Corporate email skullduggery*, an investment rollercoaster ride set to rival that of Project Exodus, a savage tussle between corporation and competition authority, and Mario. The nexus between video games and advertising has always been one to watch, and no more so than in recent months. 

In this feature article, ExchangeWire research lead Mat Broughton details recent developments in the space, and why we are set to see a closer entanglement between ads and gaming.

*Actually someone just sent the wrong attachment, we’ve all been there.

Opportunities for marketers

Deprecation of cookies in display and mobile environments, greater emphasis on attention over basic viewability, and fragmentation of inventory all point to one outcome for the advertising industry: a flight to quality. Retail media and CTV are two of many sectors that are seeing a boost in these transitionary times, however one that is perhaps not being fully utilised is in-game advertising. 

For years we have heard and understood the notion that “everybody is a gamer”, reflecting the truth that gaming audiences are both extensive and diverse. However, there is still likely to be an awful amount of difference between someone who plays candy crush on the train, versus a Diablo 4 expert competing in e-sports competitions on a high-spec gaming PC, versus someone playing a mini-game within Roblox. While this may have proved a sticking point in the cookie-based era, with larger pools of digital inventory that can then be fine tuned with audience tracking winning out (see: Facebook), now the sheer volume of time and attention spent within games should lead to the medium being seen as a more enticing pool of inventory.

Customer recognition of the value exchange of sharing data in return for rewards, via loyalty card schemes, is one of the key reasons why retail media is taking off. In some, but not all, cases this can easily be replicated within the gaming experience, particularly in mobile titles. Getting the balance of advertising in such an immersive environment is a crucial balancing act that publishers need to get right. Opting to play games at a reduced price in return for advertising, particularly in a basic-tier subscription which grants access to many titles a la Apple Arcade, PlayStation Plus, or Xbox Game Pass = excellent. Forcing ad experiences onto users who pay £70+ for a standalone AAA role-playing game where disruptions tank immersion and therefore experience = a one-way ticket to MightilyPissingOffYourAudienceTon. So, this begs the question:

Why does gaming need advertising?

Firstly, Apple’s implementation of ‘Do No Track’ has hit the mobile gaming industry. Hard. Previous cornerstone categories such as hypercasual are “dead”, even to publishers which previously thrived in churning out titles. Though the industry has adapted by transitioning to more midcore titles to gather subscription revenue in addition to, or in replacement of, ad revenue, the looming rollout of Privacy Sandbox on Android devices is set to cause further income turbulence. 

In addition to this, external capital has dried up dramatically. Data from InvestGame revealing an 89% year-over-year decline in disclosed deal volume. Gaming has been more greatly exposed than many sectors due to cost of producing games and long development cycles (many startup studios need to hit Series A before even completing their first titles), which has been exacerbated in mobile by the move away from ultra-simplistic casual titles.

Combined with all this behind-the-scenes action, inflation is hitting the consumer in the coinpurse. In-game spend is taking such a hit that, at the turn of the year, Newzoo forecast that the mobile and console gaming sectors would decline by 6.4% and 4.5% respectively. Layoffs have also sadly been a regular feature on the video games news ticker throughout the year. While cost cutting is an approach many are taking, expect to see other developers look towards bolstering profitability at relatively low cost, as advertising excels at. One key issue is the fragmentation of inventory across multiple platforms, leading to efforts by some major tech players to consolidate inventory, opening up new pools of first-party inventory.

Microsoft’s play

Microsoft’s long struggle with the UK Competitions and Markets Authority (CMA) over its acquisition of Activision-Blizzard appears to be drawing to a close. Allowing Activision-Blizzard to divest of its cloud gaming rights to Ubisoft demonstrates that Microsoft’s metaphorical eye is clearly not on a virtually non-existent cloud gaming market. But then why is it shelling out so many billions of dollars?

In a nutshell: content. Acquiring Activision-Blizzard gives Microsoft a way to corner a broad swathe of the gaming market. Coupled with its Zenimax acquisition, should the purchase go through Microsoft would hold some of the most popular role-playing titles, one of the leading first-person shooter titles, and some of the most profitable mobile titles via Activision-Blizzard’s King subsidiary, including the long-standing powerhouse that is Candy Crush. 

Last month, a huge cache of confidential emails from Microsoft’s gaming team was accidentally leaked. The exposure detailed prospective new versions of its Xbox console, thoughts on competitors in the market, and even suggestions to acquire Japanese gaming colossus Nintendo. According to the leaked documents, Microsoft aims to grow its gaming-associated advertising revenue to USD$1.4bn (£1.1bn) in 2030. While this may seem a relatively insignificant slice for a company which currently generates over USD$56bn (£45.8bn) quarterly, there are two key points to consider. First, the high profitability associated with advertising - Uber has finally reached profitability not via delivering grub to the hungover masses, but through advertising. Second, that USD$1.4bn (£1.1bn) figure would represent a CAGR of 46% from 2022. 

That scale of growth is bound to appeal to many publishers across the gaming industry, many of which have swelled in recent years through the covid-era-combo of low interest rates on building acquisition warchests and peak interest from the stay-at-home masses. Should Microsoft’s consolidated content package bear fruit for advertisers with unobtrusive campaigns (see the patent the firm filed for how this may be done across PC and console), we could yet see in-game advertising finally hit the mainstream.

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