It's nice to see Google (NASDAQ:GOOG) chase Microsoft (NASDAQ:MSFT) for a change. The leader in online advertising announced that it purchased video game advertising specialist Adscape Media over the weekend. This comes after Microsoft snapped up Massive last year.
You know why Internet companies are doing this. There's a young audience that is spending way too much time in front of the television playing video games instead of running into ads in cyberspace. In-game ads offer the best of both worlds.
Let's take a look at a game like Need for Speed: Carbon by Electronic Arts (NASDAQ:ERTS). The auto-racing game has roughly 180 billboards, and each one is available for advertisers. In the old days, this meant paying up for a static ad. Now that next-generation consoles have online connectivity, those billboards can be perpetually updated.
They can also be very specifically targeted. Burger haven In-N-Out Burgers has a stronghold in the Southwest, but it would be squandering its money with a national ad campaign. The same goes for regional grocers, local thrifts, or just about any outfit that doesn't have a presence on a national level. Yet even the big boys can benefit from updating ads. McDonald's can promote its breakfast menu in the early morning to appeal to hungry gamers after an all-nighter, for instance.
The transitory flaw
A lot of people are assuming that Google is a natural here because it watches over hundreds of thousands of advertisers through its AdWords paid-search product. They're right, but only to a certain extent. The allure of AdWords is that local companies can pay pennies for an interested lead.
It just doesn't work that way in video games. No one is going to click on a multiplex marquee or a travel-agency window during a game. Gamers would toss their controllers at the screen if action games were broken up with senseless treks off to advertiser pages that are awkward to navigate without the luxury of QWERTY keyboards.
So let's be realistic here. In-game advertising is a great way for larger companies to carry out brand advertising. Just as Google's recent initiatives in video spots are appealing to only a fraction of its sponsors list, this isn't supposed to be a catch-all service. Thankfully, it's the kind of offering that will be appealing to those with the most money to spend.
Movie studios that want to promote an upcoming theatrical release would love that marquee space. An online travel site like Expedia would jump at the chance for brand ambassadorship tied to having its name on top of that downtown travel agency.
E-commerce meets e-gaming
This isn't Second Life, where corporate sponsors continue to set up shop. And if you check with video-game developers, you'll find that in-game advertising isn't exactly their first choice for monetization. For instance, Electronic Arts has sold hundreds of thousands of items on the 360 version of Need for Speed: Carbon ... most of them being upgraded race vehicles.
The future of video games might be dramatically different in the future. Digital delivery has revolutionized distribution. We're still buying most of our games in old-school fashion, but will that always be the case? Take-Two Interactive (NASDAQ:TTWO) is counting the days to the October release of Grand Theft Auto IV. With so many hard-drive-based consoles out there, Take-Two will be able to roll out monthly episodic updates after that.
With the rise of cheap digital delivery, in-game advertising, and a growing comfort with game-based micro-transactions, are we really that far away from the day when most new games will be given away? It's not financially feasible now, but it just may happen in a few years.
And what will free -- or at least heavily subsidized -- access to video games mean for Internet usage among young users? It can get tricky. There is only so much time to go around. So now we know why Google and Microsoft are here. They may be early to the party, but it's going to be one heckuva bash.
Microsoft is an Inside Value recommendation. Electronic Arts is an active Motley Fool Stock Advisor pick. Check out either investing service free for 30 days.
Longtime Fool contributor Rick Munarriz is a huge fan of Google, and it would be his homepage if not for Fool.com taking up that piece of real estate. He does not own shares in any of the companies in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
