Analysis Advertisers are desperate, says Katherine Hays, Chief Operating Officer of Massive, the US company that has just come out of stealth mode to lay claim to the world's first advertising network for multiple games on multiple gaming platforms.

The fundamental reason for this desperation is that the 30 second TV ad spot is no longer delivering the undivided attention of many sectors of the US buying public.

In particular advertising is missing out on the 18 to 34 year old male, and if you listen to Hays, she believes that 70 per cent of them are spending at least 5 hours a week on games. In early studies the really aggressive gamers play around 2 hours per night.

"Despite the desirability of this audience the market for in-game advertising was only $10m last year versus the $12bn that was spent on US broadcast TV," says Hays.

These figures don't quite tally with recent reports, with one from Yankee Group putting in-game advertising at around $79m, but it is still a drop in the ocean compared to TV.

"Advertisers are desperate because they lack the ability to advertise in large enough numbers to people that are playing a diverse range of games. What they want is to aggregate 1m or 2m people on any given night in the right demographic, at the right time, just like TV," said Hays.

So far Massive has signed up exclusive deals with Vivendi Universal Games, UbiSoft, Konami and Legacy Interactive, and US coverage from Atari.

"In the past, games only offered long term, permanent product placement. They offered no 'quick reach' needs," said Hays.

But now Hays says that the Massive network changes all that and reckons that she already has the advertisers on board. "We are targeting the top 100 advertisers in the US. Recently we employed a VP of advertising sales, and he found that he was being called by prospective advertisers. He said to me "In advertising you do not get proactive calls from businesses like General Motors, Coke, McDonalds and Citibank.

"Advertising agencies are being given a mandate to move budget out of TV advertising and being asked, 'How do you plan to get us into video games?'"

But the key to Massive's future is the way in which it has anticipated this market need, and tried to tie the market up, right from the start.

What Massive has signed, with each of its games publishers, are multi-year exclusive deals. This means that if any of the games publishers select a game to have advertising in it, then that advertising must come from Massive.

"Some games don't make sense to put advertising in, but where they choose to, the ads have to come from us," said Hays.

So far it seems small beer. The software to insert advertising only exists in a couple of pilot games, 15 games due out now and 40 over the coming months. Is that a lot of games? Well considering that less than 100 games makes up most of the current buying and game playing activity globally, at any point in time, it might be.

"We have tied up 48 per cent of the market already with the publishers we have signed and that figure is based on games revenue," claimed Hays.

That's a bit misleading, in that the companies that Massive have signed, accounted for 48 per cent of the US games revenues last year when you take all of their games into account. Massive won't be on all of their games though.

Right now Massive software is only licensed to work with online platforms. It doesn't require that the games themselves are designed to be online, just that the platforms are, but that lets out the Nintendo Game Cube, which doesn't yet have an online version of the device. And so far Massive hasn't yet signed a deal with Sony to work along with Playstation games.

"We have the software to work with PlayStation, it's tested and it works, but commercial terms have not been agreed," says Hays and that's virtually all she'll say about Sony. Clearly a relationship with Sony is important. The Massive contract stops games publishers from agreeing to introduce any other network advertising software into their games, so while the big publishers may not yet be able to make money on their Sony games, they can't go offering that advertising inventory anywhere else right now either. This means that the 48 per cent of the market that Massive says it has tied up, really is tied up. It can't benefit from all that marketplace until it has an agreement with Sony, but then again neither can anyone else.

We can imagine that the publishers are putting pressure on Sony to jump on the Massive bandwagon at the earliest opportunity. However Sony, being the largest games publisher in the world, expected to ship about 295m games this year, may insist on building its own advertising network, and this would split the market. That would leave those that have signed with Massive out on a limb, unable to use their upcoming Sony launches in either network, having signed with Massive, but being dependent on Sony for permission, since it has contractual control over most of its games.

Such a rift in the market would only set back the advertising industry for in game advertising. What media buyer wants to buy twice from two different organisations when planning a campaign to launch a new product or promotion?

And games publishers could really do with this extra revenue, particularly important at the current stage of the cycle in the games business, with games platforms about to be replaced. Right now consumers are reluctant to buy games platforms, but also reluctant to buy games that may only have a short life before a new platform makes them obsolete.

Hays says, "This is about $500,000 to $1m of extra new revenue per game for most games. And as far as the games publisher is concerned, it's free money."

