Dear Santa,
I've been a good boy this year. All I really want at this point is for Massive Inc. to go public. Now, I realize that what I'm wishing for is going to happen whether I've been naughty or nice. The company has already gone through a few rounds of venture capital financing, so an IPO is likely to happen sooner rather than later. With in-game advertising looking to grow even faster than online marketing, Massive has all of the ingredients in place to be a blockbuster offering.
What's that? You have never heard of Massive? You don't think you entirely grasp the concept of in-game advertising? That's fine. We'll get into that with plenty of time for you to add a Massive Inc. IPO to your holiday wish list.
Massive potential
If your kid is spending more time playing video games than watching TV or surfing the Internet, don't worry. That's normal. The only folks worrying are marketers. They thought they had their craft down and their audiences captive, but someone moved their magnets.
We live in a custom-tailored present. You see it everywhere. Movie theater attendance has declined for three straight years. Movie and television awards shows have seen their ratings fall, in some cases precipitously. Prerecorded music sales have fallen in four of the past five years.
We aren't just fragmented. To a marketer who is stuck in old-school ways, we are also unreachable. We fly through television ads as part of the TiVo (NASDAQ:TIVO) Generation. We block pop-up ads on our computers. We don't hear radio ads because we don't hear radio, period. We're either loading up the iPod or jamming away to commercial-free music through satellite radio.
You don't think this is all connected? That entertainment is failing all around us because we can't be spoonfed pitches through our stiched-up mouths? Open your eyes. At least long enough to notice that the youth around you have shut theirs.
That's where Massive comes in. This year the company launched an in-game advertising network. Fire up Anarchy Online or take in a broadband-enabled game of Splinter Cell: Chaos Theory; the game backgrounds are served with relevant ads.
In its simplest form, in-game advertising is as simple as a static ad on a billboard in a driving game or a relevantly updated movie studio marquee in a city street background. However, Massive also serves up rich media ads. Picture a video game character walking by a television store when a Coke or Dunkin' Donuts commercial is playing. For now, gamers dig in-game advertising because it actually adds a layer of realism to the gaming experience. Fancy that; ads that folks can't avoid just happen to be appreciated and serve as an experience enhancer.
Everything is starting to work in Massive's favor. From the Xbox 360 to next year's Nintendo and PlayStation rollouts, the next generation of video game consoles thrive on online connectivity. The hardware makers see it as a way to serve cheap software updates but that opening is also the gateway to the widening of in-game advertising.
Massive estimates that for every copy of a title sold that is a part of its network that Massive can deliver as much as $1 to $2 in pure profit to game publishers. Video game software companies work on thick profit margins. Massive takes a good thing and makes it even better.
The hurdles to clear
If Massive sounds like a slam-dunk, please tell the major software firms. Even though the company was quick to land worthy outfits like Ubisoft and Vivendi Universal it wasn't until this week that the company finally inked one of the biggies, THQ (NASDAQ:THQI).
Will Electronic Arts (NASDAQ:ERTS) follow? If you follow Massive's claim, EA could have generated between $16 million and $32 million in ad revenue off its Sims franchise in fiscal 2005. Need for Speed would have produced between $15 million and $30 million. EA had 31 different titles sell at least a million copies. Add it up and the $504 million that the country's leading video game produced in net earnings in fiscal 2005 would explode significantly higher. At the very least it would represent a marked improvement from the 1% of total revenue that EA generated from licensing and advertising.
So is that the rub? If the big companies aren't on board with a simple, passive royalty scheme, does it mean that Massive's claims are exaggerated? Perhaps, but this is an industry that is still in its infancy. As more advertisers flock to in-game advertising, given its limited capacity it is quite conceivable that rates will be pushed even higher and this will become an even rosier scenario for Massive. More creative applications will follow. This is just the foot in the door. The fist comes next.
Yes, maybe the heavies will find a way to cut out the middleman and go it alone. Shockwave.com has done just that with its popular online games. However, Massive already has the expertise, technology and paying sponsors at its disposal.
No, Massive isn't alone here. IGA Partners has been serving ads on Counter-Strike since last year. News Corp.'s (NYSE:NWS) IGN.com has entered the market and even though it got a late start it's got a definite connection with the gaming community through its series of online properties.
Ad it up
In-game advertising grows bigger every passing day. Even Nintendo (OTC BB: NTDOY.PK) has some WiFi-enabled games on its handheld Gameboy DS system. Online connections are attractive to gamers because of the multiplayer possibilities but it's also the juicy worm on the marketing hook.
It is clearly a Rule Breaker industry, and I'm not just saying that because it seems as if the lively discussion board over there is never short of a visionary thread on the potential of what Massive and its pioneering peers are up to. Video games factor into many of the active stock recommendations such as NetEase.com (NASDAQ:NTES) and Gamespot.com parent CNET Networks (NASDAQ:CNET).
The ads are coming. Santa, please don't let them stop.
Electronic Arts and TiVo are Motley Fool Stock Advisor recommendations.
Longtime Fool contributor Rick Munarriz is old enough to remember playing on an Atari 2600 before it became a relic. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
