Google

(GOOG) - Get Report

may be the king of online advertising, but

Microsoft

(MSFT) - Get Report

has the lead when it comes to another fast-growing market: in-game advertising or advertising embedded into video games.

In-game advertising is one of the biggest trends of the video-games business. The Yankee Group, an industry firm, estimates that the market will hit $700 million by 2010 and that about 200 games across almost all the major game platforms had advertising embedded in them by year-end 2006.

With

its purchase of in-game advertising start-up Adscape for reportedly $23 million in February, Google seems to have gotten a whiff of the potential.

But Google's entry comes more than a year after Microsoft purchased in-game advertising company

Massive

in a deal reportedly worth between $200 million and $400 million.

Microsoft's head start seems to be paying off. Massive, which specializes in dynamic in-game advertising, has been steadily building up its network and has relationships with more than 40 game publishers.

In an interview with

TheStreet.com

, Massive CEO Cory Van Arsdale, a 12-year Microsoft veteran who took the top job after Massive's founders moved on in January, sizes up Google and how Massive has been tackling the in-game ad challenge.

TheStreet.com:

What does the Massive network look like now?

Van Arsdale:

The momentum is great on several fronts. We have integrated over 70 titles today, of which 53 are active. We expect to have about 100 titles in the network by the end of the calendar year. From the sales perspective, more people, including Nielsen, are telling advertisers this is a medium they have to be in.

We have started securing longer-term agreements with our advertisers. A lot of buys six months ago were spot buys. We now have several repeat advertisers, some of whom we have done 10 to 15 campaigns for. They look at it as something they buy for a year-long cycle -- not just a one-month cycle -- and we are working with publishers to make the network larger and more predictable.

Google has done very well with online advertising. Can it do the same with in-game advertising in video games?

Cory Van Arsdale,
CEO of Massive

Google is investing in this space just like they did with radio, and it makes perfect sense to me. At the moment, I don't think Google's going to be an incredibly serious player, but they are investing in it and trying to decide how they can extend the efficiency of their online ad network to this.

But there is quite a bit of art to develop in in-game advertising. When we take an ad and put it into a game, we think of 53 different inventory elements, none of which is easily automated.

This is not a flat HTML two-dimensional ad. For instance, we integrate the ad on the side of a truck or on back of a wall or on the side of a corrugated roof or a billboard. We work extensively with the publishers on quality of inventory element. Google likes things that are automated, and this is not one of those. Maybe it is part of the challenge they see. But right now we feel really good about our position and technology.

If matching an ad to a game requires so much attention, how scalable is your network?

Part of why it takes more effort now is because it is a new medium. Advertisers are not familiar with it, so they don't know the right creative. Some of it is has to do with education around the medium. We are working on that, and we are highly efficient when working with advertisers and developing creatives for this medium.

Massive, because of its Microsoft affiliation, is closely associated with the Xbox platform and games for that platform. Will you extend the ad network to include other consoles?

We have had conversations with

Sony

(SNE) - Get Report

and

Nintendo

(NTDOY)

, and I would like to have them in our network this year. But this is a decision they have to make. Nintendo has never embraced advertising, so that's a long shot for anybody. But with Sony, we have had very positive discussions.

Could Google be at an advantage here because it isn't affiliated with any one console manufacturer?

I think platform manufacturers are going to look at what works best for their platform. Video-console game space is unique in that the console manufacturers make money on the people participating in their environment. So they are very concerned about overall quality of what goes into their environment.

They are not so willing to throw anything into it. Our technology is coming up on the third generation, and we have worked to build relationships with publishers.

How do you split the revenue from in-game ads with the publishers?

It depends on the deal. It's a healthy split, and I don't want to say anything more than that. But publishers have a potential to gain significantly from this. Dynamic in-game advertising can scale much larger compared with static advertising. A good title will occupy a user from 25 to 50 hours, and static placements will be limited. But dynamic is not limited theoretically, so there's plenty of opportunity.