And it opens up advertising markets that were completely unavailable to in-game advertising before. Films, for instance, are a huge potential vertical, but because they need to change their creative materials in real time, so far they could not use in-game advertising at all because of the delay in bringing games to market and the length of time they stayed there.

So does Massive have a huge list of technology and business model patents from this business to try to stop competitors entering it? According to Hays, Massive doesn't need them. "Once publishers get used to that cash flow from advertising, they are going to find it hard to live without it. Let's say they are at the end of a three year deal with us and considering signing with us or a new competitor.

"If they are launching a game in the dying days of our deal and they have to finalize production, they would be breaking the terms of their contract to introduce competing technology. What they have to do is either delay the introduction of the game - which is lost revenue - or issue it with our software in it. That means they would get a few days or weeks of advertising revenue and then their new game would have to run for the rest of its life without an advertising component."

And this will also be true of all of the publisher's old existing games. "Our reach projections are critical and we have been very conservative with them," says Hays. "Our reach calculations are 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 for that first month. We anticipate that each game will churn after 4 months."

Effectively Massive reckons it has 4 to 5 months of advertising inventory to sell before people stop playing the game in large numbers.

The truth is very different from this. "We will continue to serve adverts to the games whenever they are played," confirmed Hays, which means that the past three year's of games, where they have a residual amount of continued play, will also produce revenue (often there is a kind of sentimental nostalgia among gamers who go back to their old favourite games for a week or so).

So Massive is not claiming that old games will give it extended reach when they are played, not as far as it effectiveness calculations or revenue projections go. But they will.

And any publisher that cancels a deal with Massive must be prepared to lose that 'old' revenue, which Faultline is confident will be considerable.

Another key element of the Massive technology is that any given publisher can select not to take either a particular advertiser or those adverts with a mature rating or can request that it only has one type of advertising such as sports advertising, or can ban a particular group such as alcohol advertising.

Likewise an advertiser can decide on his adverts' 'reach' by targeting particular games or games genres.

This can also be done against game buyer demographics, but these are notoriously unreliable. Demographics at present come from cards filled in when the games are bought. Parents don't yet consider that when they fill their own names and address and age on a form, they are pre-selecting the type of adverts that their children will see. Put down the fact that you are a 43 year old man, and your young daughter might, in the future, get pornography advertising or put down you are a 39 year old woman, and your 13 year old son is bemused to find he has panty liner advertising all over his racing game.

Massive has tried to fix this by offering an optional registration at the beginning of each game, to establish the demographics of the actual player, rather than the game purchaser. This registration data is jointly owned by Massive and the game author, but gamers aren't wild about filling in forms, and Hays acknowledges that there's little that can be done about this right now and that advertisers are best focusing on the family demographics - where the family lives, and other evidence of its income (which might come from web advertising databases etc...) rather than targeting individual players.

But this is not any worse than TV viewer demographics, which can only be discovered by interview, or by technical means, such as local People Meters, and then only 'after' they have viewed a particular night's viewing, not before.

Right now this whole service is constrained by the number of gamers who have an online device. "Most PCs are attached to the internet, and a high percentage attached to a broadband line, but only 12 per cent of consoles are reported as being online. Next year that figure is going to go up to 25 per cent," says Hays, and she rightly expects her revenue to double as the online gamers audience doubles.

Part of this has been due to the fact that both Sony and Microsoft have charged separately for the online adaptors which are needed to plug into a broadband line. Sony's new PlayStation 2 now comes with an online adapter built into it and it is reasonable to expect that all future games platforms will come with such an adaptor. It still doesn't mean that anyone has plugged their broadband modem into the games platform.

If a home has a wired broadband line (as opposed to a wireless router) then it is more likely to be plugged into a home PC than into an Xbox (or PlayStation). What happens if the console is not online?

If it was recently online the advertising may still show, but there isn't a reporting path back to the Massive servers to say which adverts have been viewed. If it's been offline for a while then the game authors set their own defaults, either fake, humorous adverts or blank walls. And that means no revenue for either them or for Massive and less advertising inventory to sell.

We would expect games authors to deliberately place online elements into their games, such as online cheat lookups from in-game, to encourage connection, in order that they make their fair share of advertising dollars.

How it works

Massive has written a data link library which can be called by the game playing program. This library is furnished with new adverts for a given game level, the level that is about to be played, and these are downloaded from a Massive server over the internet while the game is loading into memory. This might create a delay of a few seconds, but it should be largely unnoticed by most gamers.

