The announcement may have been lost a little in pre-E3 fervour, but one of the biggest emerging areas in the games industry got a major boost back in May when top in-game ads firm Massive Inc revealed that it had been acquired by Microsoft. Within days, Xbox supremo Peter Moore was declaring that in-game advertising was part of the industry's business model of the future, and a sector which had been slowly gaining acceptance was suddenly boosted to the forefront of people's minds.
A contentious subject among gamers, in-game advertising is now at the top of the agenda for those seeking alternative revenue streams from interactive entertainment - including, it seems, the platform holders. We caught up with Massive Inc's president of new media, Nicholas Longano, to find out more about the Microsoft deal, the business model his firm proposes - and how it's working to win over the hearts and minds of gamers as well as the wallets of advertisers.GamesIndustry.biz: How long had you been talking to Microsoft before the acquisition deal was announced, just prior to E3?
Nicholas Longano: The reality is that this has been in the works for well over a year - what I mean by that is that we've been talking to the team at Microsoft, they've been assessing our technology, they've been looking at our operations... We actually went live on the Xbox last year, last October, with Rainbow Six, Karaoke, a couple of titles, which was part of the Microsoft pilot.
The purpose of all of that was really to take a look at how gamers reacted - because as you know Microsoft as an organisation, and Xbox as an organisation, wanted to ensure that game integrity and gameplay is foremost in whatever we do in terms of advertising. It's always done in the background, it's done as a secondary thing to the gameplay experience.
They wanted to make sure that we respected the gamers - we've always said we did, but they wanted to make sure, because this is a massive deal, delivering advertising into games. They recognise, as well as the publishers do, that if you have development costs rising sixty or seventy per cent in this next generation, you've got to make sure that you have a secondary revenue stream to help to offset those rising costs. That's absolutely critical for the industry.
In terms of the benefit to the gamer, well, we used to say over a year ago that it adds realism to the title - the question, naturally, was "What are you talking about? What realism?" Well, you know, if you go down to Times Square, or Piccadilly Circus, or whatever it is, you want to see real-life ads - because those real-life ads are what you'd see in the real world. These teams are spending so many million dollars developing next-generation titles - why are they spending so much? For realism! Advertising helps to enhance that.
At E3, Peter Moore was talking a lot about the future of the business and the future of its revenue models, and he mentioned Massive as a key part of that - particularly its integration with Xbox Live. Do you think that Microsoft essentially went shopping for an online advertising agency to fulfil that vision - that if Massive hadn't existed, they would have had to build it?
I honestly don't know. I think you'd have to direct that question back to Peter.
Do you think, though, that what Massive and the other online advertising agencies do was inevitable - that videogames are moved naturally towards a model where they're advertising supported, like other forms of media?
It had to happen. Absolutely. I was at Vivendi - before I started massive I was with Sierra Studios, Universal Interactive, Vivendi Universal Games. Even back then, in 2000 and 2001, with the platform transition at that time, we were looking for new revenue streams to offset retail sales. The cost of development was rising, and it continues to rise today as I mentioned earlier. Margins were shrinking; licenses were costing a heck of a lot more for publishers, and when you think of the many licenses that are used within this industry, that costs a lot of money, and that cost typically goes up and up and up.
So, publishers are forced to look at new revenue streams - significant ones. When you take a look at in-game advertising in terms of what it contributes to the bottom line - with a typical boxed game that's shipped to retail, what goes back to the publisher's bottom is maybe five or six dollars, and the more successful ones maybe make a little more. In-game advertising today, before our acquisition by MSN and before all those enormous resources are put behind it, is already generating somewhere between two and three dollars for publishers - so it can give you between a forty and a fifty per cent rise in profits.
What does that mean? As a publisher, I can give you free gameplay - look at Funcom and Anarchy Online. Look at the announcement of free gameplay in Planetside as well. Those are supported by advertising. It means I can take more risks, because my bottom line, my break-even, has been adjusted. I can take more risks and be creative; I can go out there and develop games that otherwise wouldn't happen in a risk-averse industry.
That's what this industry is becoming - risk-averse. That's why you get title A, version ten of it - or lots of licensed product. Publishers, however, are wanting more and more to go out there with original IP - that's where the excitement is, those original products, new games that push the boundaries. This gives them the opportunity to do that.
Looking more specifically at your deal with Microsoft, what does this change for publishers who have been your clients up to now?
