As the search giant sorts out how it might serve ads into online games, it has to take the Xbox factor into account.
Google has reportedly looked at acquiring AdScape Media, a small company, founded in Ontario and now based in San Francisco, that specializes in so-called in-game ads. Google did not return calls seeking comment, and an AdScape spokeswoman declined to comment on the talks.
Though an industry insider who asked to remain anonymous said negotiations had stalled, such an acquisition would allow Google to take on old foe Microsoft, which last year acquired a similar but larger company called Massive. In-game ads, however, are one place where Microsoft would have a rare advertising advantage over Google thanks to thriving sales of its Xbox 360 gaming console and a long list of gaming titles.
"Google would be playing catch-up against some significant entrenched providers," said Michael Goodman, a program manager at research firm Yankee Group Research. "The biggest challenge for them is they might see themselves closed out of the Xbox as a platform to serve ads to."
In-game ads may sound like a niche, but it's a growing one that reaches a choice demographic for advertisers. A recent Nielsen Entertainment study found that men aged 18 to 34 are spending more time playing video games (12.5 hours on average per week) and less time watching television (9.8 hours per week).
About 6 million U.S. households have at least one "power gamer," someone who spends as much as 20 hours per week and $50 per month on games, and there are more than 15 million active players of casual games, which are free ad-supported games such as Tetris or cards, said Michael Cai, director of broadband and gaming for Parks Associates.
"It's not a pimply faced teenage kid playing video games in the basement anymore. It's people with a lot of disposable income," said Jeff Berg, content editor at the Interpublic Emerging Media Lab think tank. "It's a natural space for Google to move into if they can do it effectively."
The dollar value of this market isn't nearly as small as many people would think. Parks Associates predicts that game advertising revenue will grow from $120 million in 2006 to $200 million this year and $300 million in 2008. Yankee Group forecasts in-game ad revenue to reach $732 million by 2010.
Buying AdScape wouldn't get Google a lot of new customers, but it would get the company technology, Goodman said. "Google already has significant relationships with advertisers, but they would have to build up relationships with game publishers," he said.
Over the last 18 months, the search giant has been rapidly moving into new ad markets such as print and radio, using its automated online ad-delivery system to provide a way for advertisers to reach new customers via offline mediums. Google purchased radio advertising provider dMarc Broadcasting for just over $100 million a year ago and has been conducting radio ad delivery tests.
While it's hard to imagine virtual world games like World of Warcraft being a great advertising vehicle for Coke or Pepsi, plenty of games could be ideal, such as sporting titles.
"For example, we take Nike's (ads) they've used for print or television and implement that straight into the games across our sports titles," said Justin Townsend, chief executive of in-game advertising firm IGA Worldwide. The ad is delivered over the Internet and can be changed depending on which advertiser has purchased the ad rights, he said. The ads are targeted geographically, so players in Germany, for example, will see a German version of the ad.
Because Google's greatest success has been in contextually targeted ads rather than display ads, it might be better suited serving ads that appear alongside casual games, which are sold over the Web, Cai said.
"The question is whether Google is interested in getting into a new media form--gaming, and whether they are looking beyond search and trying to address a new ad business--display advertising," he said. "Google is the king of search ads, but they aren't that dominant in brand advertising."
But is the gaming industry ready for Google's automated kind of advertising?"It's not clear," said Jonathan Epstein, chief executive of Double Fusion, a competitor to AdScape, IGA and Massive. "It doesn't mean it can't get there, but when you look at how markets evolve it's always the specialists that drive innovation and focus in the market."
Eva Woo, vice president of marketing at AdScape, said her company has a technology that allows advertisers to interact with consumers without interrupting the game, something that could appeal to Google. If a gamer opts in, AdScape's Real World Virtual World Gateway will deliver messages via SMS or e-mail from the advertiser, Woo said.
When the game detects that a player has reached a certain level in the game or that a player is having problems getting beyond an obstacle in the game, for example, the advertiser could offer hints, rewards or coupons. "We've been developing this (advertising) technology for five years," she said. "We have one patent issued and 15 patents pending."
A risk for Google, of course, is getting shut out of Microsoft's growing Xbox market, and the question remains whether gamers will rebel against publishers who allow advertisers into their gaming worlds.
"Male gamers playing core games don't mind ads if they help make the gaming experience more realistic rather than disrupting their gaming activity," Cai said.