Video games to feature 'dynamic' ads.

THQ Inc. became the first major U.S. game publisher to join the fast-growing in-game ad network Massive Inc. last month.

The Agoura Hills company now joins mid-sized publishers Atari Inc., Vivendi Universal Games, Take-Two Interactive and French giant Ubisoft Entertainment SA in opening up its games to dynamic ad placements.

Massive's inroads into the game publishing community are creating a buzz, even though the current financial rewards are baby steps at best. After all, in-game advertising and product placements brought in a scant $79 million in revenues across the estimated $10 billion industry last year, according to the tech research firm Yankee Group.

But before Massive came along in 2004, video game advertising was "static"--meaning ads like billboards or product placements were hard-coded into a game, and remain there permanently.

Massive's "dynamic advertising" has the ability to change. The company works with video game developers to pick areas within the game to be "tagged" for advertisements--a blank brick wall, a billboard, the walls of a sports arena, etc. When users connect to the Internet with their game, it connects to Massive's ad server. The ads are then fed into the places within the game that were tagged, and because the game is hooked into Massive's server, they can be changed and updated throughout game play.

"You can run an ad campaign for a hot latte in the morning and for an iced cappuccino in the afternoon," boasted Nicholas Longano, chief marketing officer for Massive. Massive is based in New York but has a substantial office in Santa Monica, where Longano works. He recently signed up San Diego-based Sony Online Entertainment and L.A.-based developer Sparks Unlimited, creator of "Call of Duty: Finest Hour."

Long-term strategy

"In the next six months we will not be generating significant revenue from dynamic ads," said Dave Miller, senior global brand manager for THQ. "But we see them as a significant partner. This is a long-term strategic move."

Massive has a network of more than 120 game titles from 10 publishers in its network, and big name advertisers including Coca-Cola Co., Honda Motor Co., U.S. Navy, Nokia Corp., Panasonic Corp., T-Mobile, Paramount Pictures, Verizon DSL, and Warner Bros. The network can track and report impressions and seconds of viewing time for each ad.

With advertisers chasing after young people as they abandon television for video games, publishers and ad agencies are trying to figure out how to delicately ram advertising into the game universe.

"This is the only entertainment industry that does not have a revenue stream beyond retail sales," Longano said.

Massive claims its dynamic ads can provide an additional revenue stream for game publishers of $1 to $3 per game.

In-game advertising is expected to grow to $562 million by 2009, according to the Yankee Group.

"When you look at the market opportunity for dynamic in-game advertising, static product placement pales by comparison." said Evan Wilson, an analyst with Pacific Crest Securities.

Wilson called Massive's estimates optimistic, capping the potential ad revenue at about $2 per game--still a meaningful amount.

Of course that assumes that gamers are playing on a console with Internet connectivity, like the "Xbox Live" feature of Microsoft Corp.'s new Xbox 360 console.

The THQ deal "validates Massive's value proposition," according Michael Pachter, analyst with Wedbush Morgan Securities. "But Massive will only be able to deliver revenues for console games if they are linked to Xbox Live."

About 80 percent of PC video game players connect to the Internet, but PC game sales have been flat for the past few years, losing out to more sophisticated consoles. As of September, Microsoft reported that only 10 percent of Xbox 360 users (about 2 million) subscribed to "Xbox Live." The company has a target of 50 percent Internet connectivity by next year.

Though Massive has secured an agreement with Microsoft to provide ads to Xbox games, it does not yet have permission from Sony Corp. to link ads through PlayStation 3 consoles. And publishing giants Activision Inc. and Electronic Arts Inc. so far elude the ad network. But Longano says the company is working on it. "We're talking to everyone," he said. Activision has been working with Nielsen Entertainment to develop its own ad-fee template and tracking system.

Delicate balance

Placing ads in video games is still a delicate issue. "Our biggest fear is that we'd turn off our gamers," admitted THQ's Miller. In a year where game sales were down almost across the board, THQ was the only major publisher to reaffirm its earnings guidance through next year. "No one right now wants to do anything to derail or sidetrack the industry," Miller said.

Having creative control over the ads was crucial. Massive programmers work with THQ developers to identify good locations for ads within a game, but THQ has ultimate control over the ads, locations, and the brands that appear, Miller said.

Racing games, sports games and urban cityscapes make the most sense for this type of advertising, because they make the games feel more real, Miller explained.

A December study by the Yankee Group showed that certain advertising actually enhances a game, according to players surveyed. Developers can't use real brands if they don't have the licenses, so "when you're walking down a city street and pass a soda machine, we have to use something like 'X-Cola,'" said THQ's Miller. "You see it and register, 'Oh, that's fake,' and it brings you out of the game." Having a real brand on the machine would make the scene look normal.

Game enthusiasts caution the ads have to be imbedded in the game in a way that feels authentic. "Once the promos become jarring to the experience, it will quickly become negative," said Simon Tonner of GamePro Magazine.

"We're not going to have people walk through a giant hologram of a Pepsi bottle for no reason," Miller insisted.

Even some analysts are skeptical of how the ads will evolve. Though ads may enhance some game play, they might not be as "seamless" in fantasy games. "You can't have a Sprite machine out there when you're battling the Covenant in 'Halo 2' on Mars," Wilson said, referring to the popular "Halo" Xbox franchise. "But if it's on the walls of a NASCAR race, that makes sense."

THQ's games include MX Unleashed, a popular off-road game, as well as Full Spectrum Warrior, The Punisher, Destroy All Humans and The Incredibles.