It looks like in-game advertising as the next great source of revenue for video game makers is the hot topic this week. First, Fool Steven Mallas described his intrigue (see Let the Advertising Games Begin), followed by an excellent, in-depth article on BusinessWeek Online.
I thought I might as well put in my two cents.
To rehash, on April 8, Activision (Nasdaq: ATVI) and Nielsen Entertainment announced a partnership to develop standard "audience measurement metrics" to help advertisers "assess the impact of in-game ad exposure."
Here's the premise: According to Nielsen, males ages 8 to 34 spent more than 30 billion hours watching television last year. Three-quarters of them own a video game system, and that same demographic spent a roughly equal 30 billion hours playing video games. Even so, advertisers spent more than $8 billion trying to reach that demographic through television, but only a nominal amount on advertising in video games.
Here's what I'm thinking: If the game makers -- most notably Stock Advisor picks Electronic Arts (Nasdaq: ERTS) and Activision, as well as Take-Two Interactive Software (Nasdaq: TTWO) and THQ (Nasdaq: THQI) -- could get even a fraction of that $8 billion, they'd be golden. I could be wrong, but it seems to make sense that any advertising revenue would flow almost straight to the bottom line, providing a nice boost to the four companies, which combined to earn less than three-quarters of a billion dollars last year.
According to Nielsen, more than half of the "heavy" gamers surveyed like games to contain real products, and 35% of male gamers "agree that advertising in video games helps them decide which products to buy." This makes winners of games that virtually take over the lives of the people who play them -- and with some relevance to real life -- like EA's Madden and Need For Speed: Underground 2, Activision's Tony Hawk and True Crime, Take-Two's Grand Theft Auto, and Sony's (NYSE: SNE) Gran Turismo.
And it makes perfect sense.
Take Gran Turismo, for example, a series that has greatly influenced my decision on my new car. The games are renowned for their realism, and as a gamer I was able to drive dozens of different cars from manufacturers from around the world, getting a feel for both styling and drivability. In fact, Road & Track's new Speed magazine for tuning enthusiasts reported on a test between the Honda NSX (sold as the Acura NSX in the U.S.) and the next-generation prototype solely based on the test version of the upcoming Gran Turismo 4.
On top of the cars, the tracks in the games are laced with advertisements (many of which are the real advertisements from the real-world tracks) from companies such as Dunlop, Bridgestone, Penzoil, etc. In addition, you can fit your car with rims from Falken or Rays Engineering.
Just associating those names with the game enhances their brand appeal.
How cool will it be when Activision puts a real McDonald's (NYSE: MCD) at a real street corner of its next True Crime? OK, so maybe the violent association may preclude such an occurrence, but I could see wanting to visit the real Mickey D's for kicks, so there must be some kind of advertising opportunity there, perhaps in another game.
What about driving around to different car shops, differentiating between the quality of parts manufacturers such as AEM, HKS, and GReddy/Trust in EA's Need For Speed Underground 2? And Coca-Cola (NYSE: KO) associated with Madden would certainly make Coke look hipper.
Revenue from in-game advertising is a great opportunity for video game makers, and there are no losers here. I would consider paying up for Electronic Arts in particular with its dominant sports franchises. However, if you look elsewhere, I would stick with what I consider the other three most viable players: Activision, THQ, and Take-Two.
Talk over video games and advertising on the Video & PC Games discussion board - only at Fool.com
Fool contributor Jeff Hwang owns shares of Electronic Arts.
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