Well, we were acquired by MSN, but Massive will continue to remain an independent organisation. We will continue to do what we were doing before - that is, to deliver advertising to games across all platforms. That's our mission, that's our objective. The only difference is, directly after the deal we had an SDK ready for the Xbox 360. That's the difference, we've now opened up the Xbox 360 as a platform, and the Xbox is fully open - publishers can come in and take full advantage of that.
While we've already done a pilot programme, in the second part of 2005, it was limited - we didn't want to just rush in there and open the entire platform up. Now we have the ability to do that, and of course, we're determined to do it in the right way - with lots of QA testing, lots of playtesting, and everything assessed to make sure it's done constantly right.
That's another difference - now we have the resources of MSN. What does that mean? We have greater access to software developers, we have an MSN sales force - 900 people, world-wide - so from a publisher's perspective this is tremendous news, because now you've got this global infrastructure as well, helping you to generate new revenue. I think everyone is going to benefit.
Does it mean, however, that further down the line you won't be able to support the PlayStation 3?
That could be the logical conclusion, but at the end of the day I would leave that to Sony - it is their decision. In my opinion, though... Microsoft and Sony compete on hardware, and on content. Advertising in a videogame doesn't sell any more units, it doesn't sell less units - and the last time I checked, Sony Vaio computers ship out with Windows on them, so it's not like the two companies don't already work together. Maybe there's a possibility, or perhaps we could work together on serving advertising across all platforms.
So Sony would have to approve of you setting up an advertising system on their platform? That's the obstacle?
It's the same on the Xbox 360, or on any platform - if you're serving any kind of content to that platform, you have to have approval. Its not like you can just go underground and start serving - it doesn't work like that. You have to have approval.
Is that simply because of the need to develop the SDK software, or are there restrictions on actually serving content to the platform that you need to get through?
Yeah, you have to develop an SDK that goes through their certification process.
Otherwise you'd have cowboys all over the place serving adverts into videogames without any checks and balances in place. At the end of the day, it's their platform and they need to protect that platform; they need to be reassured that the people who are serving ads onto that platform are well qualified.
Right now, we represent maybe 95 to 100 per cent of in-game advertising experiences; we've got something like 75 million game sessions recorded, that we've served ads into, with each session being 90 minutes. So, we've got billions of impressions of working experience.
In terms of what you're doing with Microsoft as well, has there been any discussion of putting Massive advertising onto the Xbox Live system, as opposed to onto individual games?
You know what, we haven't gone that far, as far as discussions are concerned. I think that we'll assess every opportunity - and I think that Microsoft will also assess where exactly or how exactly it wants to roll this out, how to use this technology across all its business opportunities.
Looking more generally at your business, how closely do you target the way that you work to different territories? Do you find, for example, that there's more acceptance of blatant advertising or sponsorship in North America than there is in Europe, where marketing messages seem to be treated more cynically - or do you find that if ads are right for the game, that applies worldwide?
The starting point is always to ask if it's right for the game. That's priority number one - you're not going to see advertising in something that's a sixteenth century medieval game. There are restrictions; there are different legal requirements from one nation to another. Respecting privacy is always key - that's why we aggregate data, we never record or collect data on an individual level.
So, no - each territory has a different stance. When a game ships out to market, it's the same game, and all of the same ads are tagged in the same areas - so each location within the game is tagged, that's the same worldwide. That's what the development team does - you must understand that we don't put the ads in the game. We leave that totally up to the development team.
So if a development team did perhaps want to put fewer tags in a European SKU of a title, they would be able to do that?
Absolutely - just shut off the ads as they're served, or put fewer tags in as you're going through the localisation process. Let's just say you did playtesting in the USA, and the game was given the thumbs up, but the same playtesting in the UK said that there was too much advertising - you can just shut those ads off. You've got to do it that way.
Do you find that there's more cynicism to the whole concept of in-game ads among consumers in Europe than there is in North America, then, or is that attitude commonplace everywhere?
You know what, we monitor the boards; we see what gamers say. I think at the end of the day, if you do it in a manner that respects them, and you don't try to be underhanded about it - so they feel like you're trying to sneak an ad in there, or trying to fool them - no, everything has to be out there. They play through the game, they see these ads, and I think if it's done responsibly, if we exercise caution - which we always do, we go through four levels of QA and playtesting before a game is approved - if development teams continue to do this the right way, which they have to, and as long as we don't do this opportunistically...
If you see an ad somewhere where it clearly doesn't belong, then we haven't done our job and the marketing team hasn't done their job either, because there are meant to be so many checks and balances in place to prevent that. So absolutely, we listen to what the gamers say.
Nicholas Longano is President, New Media, at Massive Inc. Interviewed by Rob Fahey.