[In-game ad deals can benefit both game developers and advertisers -- and veteran game lawyers Boyd and Lalla discuss business and contextual considerations for in-game advertising.]

Advertising in games is currently in a stage similar to internet advertising in the late 1990's --  the research and development phase. As such, many deal terms during negotiations between game companies and advertisers -- including one of the most important to all parties, price -- are in flux.[1]

Ask three different business executives in the industry the same question about negotiating in-game advertising deals, and you're likely to get three different answers.

This article pulls together some of the more uniform aspects of advertising deals in the game industry, and discusses the major issues facing both game companies and advertisers as they contemplate the pros and cons of game placements -- and negotiate in-game advertising deals as they move forward.

The State of the Market

Before we launch into a discussion of the business and legal issues that game companies and advertisers may need to know moving forward, a brief review of the current status of advertising and games may be helpful to frame the discussion.

As most game industry veterans are aware, the game industry is rapidly overtaking other forms of entertainment to become a financially and culturally dominant force in the United States and abroad.

The global games market has been booming in the last several years. According to industry analysts such as DFC Intelligence, between 2000 and 2001, the U.S. games industry grew from $6.6 billion to $9.4 billion. In 2007, that figure was up to a record-shattering $17.94 billion -- and that doesn't even include PC game sales or online revenue. Our most recent figures show that the global video game industry revenue was approximately $40 billion in 2007.

Globally, the worldwide interactive entertainment industry is on track to achieve revenues of $57 billion as early as 2009.[2] On the individual game level, we have numbers like the best-selling U.S. debut of any entertainment product ever: Last year's launch of Grand Theft Auto IV generated 500 million dollars in revenue in one week.[3]

Given the level of growth and the relative figures to other forms of entertainment, games have become increasingly attractive areas for marketing communications by advertisers. Research firm Parks Associates estimated advertising in the game industry to be $370 million in 2006, growing to $2 billion by 2012.[4]

The proposition is attractive to the game industry because it offers an additional revenue stream beyond the traditional model of revenue from retail sales, and it is also becoming more important to advertisers who are looking for new ways to reach consumers, particularly the coveted young male audience of 12-34 years old who spend more and more of their time playing games rather than watching traditional television.

Advertisers are no longer spending their advertising dollars on traditional media purchases such as television, where consumers are using their DVRs with ever more frequency. They are expanding their digital media budgets, and in many instances, this includes in-game placements.

This article focuses on the business and legal issues surrounding advertising agreements in the game industry. Specifically, we address what deal points are most negotiated, and what variations or fallback positions are possible for these negotiated points. The article examines these issues from both the advertiser's and the game company's sides of the table.

This includes the tensions between advertisers with their traditional business models and need to protect their branding and intellectual property -- and the ever-growing and developing game industry, plus the importance to game companies of flexibility in their approach to advertising.

The primary objective, in many instances, is to include seamless advertising that doesn't interrupt or otherwise interfere with the player's enjoyment. We then discuss how the parties measure success, and whether including advertising in games is always the best choice for both advertisers and game companies.

Placement

One of the most critical deal points is the placement of the advertising in the context of the flow of the game. Placement is a complex decision that involves hard thinking by both parties on which game to advertise in, the places most suitable for advertising, any exclusivity for the advertiser in the game, and the choice of whether such placement will be fixed or dynamic within the context of the game and advertising for the brand.

The game itself is the first critical choice. For instance, brands traditionally associated with sports advertising are most appropriate for sports games. Certain youth brands may aim at skateboarding, platforming, or similarly themed games. Advertisements are intended to create brand awareness for the target demographic -- but if  the audience feels the brand is out of place in the game, the advertisement may have the opposite effect.

Aside from the choice of game, there are still many more decisions to be made. Is the advertiser looking for static advertising or dynamic advertising? Static advertising is a fixed placement in the game at launch and stays in the same form after release of the game indefinitely. This type of advertising does not rely on an internet connection to broadcast the images into the game -- but it also cannot be changed after launch.

The disadvantage of dynamic advertising is that it requires an internet connection to be broadcast into the game -- but it also has some particular advantages. It is a flexible branding image where elements can be interchangeable. It also provides advertisers an easy method to measure and collect valuable advertising data on consumers -- and potentially even consumer behavior based on impressions, keywords, clickthroughs, and other kinds of information.

As discussed, it's also easier to correct potential issues for both parties in a dynamic placement. If there is a problem in a fixed placement with a branded image, or with any claims or other copy in the advertising, a recall may be the only solution to the advertiser -- and the game company will likely resist it as much as possible. As discussed later, dynamic advertising is typically cheaper, and is therefore fast becoming the common choice among many advertisers.

[1] For clarity, throughout this article, the authors deliberately use "game companies" to mean both publishers and developers and "advertisers" to refer to both advertising agencies and brand holders.

[2] http://blogs.pcworld.com/gameon/archives/007189.html

[3] http://en.wikipedia.org/wiki/Grand_Theft_Auto_IV

[4] http://www.clickz.com/showPage.html?page=3626301