These files, mostly 10 to 20 kilobyte files of text, audio and graphics, are now callable from the library as the game plays. Over a two week period just before the game is released Massive works with the game authors to decided where these files will play. In a grand prix racing game they may be the advertising around a circuit, in a Mall based game, such as the first Massive enabled Mall Tycoon, they may be billboards and shop window advertising, and around a stadium they have all the locations that are used in real stadiums.

Both the game authors and Massive follow rules of thumb to limit the invasiveness of the advertising to make sure that it doesn't break the reality of the game. The early games that have been Massive enabled have around 50 advert locations identified within the game, and it looks to serve between 8 and 20 adverts per hour during the game play.

The important difference between TV advertising and in-game advertising is that the game variety is non-interruptive. You don't have to stop playing the game to notice a billboard, and since there are billboards in real life, the game appears more like real life, rather than less like it.

There will be an eerie sensation when a game player walks down a street and sees that same advertising campaign, say for a major motion picture that is starting its run next week, using the same artwork and delivery format as one he saw that evening in a game that he bought 3 months ago. Research says that it enriches the gaming experience and we can't see anything wrong with that observation.

The likely future

Despite huge promise, this Massive adventure is still really in its early days. There are few rules about just what advertising works, and Massive will have to prove over and over again that this form of advertising has the same effect as, for instance, national billboard advertising or internet advertising, but Massive is effectively modelling this on internet techniques and is using agencies to measure the 'brand lift' created by this form of advertising.

But advertisers will have to ask themselves is there any real point in convincing boys of 15 that don't yet drive, that Castrol is a really fine motor oil? It might well affect sales in three years time, but that's not what this year's advertising budget is for. So the market will have to emerge, emulating new advertising markets like the Internet, but creating its own rules of thumb as it goes, over the next three years.

Contractual Monopoly

One thing that the company has been at pains to attempt is a kind of monopoly by contract. Some big players like Activision and EA Games may not yet be part of this network and may end up never joining it, but if they capitulate and Sony joins the party, then Massive will have far too tight a contractual grip on a new form of advertising.

Certainly if that point is reached Massive may not be too worried about changing the contract to make it a little less restrictive to participating publishers. A start up is allowed to behave monopolistically, but if it starts winning the war, we expect to see other companies raise legal challenges to its contracts.

Hays is not giving out financial projections right now, but she would be delighted if 2005 yielded Massive something close to $15m in revenues, but probably is internally projecting far less.

Given that games publishers have mostly negotiated more than 50 per cent of the total advertising revenue for their games, roughly 66 per cent, that would mean that Massive alone would be responsible for $45m of in game advertising in the US alone.

Massive plans to launch its network in Europe during March 2005, and in Asia (with an unnamed partner) in November 2005. It is likely that this revenue could double due to the geographical reach during 2006, and double again, due to the number of games platforms that are going online, that could easily create a $180m revenue operation, with some $60m for a highly profitable Massive and a valuation that is likely to be ten times revenues ($600m) as it seeks to go public in 2006.

Our own view is that if Massive manages the key hurdles ahead of it, like a relationship with Sony and a successful shift to the Far East, it could be far bigger than this and it would all be in the price for a 2006 IPO. And all of this from Massive's $5.5m of funding and a two year development effort.

Back in the early days of Internet banner advertising, prices went as high as $100 for 1,000 page views, valuing each advertising viewer at $0.10. It's much lower today, but in game advertising is likely to go through a similar honey moon period where the advertising is at a premium.

Do that calculation for the top 100 games launched each year, across multiple platforms.

There are 68.5m US homes with a games platform, and more than double that around the world, with perhaps 50 per cent of them online by 2007. Allow for just two hours of gaming per household per day (across multiple individuals), with 10 ads per hour and even at 1 cent per advertising impression, around one tenth of the same price of early internet advertising, you end up with a $2.5bn industry in no time at all, perhaps as soon as three years.

Coming back to a recent research analysis of the industry, most companies are doubtful that it will ever go to these types of numbers and the Yankee Group only expects it to creep towards $100m during in this time, with advergaming becoming more important.

By this Yankee means that new game formats will arrive, like free web sites and free to air television, where the game is GIVEN away, and paid for entirely by advertising. This is almost certainly coming, and it will then leave the gaming market open to a few new Massive style networks, because they wouldn't have to sign up existing games suppliers.

But it is hard to see this dwarfing the paid gaming market overnight, and if it ever does, it is certainly a long way off, leaving Massive with a long run out in front on its current business model.

Copyright © 2004, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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