Is it game over for the virtual ad?

It seems like only yesterday that Barack Obama was using computerised billboard promotions for his election campaign in Burnout Paradise, every petrolhead's favourite video game. But within a few years of in-game advertising being touted as a potential $1bn-a-year industry, its star has waned even more dramatically than that of the new President.

Gaming presents myriad opportunities for advertisers, from billboards in urban landscapes for driving or shoot-'em-up games or pitchside signage for sports formats, to product placement and soundtracks. Microsoft thought it could capitalise on the potential in the sector when it acquired Massive Incorporated, a specialist provider of advertising in games, for around $300m (£186m) in 2006. Months later, Massive was predicting it could add up to $2 in advertising revenue for every game sold and its CEO, Mitch Davis, was predicting a market worth $2bn a year. Then a few weeks ago, the company was closed down. Microsoft will concentrate instead on applying that expertise on Xbox Live, its gamer-focused subscription service, which allows it to keep all ad revenue for itself, rather than share money with game publishers.

Meanwhile, Electronic Arts (EA), one of the biggest game publishers (with titles including The Sims, Battlefield and Rock Band), has cooled its enthusiasm for in-game advertising. EA had reacted positively to a Nielsen study last year that showed that Gatorade ads in sports games such as NBA Live had prompted increased sales of the drink. EA's Elizabeth Harz had said that the findings showed that "brands can feel confident adding gaming as a core media channel for their advertising".

But by October, her colleague Ben Cousins, EA's general manager, wasn't so sure. "We actually aren't getting much from ad revenue at all. The in-game advertising business hasn't grown as fast as people expected it to," he told Edge magazine at the launch of Battlefield Heroes. And Bobby Kotick, CEO of rival publisher Activision Blizzard (which makes Call of Duty and World of Warcraft), also signalled a move away from in-game advertising, acknowledging that gamers don't necessarily like being sold to when they're trying to enjoy themselves.

"There was a time when we thought advertising and sponsorship was a big opportunity," Kotick told a conference in New York.

"But what we realised is our customers are paying $60 for a game or paying a monthly subscription fee and they don't really want to be barraged with sponsorship or advertising."

British gamer Richard Lewis, of Heaven Media, says: "When gamers see in-game advertising, they know that it is a source of revenue for the people that have already sold them a product and in general it has been received poorly by most players exposed to it. This is especially true of those playing subscription games. They see themselves as paying for a premium service and the expectation is that they should be allowed to enjoy their game without interruption."

According to Lewis, the blame for the limited progress lies with the advertisers and a paucity of good creative work. "There were so many more possibilities than just simply having 'in-game' billboards or scrolling adverts, that were never really explored," he says. "Creative minds had talked about in-game storylines where the prizes would relate to real products or character cross-overs involving those from corporate brands. None of this materialised and the advertising in-game was generally as mundane as it is in real life."

But the opportunity has not been lost, says Jack Wallington, head of industry programming at the Internet Advertising Bureau.

"I think advertisers are significantly underusing in-game advertising in all its forms," he says. "I think there's still an issue with the perception of who is playing games. The advertisers I talk to think it's still a niche audience. They understand that it's a good way of reaching the young male demographic. But we know that 20.1 million people play games on consoles and that's a huge chunk of the UK population."

As the appeal of gaming spreads, so too does the range of games on offer and the opportunities for advertising clients to find environments that are suited to their brands. Although EA struggled to match in-game advertising to Battlefield Heroes, it has enjoyed success with other franchises. Renault has integrated its zero-emissions car into the real-life simulation game The Sims (which has a broad user demographic), enabling players to endorse a green lifestyle by "buying" the vehicle for free. "[Renault] were looking to drive awareness among a certain audience for their forthcoming range of electric vehicles and felt that The Sims was a very suitable avenue in which to engage with that audience and drive awareness for their product," says Josh Graff, who works on EA's global media sales. Coca-Cola has also struck up a groundbreaking deal with EA's social game Restaurant City, which has nine million fans on Facebook. Under the partnership, users are able to acquire a Coca-Cola vending machine for their "restaurants", enabling them to "generate more money in your virtual environment," Graff says.

If anyone knows the future for in-game advertising, it should be Alex Sood, CEO of California-based Double Fusion, one of the biggest specialist companies in the sector. He believes that the rapid improvements in gaming technology are making the medium increasingly active to advertisers, especially with many gamers playing on the internet. "Games today don't look anything like they did five years ago, [in terms of] how realistic they are, how much user interactivity there is, [and] online interaction between different users playing the same game," he says.

He argues that gaming remains an unrivalled means of gaining access to the "lost boys" generation of young males who have in many instances disengaged with traditional media. Sood also claims that in-game ads are far more likely to be noticed than those carried on other platforms. "The key issues of recall, brand favourability and positive response to the creative, are much, much higher in our space," he says. "The user is so alert and active during game play that whatever they see is consumed and retained at a much higher rate."

According to Sood, in-game advertising has been undermined at a crucial time in its evolution by the cut in spending that has hit all commercial media. "The advertising market has been challenging and has slowed the growth of this space, but now I think it is back on track and is experiencing a very tremendous growth rate."

He argues that it is still realistic to regard the sector as a $1bn market by 2014, but says it would benefit from wider recognition if it were seen as something distinct from online advertising. "Ultimately, in-game advertising needs to be recognised as its own media category. It should be seen as part of a larger mix [particularly] for people that are trying to solicit males aged 18-34."

Sood rejects the notion that gamers find ads intrusive and says this is a problem only when commercials are crowbarred into inappropriate spaces.

"I would never advocate putting an advertisement on the moon in a sci-fi game because it wouldn't look natural," he says. "A lot of it is down to respect for the user. If you are putting the ad in a location that's sensible, then the user will take notice of it."

To critics who say that in-game ads have so far lacked creative flair, he points to new initiatives where brands are offering prizes to gamers who interact with ads, possibly in the form of a treasure hunt that takes place during the game. "If you interact with five advertisements in quick succession, you could be offered a prize or reward. Treasure hunts are fairly new [but] it's something we will see a lot more of this year."

EA employed a reward-based ad in a partnership with Dr Pepper for Battlefield Heroes, with gamers obtaining a code when they bought a bottle of the soft drink and then using it to generate in-game rewards.

Unlike in the "real" world, clients have zero costs in manufacturing or distributing virtual prizes. Competing traditional media would be very complacent if they thought gaming will not be coming back for a bigger slice of the advertising cake. "I firmly believe that as we become more knowledgeable about this medium," Sood says, "you will see it take the lion's share."