Stagnant Economy Threatens Gaming Ads

SAN FRANCISCO -- Over the past three years, in-game advertising has grown quickly, offering a promising revenue stream for the video game industry.

Now, there are worries that this segment of the industry may be slowing, a victim of a stagnant economy that may have slipped into a recession.

Research firm eMarketer says advertisers are likely to spend $25.8 billion online this year, down from $27.5 billion it had projected in October. That lower level of ad spending, though, is still 23% higher than what was spent in 2007.

Analysts say ad spending on video games cannot remain impervious to the state of the overall economy. "There's no question that a gloomy economy tends to exert downward pressure on entertainment spending overall," says Paul Verna, senior analyst with eMarketer.

Despite those concerns, analysts and advertisers remain confident that in-game advertising, which allows marketers to integrate ads into video games, can weather the storm better than as television or radio. In-game ads may even do better than search ads and rich media such as online video.

Industry experts say in-game advertising is poised to perform better than its rivals because video game sales are expected to remain healthy as games publishers move quickly to offer a greater number of titles to targeted audiences.

"In a downturn economy there are less advertising dollars but it is traditional channels that will feel the pain," says Michael Goodman, an analyst with the Yankee Group. "We will continue to see increased budgets for in-game ads, not as much in an up economy but still better than other mediums."

Added Cory Van Arsdale, CEO of the Microsoft's(MSFT Quote) Massive network, which specializes in serving up ads in video games: "Massive is a really cool thing to buy and we are a little bit immune to it (an economic slowdown)."

In-game advertising involves three sets of players: game publishers that create the content, ad networks such as Massive that offer a platform that can dynamically insert ads into the games, and advertisers.

Traditionally, video games carried no ads. But increasingly, publishers are offering their blockbuster titles up to advertisers. That means a company such as Coca-Cola(KO Quote) can have a Coke machine or Nike(NKE Quote), a billboard or Hewlett-Packard(HPQ Quote) its logo displayed in the background of a video game.

This form of marketing allows companies and agencies to reach the coveted 18- to 34-year-old demographic, integrate ads with content better to attract players and be part of a medium that allows for extensive interaction with the audience, experts say. Typically, gamers play a single title for anywhere from 25 to 50 hours.

"It gives the advertiser a lean forward experience that not many other mediums out there can," says Darren Herman, former founder of IGA Worldwide, an in-game ad network, and currently head of digital media at Media Kitchen, a media buying and planning agency in New York.