While at the GameOn Finance event in Toronto, I found myself in an interesting conversation about ways to maximize the revenue generated by MMOGs. I found it difficult to fully express my thinking on the matter at the time, so during my flight home I wrote this post. Consider it a sneak previous into my upcoming IGDA Leadership Forum lecture on MBA Lessons applied to the game industry. :-)

One of the concepts I learned in business school was the “two-part tariff,” which is best explained through a simple example that we’re all familiar with: a nightclub. Most nightclubs generate the majority of their revenue from the sale of liquor. Why then do some of them also choose to charge a cover fee? Doesn’t that turn away potential customers? Well, part of the reason is simply to “keep out the riffraff,” but bouncers at the door can (and generally do) already reject anyone who looks like they won’t be a valued customer. Part of the reason is to project an aura of quality and/or exclusivity, but again, a velvet rope and an obstinate bouncer can already accomplish that as well.

Two kinds of customers

The third major reason for a cover charge at a nightclub is revenue maximization, pure and simple. Here’s the underlying rationale: nightclubs basically have two kinds of customers. One kind buys a lot of drinks (the especially valued customer buy a lot of the most expensive drinks.) The other kind buys one drink and nurses it all night, or even — heaven forbid — just a glass of water. Both kinds of customers are attracted to the nightclub because it offers music, attractive people to dance with, etc. Both kinds of customers clearly value the experience. But only one kind of customer will be profitable for the nightclub. Sound familiar?

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Thanks to everyone who happened to attend my GDC lecture. I’m really very flattered that we had standing room only, despite something like 25 other sessions taking place at the same time (several of which I would personally have liked to attend!)

For those who asked, please feel free to download my slides here.

Next-Gen did a brief writeup of the session, which is nice. They focused on the “in-game-ads” portion of the talk. One point that didn’t make it into the Next-Gen writeup, which I’d like to clarify, is that while highly-integrated ads are indeed very effective (when done right), non-integral ads (like virtual billboards) can also be effective when done right — just in a different way. The influence of non-integral ads is more subconscious, and is limited to “low information” messages (like logos and images.) Anyway, it’s all there in the slides. :-)

I’ve spent the past few months interviewing many different people on the subject of games and advertising — professors, ad sales professionals, game developers — you name it. I’ve learned a great many things from these interviews, but one thing I have not learned is of the existence of much research on the topic of improving advertising effectiveness. I am referring specifically to ads in and around games, as well as advergames themselves.

I’ve found plenty of non-game-specific ad research. And there are several studies (sponsored by major publishers and/or in-game ad networks) that seek to prove advertisements in games are effective, without exploring what can make them more effective.

So I thought I’d ask you all: if you’re aware of any studies on the subject of game advertising effectiveness, especially studies that weren’t sponsored by organizations with a perceived bias, I’d greatly appreciate hearing about them.

Over the past few years, the concept of “involvement” has become an increasingly hot topic amongst media executives and marketers. MIT C3’s own Stacy Wood, an Associate Professor of Marketing at the University of South Carolina, has been studying involvement (among other things), and she recently wrote an excellent article on the subject. The article isn’t publicly available, but I’d like to share parts of it with you — it is relevant to game companies as advertisers, and as developers of an advertising medium.

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The public release of Paul Hemp’s article on Avatar-Based Marketing has inspired me to write about something that we’ve been discussing at MIT for the past couple years. That is, reverse-placement: the idea that fictional brands can be created in games, then introduced to the physical world as real products. Also, the idea that market research can be conducted within games.

Consumer product companies spend tens of millions of dollars (if not more) attempting to establish a new brand, especially in competitive retail markets. Fighting mature competitors for mindshare and shelf-space is difficult at best. Many video games, on the other hand, offer vast acres of uncluttered virtual real estate via which to introduce a new brand.

