Microsoft expected to buy Massive

Just three week’s ago Faultline said the US in-game advertising networks were so well established that instead of Microsoft and Sony building their own networks, they would do better to buy the existing players.

Microsoft has now moved for market leader Massive Inc, which already delivers advertising into 70 games, many of them exclusively on the Xbox version of the game. So far the deal is at the rumor stage, but we expect this is just while paperwork is worked through and should it go ahead, the rumored price of $200 to $400m gives an idea of how important this market segment is going to be. Faultline happens to believe it will become a $3bn market while other research groups are predicting it to be far smaller at present.

In-game advertising networks rely on an online connection being used with the games console. At game start up, the console issues a request for any new adverts that are supposed to go with the game, and they are sent online.

They used to be simple 10 to 20 kilobyte files of text, audio and graphics, callable from a remote library as the game plays, but back in August Massive added TV style video ads into its gaming system. These can be downloaded in the background, rather than delaying the game start up.

Then as players reach a specific part of the game used for advertising, and this might be an advertising hoarding, the sides of a race track or a TV screen in the gameplay, the advert will begin to play. The system is careful not to put gamers off by intruding on their game time, and surveys have been carried out that support the notion that gamers actually like real ads, because they make the game appear more life like.

When Massive began life in 2004 the entire in-game ad market was just $10m it said. Yankee Group now says that the market will grow by more than five times to reach $732m by 2010 from $56m last year.

So far Massive has had no more than $30m invested in it, with $10m spent in a third round this January. The company reckons that each game will yield between $500,000 to $1m of extra new revenue for each game. With 70 live games over the past two years, and an average revenue generating lifetime of four to five months per game, this suggests that Massive has revenues of no more than $35m, with half of that having to go back to the games publishers it partners with. That would make the rumored valuation between six and 12 times revenues.

Massive has signed up deals with Vivendi Universal Games, UbiSoft, Acclaim, Konami and Legacy Interactive, and the US part of Atari, it told us last year.

It offers advertisers "reach" calculations based on the title's sales and then a percentage of these which are online and a calculation of how many playing hours that games will generate in its first month.

Massive reckons it has four to five months of advertising inventory to sell before people stop playing the game in large numbers, but the company will continue to serve adverts to the games whenever they are played, which will provide a kind of "long tail" for game advertising.

At the moment gamers do not universally register their games online, and this can reduce the amount of demographics that is available to advertisers. Usually they try to get players to register the first time they use them, but this is notoriously unreliable. This means that there is very little guidance for the types of advertising that can be sent in-game.

However, if Microsoft goes ahead and buys Massive, it can take its device registration details and mix them with the advertising demographics to considerably improve this small chink in in-game advertising.

After Massive, both Double Fusion and IGA are also compelling acquisition targets, and we would expect that Sony might at some stage move to either acquire or build its own service, perhaps not a US based service though, and that Google, the doyen advertising based services, will be immediately on the scent of some form of move here.

We suggested previously that Google's way of getting into the gaming business would be to give games away for free, and sell adverts in them. If Microsoft completes his deal, the urgency to enter the game market at Google, and elsewhere, may go up considerably.

Copyright © 2006, Faultline

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