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Can Games Capture a Share of Online Advertising Revenue? January 31, 2006 Despite its rocky history, nearly everyone agrees that the potential for online advertising is enormous. The argument goes that advertising budgets should be spent roughly in accordance with how consumers spend their time. Thus, if 20% of consumer time is spent online, 20% of advertising budgets should be spent online. Of course, that thinking lost a lot of people a lot of money in the late 1990s. Online advertising spending peaked in 2000 at $8 billion and declined for several years, even as people were spending more time online. However, the last two years have seen record spending for online advertising. According to the Internet Advertising Bureau, online advertising could reach $12 billion in 2005 (up from slightly under $10 billion in 2004). Of course, the biggest growth area for online advertising is from the search and keyword advertising best exemplified by Google and Yahoo. Online games are attracting an increasing amount of consumer time, but they attract a comparatively low rate of advertising spending. The question this article will address is whether game companies will be able to cash in on the online advertising bonanza or whether games will continue to be a paid-content media form. The relationship between games and advertising has always been rocky. Games have not followed the advertising rule of spend-money-where-consumers-spend-time. Despite garnering enormous amounts of consumer time, especially in the valuable young male demographic, video games have never generated serious revenue from advertisements. This is despite the fact that advertisers and game companies alike have tried for years to bring advertising into the games. Advertisements have appeared in games since at least the early 1980s. Furthermore, ads have not been limited to billboards and logos in sports and racing games. From the infamous “/pizza” command in Everquest, which allowed users to order real-world pizza in the EQ virtual world, to Axe body spray signs in Splinter Cell, advertising has spread across all game genres,. However, this advertising has been at most a minor revenue source and is probably best compared to product placement in movies and television. Product placement in video games has been hyped for years, but the biggest growth in advertising has been with online games, and most specifically casual online games. Massively multiplayer online games (MMOG) and retail hybrids like Half-Life 2, have not really attracted advertising. On the other hand, online-only casual games present a fundamentally different opportunity than buy-at-retail, play-online games. Users play the games through a traditional website, often within the web browser. In this way, they become just another content type on the Internet, as likely and able to host advertising as a blog, newspaper, email account, or Salon.com. Ads can be displayed around the actual gameplay space. They do not require special creative advertising work or incorporation into the actual game. One ad buy can span all of Yahoo’s properties, including games. As has been said, content is king, and game content seems particularly attractive. Casual game sites record tens of millions of unique users a month. Online game providers are some of the “stickiest” sites in the world, which means each user spends a lot of time on the site. These two factors combined mean that game sites should be attractive to advertisers. At this point, there is no question: the usage is there. Google is now generating over a billion dollars in advertising revenue per quarter. Game content already has heavy usage and even if it could only attract a fraction of the advertising of Google it could be a significant source of revenue. Unfortunately for online game companies, the story is a lot more complicated. There are crosswinds blowing around nearly every key point in advertising’s potential for game sites, making it difficult to determine how integral advertising will become to online game business models. In order to understand why, we have to look at how online advertising revenue is generated. The Basics of Online Advertising There are three main types of advertisements online: search ads, contextual ads, and display ads.
In the early days of the Internet and online advertising, display ads known as banners were everywhere. Unfortunately, these ads were only marginally effective. Numerous companies bet their entire business models on banner ads and, when they did not take off as fast as expected, the whole house of cards came down, in part leading to the dot-com bust. Since then, the major growth in online advertising has NOT come from display ads, but rather from search advertising, with contextual ads a somewhat distant second place. Display ads have grown, but not nearly at the rate of the other types. To the point, Google does not use display ads and its revenues have outpaced other online advertising dependent companies. What has this meant for game companies? Well, search ads are obviously not germane to games, so that source of growth has passed games by. Games are uniquely unsuited for contextual ads as well. Text can be parsed by computers far easier than game content. Also, even if certain pieces of game content could be indexed by search engines, it is hard to draw a link between playing a balloon-popping game and wanting to buy balloons. At best the targeting is of a certain demographic, such as fans of football games. However, game content is attracting an increasingly diverse audience and therefore game advertising revenue is highly dependent on the growth in display ads. Display Advertising Predicting how well display advertisements are going to do online is difficult. We know that search and contextual ads are pretty effective as far as advertising goes. But display ads are an entirely different animal. While many small companies advertise via keywords or contextual text ads, only the truly large corporations are interested in the less targeted display advertising purchase. So really, game advertising revenue is tied to the growth in big name brand advertising on the Internet. The good news is that display advertising is growing. Microsoft’s last quarter saw more than 20% growth in display advertising on MSN. At a structural level, there are two things at work. One is that large companies need to reach a truly broad audience and stimulate demand: the number of people who eat at McDonalds is far larger than the number of people who search for McDonalds on Google. A company like McDonalds grows by continually generating demand. Keyword and contextual advertising work