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Now that we know Massive could be valued at up to $400M, I think it’s high time I launch my own startup to take advantage of the in-game advertising market. I’ll be calling it either “Gigantic” or “Enormous”, or maybe “Ginormous”. And I won’t actually have proprietary technology or an ad-sales team. I’m just going to think of neat ideas for in-game ads, then sell those ideas to the highest bidder. Given the current market conditions, “Edery Ginormous, Inc.” should be worth at least a mil, wouldn’t you say?  :)

And, lest I be accused of empty posturing (or wasting your time, though it’s probably too late to avoid that), here are some of my ideas for in-game ads. The key to these ideas is: A) they all “fit naturally” within the game’s environment, B) they reinforce the advertiser’s brand message in some way, C) they do not distract the player from the fun; rather, they are part of the fun.

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Ever since it was announced that Microsoft may acquire Massive, speculation has run rampant as to what MS is up to. Mmmmm…. speculation. I want in.

Massive has the following: relationships with most major developers and publishers, a solid ad-sales group, and (presumably good) ad-serving technology. Massive’s expertise and insight has some value as well, though it’s difficult to quantify how much.

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Michael McHale, Senior Producer at Konami, kindly answered some of my questions about his experience working with in-game advertisements.

Please describe how you made use of in-game advertising in Karaoke Revolution Party.

KRP for the Xbox includes technology from Massive, Inc. If the player is logged into Xbox Live, new ad-containing textures will stream into the game.

We made sure that the advertising spots appear in logical places in the game environment. We were very careful, so the ads are not constantly “in your face” and they integrate nicely with the background environment. We believe that it adds to the gameplay experience when the environment changes dynamically.

Did you reach out to advertisers who you thought would “fit” the game’s theme, or did you work with advertisers who reached out to you, or both? How did that affect the design and development process?

Massive’s sales team sold the ads. We retain approval over all ads before they appear in the game. The content must be appropriate for the audience (the game is rated E10+), and we expect the ad art assets to be high quality, and to fit the general art style of the game.

Did you experience any conflicts with your advertisers? How did you negotiate the process of integrating their ads into the game in a highly visible but tasteful way?

We created a guide that shows where the ads would be placed, with screenshots of the game environment. This hopefully helped the ad agencies. There was a set of ads that we felt did not meet our quality standards and did not fit the art style of the game, so we rejected them.

What surprised you most about the process of embedding advertisements into the game? Would you do anything differently?

There are currently two different types of advertisements you can run, and they each have limitations. Static ads are placed on the game disc and are visible whether you are online or offline. The issue with static ads is that you can’t track how many times they are viewed, and you can’t refresh the content, so the user sees the same ads for the life of the product. The ads have to be placed in the game months ahead of time before the game is released, so agencies can’t run ad campaigns that hit at a specific time, such as an ad for a movie release. The PlayStation 2 does not have a hard drive to store data, so static ads are your only option there.

Dynamic ads can be tracked and scheduled, but the player must be online while playing the game in order to see the ads. This works well for online multiplayer games, but not as well for single player games. I expect this issue to be worked out in the future, when dynamic ads will be stored and visible even when you are offline.

From the development side, the process of planning where the ads will go and integrating the ad-serving technology into the game takes time. Although the impact to our development schedule was minimal, we were still taking time that could have been spent elsewhere.

Looking back at the project, I don’t think we would have done anything differently, but it would have been nice to store the streaming ads locally on the Xbox. We hope we did a good job of integrating the ad content without being too intrusive. Advertisers and their agencies understand all too well that the end user can have a negative reaction to ads if they are not integrated into any form of media in the right way.

I just sat in on the “Continued Growth of Gaming” panel at the MBA Media and Entertainment Conference in New York. Moderator: Cyrus Beagley (Engagement Manager, McKinsey Entertainment Practice). Speakers on the panel: Greg Costikyan (Founder, Manifesto Games), Chris Di Cesare (Director of Marketing, Xbox), Nique Fajors (VP of Brand Management, Atari), Frederic Markus (President, eRelevant Games), Joseph Varet (Sr. Director of Biz Dev & Strategy, MTV Networks). I managed to catch most of what was said, except in the case of Greg Costikyan, who speaks two to three times faster than most normal human beings.

Topics discussed: What makes a franchise successful, MTV’s role in the video game industry, innovation, the attractiveness of various game markets, and some questions for Microsoft about portables and shortages.

Read the full transcript here.