Advertising's Call of Duty

Video games are hot right now -- from the very young gamers to those much older, entertainment software is becoming a thriving industry for all ages and demographics.

What you might not realize is that video games are also becoming a powerful social medium. Games like Electronic Arts' (Nasdaq: ERTS  ) Madden NFL 07 and Konami's (NYSE: KNM  ) Dance Dance Revolution have "people-gathering" equity -- that is, they tend not to be enjoyed alone. In this way, games are not unlike movies, music, or television; we all join up with friends to view a film, hear the latest songs at a concert or club, or watch an episode of The Sopranos.

According to a recent Reuters piece, it's the same thing with games played on consoles from Sony (NYSE: SNE  ) , Microsoft (Nasdaq: MSFT  ) , and Nintendo (OTC BB: NTDOY.PK). The article gave a couple interesting pieces of data, courtesy of research group NPD. Madden NFL 07 sold six million units -- fourteen million gamers, however, have interacted with the sports title. Activision's (Nasdaq: ATVI  ) third Call of Duty entry moved two million units -- nine million gamers actually used it to wage virtual warfare. Not only is this effect caused by social interaction, but software doesn't necessarily get purchased only once -- players can readily buy used games.

Video game companies want to make more money -- in fact, they need to make more money, because development costs are getting quite high. Multiple millions of dollars are needed these days to produce a tentpole piece of software -- budgets falling between $10 million and $20 million are becoming more and more realistic. Combine audience expectations with consoles that are advanced and arduous to program for, and you can see why development expenditures are on the rise. Thus, publishers are looking to generate an additional income stream to supplement revenues from software sales; advertising within titles is being used to leverage the popularity of video games with the valuable demographic which plays them. Knowing how many players actually interact with a title is a great way of judging the marketing potential of the medium. To that end, last year Nielsen announced its interest to generate ratings for video games.

Since advertising works best when it's in front of as many eyeballs as possible, one would assume that publishers will be looking to strengthen their support of the Nintendo Wii system. So far, the Wii has plenty of people-gathering equity -- Rick Munarriz confirmed this in a recent article about the Wii's effect on his own family. In addition, the industry will probably push multiplayer titles, so expect emphasis on such genres as racing/party games.

Franchises are going to take on a new aura of mega-importance once advertising revenues really kick in. Top publishers like EA and Activision are well-positioned to benefit from the evolving model of in-game ads. Investors need to seriously consider this sector, since the stats continue to show how fascinated the culture is by electronic entertainment. With numbers like these, this story is only beginning.

Video games and investing are a fun combo:

Nintendo, Activision, and Electronic Arts are Motley Fool Stock Advisor recommendations. To see what other great stocks are part of David Gardner's entertainment kieretsu, take a free 30-day trial to the newsletter service today.

Fool contributor Steven Mallas owns shares of Activision. As of this writing, he was ranked 13,012 out of 24,917 investors in the CAPS system. Don't know what CAPS is? Check it out. Microsoft is an Inside Value pick. The Fool has a disclosure policy.


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