get hungry. So, as part of the adventure, they can stop off to grab some burgers and fries at a nearby McDonald's (MCD).
Sure, it's an advertising plug. And chances are such in-game marketing will proliferate and emerge as a major new revenue source for the $7 billion online and video software industry, experts say. The 18- to 34-year-old male in the U.S. is watching less TV and spending more time playing video games than before. "It's a strategic priority for our company," says Robert Kotick, chairman and CEO of Activision (ATVI), the maker of Extreme Skate.
Here's his math: Last year, advertisers spent more than $8 billion targeting males in that age group, according to Nielsen Media Research, a division of media group VNU. Nielsen estimated they watched some 30 billion hours of TV. Of course, they also spent at least that much time playing video games -- yet U.S. advertisers spent less than $15 million advertising there. That's about to change, experts predict.
INFO SHORTAGE. Spending on in-game advertising, currently estimated at around $200 million a year today worldwide, could reach $1 billion by 2008, estimates David Cole, president of gaming-market researcher DFC Intelligence in San Diego. The market will get a boost as more game consoles go online and as broadband penetration rises, making online entertainment more robust and varied. Plus, industry heavyweights Activision and Electronic Arts (ERTS), and entertainment conglomerate Viacom (VIAb) are spreading the word.
Marketers soon will be able to find out how well their in-game ads are doing, which they can't today. Now advertisers may only know how many consumers bought a particular title or, with online games, how many people clicked on their ad. That's not much to go on, especially compared with TV advertising, where marketers can get real-time ratings data.
"Companies just have to take it on faith that there's some value [in in-game advertising]," says Bill Nielsen, director of subsidiary marketing for the Xbox console at Microsoft (MSFT). So they tend to risk only a fraction of their promotions budgets on the medium, keeping their much-larger advertising budgets for more traditional venues.
CLEAR SHOTS. But within the next 12 months, marketing service Nielsen Entertainment, backed by Activision, will start a gaming-ratings service similar to its existing TV-ratings service. Consumers within sample households will carry pager-like devices on their belts that will alert a special personal digital assistant (PDA) of their presence at home. Then special tracking gear will provide the PDA with real-time information of what they're playing, which level of the game they're on, and which ads they're seeing, says Michael Dowling, general manager of Nielsen Interactive Entertainment. That means in-game advertisers will receive more detailed information than TV ads currently offer.
To make the prospect even more enticing, in-game advertisers - which now include shoemaker Nike (NKE), carmaker DaimlerChrysler (DCX), foodmaker Nestle, tire manufacturer Toyo, cell-phone maker Sony Ericsson, and chipmaker Intel (INTC) -- might have more freedom to serve up ads when they want.
For instance, New York-based start-up Massive Inc. has developed peer-to-peer software technology that allows advertisers to market a movie in online PC games when players who are most likely to see the flick are logged on. Massive's software, due to launch in October, will work with certain games from publishers like Atari (ATAR), says Richard Skeen, Massive's vice-president for advertising sales.
VIRTUAL MONEY BACK. In-game advertising also has a number of inherent advantages over TV ads. Instead of seeing an ad flash on the screen for 30 seconds, players could, potentially, see it for hours in the game - and actually interact with it. Gamers could drive around the virtual race track in a new Jaguar. "They might be in the game for 130 hours," says Mark Workman, president and CEO of FirstFireworks Group, a Los Angeles entertainment marketing and consulting firm. "It's too big a number to be avoided. Everybody feels that that's where we ought to be."
In-game advertising might even be able to keep the viewer's attention better. At Neopets, an online virtual world full of unicorns, dragons, and other mythical creatures, a player might stop by a Disney theater, where he can play a Walt Disney (DIS) movie-related game to earn Neopoints - good for buying shop space and land in the game.
"There's an incentive to stay alert," says Rik Kinney, executive vice-president of Neopets, which boasts 11 million active users each month. "So the likelihood of players having gotten the message is higher." Indeed, the site's recent campaign for a music artist resulted in 13% of Neopets' members purchasing the artist's CD, with 16% more saying they plan to buy it.
TEST DRIVE. Finally, such advertising is dirt-cheap compared with TV ads. Many publishers accept barter: Half of in-game ad payments that the Xbox division receives are cross-promotions, says Microsoft's Nielsen. For instance, fast-food chain Taco Bell, a division of Yum! Brands (YUM), ended up including the company's NFL Fever football game in a recent TV ad campaign.
Advertisers that have taken the plunge into gaming are seeing results - and spreading the word. About 38% of people who've downloaded DaimlerChrysler's games (which allow players to test-drive Jeep, Chrysler, and Dodge vehicles) from sites such as Yahoo! Games (YHOO) have said they planned to buy one of the cars, says Julie Roehm, director of marketing communications for Chrysler, Jeep, and Dodge. So the carmaker, whose Jeep Wrangler was also ridden by characters in the game Tomb Raider: The Angel of Darkness, has doubled its in-game ad spending from 2003 to 2004, she says.
Advertisers are searching for efficient and cheaper ways to reach the 180 million people worldwide who are playing games, according to DFC Intelligence. For game developers, "investments [to create and market a game] are approaching the size of good-size independent films," says Wim Stocks, an executive vice-president at Atari. "And every publisher is out looking for ways to defray those costs."
Bottom line: The incentive to make in-game advertising work is there. And the shift of advertising dollars from TV to gaming will take time, but it's clearly under way. By Kharif in Portland, Ore., with Stephen Baker in New York