best when the consumer already has a fairly good idea of what they want. A great deal of marketing is about introducing a consumer to a product they did not know existed or at least did not know they needed. Google is best for consumers fairly far along in the sales cycle. The other good news for display ads is that rich media advertisements have come a large way in terms of quality. It has long been argued that broadband connectivity would be a key driver in helping make the Fortune 500 more comfortable with online advertising. Video advertisements, in particular, are now a reality with growing broadband penetration. Video ads look like TV commercials, which is a tried and true format. All of this leads a company like Ford to declare that they are going to spend 15% of their advertising budget online, a large percentage of which will go into display advertising. This is another spot where the crosswinds come into play. Once video advertisements are widespread (and they are clearly headed that way) there is an issue of whether consumers will start to turn away from sites that force them to watch commercials. While corporations are familiar with commercials, so are consumers. Programs to block display advertisements abound and they are a lot cheaper than TiVo. Relevant and search targeted ads are often viewed as a better form of advertising, possibly the future of advertising, because they are much more likely to actually be useful to the consumer. The Reality Right Now Game sites are attractive to marketers because they often have highly focused demographics depending on the game content they offer. While traditional casual game sites like Pogo are heavily skewed female and older, a site like Miniclip.com is remarkably popular among 12-17 year olds. Indeed, there are probably few more precisely targeted ways of reaching middle-aged women with office jobs than advertising on casual game websites. These sites often require or strongly encourage registration as well, so it is possible to do one-to-one marketing, especially for the horizontally diversified portal players like Yahoo. So how well are game sites actually doing? The large casual game sites now claim to be selling out their advertising inventories on a regular basis. This is a far cry from a few years ago when advertising inventory piled up on game sites. Nevertheless, the best approach for most companies is to diversify revenue streams, offering consumers both paid and advertising-supported game play options. It is for good reason that all the major portal players offer downloadable and/or subscription content in addition to free, advertising-supported games. Running a profitable business on advertising alone is extremely hard. The revenue from all game advertising combined is still below the retail revenue earned by a single top 10 interactive entertainment publisher. There are single video games that generate more revenue than the entire casual game industry. So there is clearly a great deal of growth potential. It is important to remember that most game consumers still play games offline. The game console systems attract a large percentage of usage and they have, by and large, not been online. This is expected to change as the next generation console systems will increasingly be always connected. Unlike past console systems, the Xbox 360, features pervasive always-on connectivity. This opens up all sorts of advertising possibilities. Opt-in advertisements, like downloadable game demos, are already proving popular on the Xbox Live Marketplace. Given Microsoft’s experience with advertising-supported casual games on the PC, it’s not too much of a stretch to think that advertising-supported versions of its Live Arcade games could debut on the system at some point. The most successful game console systems, like the Sony PlayStation, sell over a 100 million units worldwide. In aggregate, the new game console systems could sell close to 200 million units over the next several years. Considering that each system has the potential for multiple users, this represents a large user base that spends a great deal of time in front of the television playing games. With a constantly connected system, this audience can be finally be reached by dynamic advertising that reaches the entire connected installed base. This is entirely different from the past where in-game advertising was limited to pre-launch product placement in individual game titles. Interactive entertainment advertising can only reach its full potential for games that are online. Right now that is occurring for casual PC-based games because they are attracting a significant amount of online usage. However, that is only the tip of the iceberg and we are just getting started with games going online. In other words, the consumer time factor looks like it is getting ready to explode, but it hasn’t happened yet. Therefore, the rule of whether advertising budgets will follow consumer time habits has not been tested for games. On the other hand, video game advertising has been predicted to explode several times over the past twenty five years. Truly significant revenue from in-game advertising is likely to be five years or more away, just because it will probably take that long to build the installed base and test business models. Even when it does occur, it is likely to remain a secondary revenue stream, and the leading revenue source is likely to remain consumers paying money to buy their interactive entertainment. There is growth potential, but anyone involved with this area must be realistic about the timeframe and overall market potential. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. A sample of reports on the video game and PC game market include: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2010. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems. The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends. Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. Overview of the Video Game and Interactive Entertainment Industry This report is designed to provide an overview of some of the key trends in the video game and interactive entertainment. The focus is on highlights from the forecasts and analysis of trends, game genres and business issues found in DFC reports. The Online Game Market This 660 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles. The Game Market in China This 350 page report contains a complete look at the rapidly growing Chinese game market, including forecasts to 2010, government regulations, market entry strategies, business models, distribution options, game genres and numerous company profiles and case studies.
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