Tons of hardware and software are sold each year in the video game industry (2005 saw revenues of $10.5 billion in the United States), and the sector is poised to grow in the years to come. Technological advances allow for titles so sophisticated that they're almost like interactive theatrical pictures these days. Because of this, video games are stealing viewers from mainstream television, causing major headaches for broadcasting entities.
Those headaches are ripe opportunities for publishers like Activision (Nasdaq: ATVI ) , Electronic Arts (Nasdaq: ERTS ) , and THQ (Nasdaq: THQI ) . Why? One word: advertising. Many consumers -- many of them from the youthful end of the demographic spectrum, a valuable target audience -- may be more easily reached through video games, as opposed to other forms of media.
With this in mind, Nielsen is readying a system to measure ratings for video games. According to Reuters, the company will create a service called GamePlay Metrics. It will provide data on video game usage, as well as other metrics relating to usage of various other forms of media. Nielsen believes it will have the service fully operational sometime in 2007.
This will be a big boost for game makers; with every new console upgrade comes an upgrade in the cost to produce a great video game, so the extra revenues are sorely needed. It takes a lot of money for Take-Two Interactive (Nasdaq: TTWO ) to make its edgy games look good. For that matter, a Halo title certainly doesn't come cheap for Microsoft (Nasdaq: MSFT ) . Going forward, budgets for software will be similar to ones for a moderately financed movie -- $20 million is not an unheard of figure for a next-generation property.
Is there a dark side to advertising in video games? I'm pretty bullish on the idea of integrating product placements and/or corporate messages with video games -- some analysts believe that in-game advertising could be a multibillion dollar giant in the next several years, perhaps reaching a billion by 2010. But I do wonder whether publishers will find themselves altering their software at times to reap better advertising packages. Television producers are constantly aware of their responsibilities to their network clients, and unless they're on a premium channel, they must make their products palatable to advertisers. Will the same thing happen to video game publishers? It's too early to tell.
Another consideration to keep in mind is that when ad revenues become a bigger part of the overall gaming business model, they could add volatility to earnings projections. When advertising budgets cycle to the downside during different market environments, I can imagine that Wall Street will be pretty heavy-handed with the stocks in this sector. Still, it's no reason for the publishers to shy away from in-game advertising. It might make the business model more complex, but it's a necessary component for future growth.
When Nielsen gets data out on how video games are used by their owners, it will create many opportunities for publishers to offset development costs and increase profitability. A whole new culture is building itself around video games -- online and offline usage is only set to increase. Whether you're a casual user or a hardcore hobbyist, you're just another eyeball to corporate America -- and publishers want to make some extra money off you. Consider it a positive for the industry.
Get to the next level with these takes:
Activision and Electronic Arts areMotley Fool Stock Advisorrecommendations. To find out why, clickhereto take a free 30-day trial. You'll get access to every single buy report, along with the research behind each one. If you subscribe today, we'll also send you a newspecial report, absolutely free. Microsoft is an Inside Value selection.
Fool contributor Steven Mallas owns shares of Activision. The Fool has a disclosure policy.