Microsoft's Cadillac of Online Ads

Xbox Live releases Cadillac Elite program, highest-profile ad program ever on a next-gen console. Jumps the gun on Sony and Nintendo

When Microsoft got itself a one-year jump on its competitors -- Sony and Nintendo -- by releasing its next-generation Xbox 360 console in November 2005, it won more than just a headstart on accruing marketshare. It also enabled the company to launch first a video game advertising strategy that it expects will be in high gear when and if Sony and Nintendo enter the fray at year-end 2006.

Witness Cadillac's new ad campaign. Just four weeks ago -- on May 22 -- gamers playing "Project Gotham Racing 3" (PGR3) on Microsoft's Xbox Live online gaming service were greeted by the new "Cadillac Elite" program, the highest-profile ad program ever on the Xbox 360 and, therefore, on a next-gen game console.

Microsoft expects to sign on at least 80 additional advertisers this year, says Kevin Browne, who views ad income as an important revenue stream, handy to have as the production costs of next-gen video games skyrocket. Browne is general manager for Xbox new media and franchise development.

In fact, in a display of how serious Microsoft is about game advertising, it bought Manhattan-based Massive Inc., a company that specializes in serving commercials into online games.

There has been much speculation about whether Sony and Nintendo will follow Microsoft's lead with ad strategies of their own after they launch their own next-gen consoles -- the PlayStation 3 and the Wii, respectively -- this fall. Surely, industry observers have speculated, neither will be allowed to use the services of Massive now that it is owned by Microsoft. And so, they note, Sony and Nintendo will need to make their own make-or-buy decisions. That means they will either have to serve ads themselves or each will have to buy out or use one of Massive's two main competitors -- San Francisco-based Double Fusion and Manhattan-based IGA Worldwide.

But, surprisingly, the two console manufacturers actually have another option. Microsoft not only doesn't intend to bar Sony and Nintendo from using Massive's services, it is actually trying to entice them to sign with Massive.

"We've talked to Sony and Nintendo and, at the appropriate time, we hope to escalate those discussions and have some serious talks about the benefits of working with Microsoft and the digital ad platform that we're building," Browne says.

He explains that, for game advertising to be successful, audience scale is important. On the other hand, complexity and confusion would hurt the market.

"If there are three different ad-serving solutions for the three different versions of, say, 'NFL Madden Football' on three different platforms, advertisers may choose not to participate," Browne says. "So we're trying to extend the olive branch and say to Sony and Nintendo that this is an area where we should all think about what will be of economic benefit to all of us ... as opposed to some temporary competitive situation."

By partnering with Microsoft, he says, the two console makers would be able to take advantage of what he describes as his company's unique position -- "owning both Xbox and an existing $2-plus-billion-a-year-advertising business called MSN all in the same corporate infrastructure."

"Nintendo certainly doesn't have that and neither does Sony," he explains. "For them to invest to become a great big ad business is a considerable risk. It's not as easy as buying one of Massive's competitors, because it's really not the technology that's the magic here. It's how you put it all together and operationalize it, how you talk to the advertisers and get them to buy into it, and how you encourage all the publishers to come onboard. Those are all much more difficult problems than just building the technical components to get an advertisement into a game."

But he is holding off before having any serious discussions.

"Sony and Nintendo are both busy launching their consoles and so I certainly understand that this is a decision that is not an immediate priority for them," he says.

Neither Sony nor Nintendo chose to comment for this article.

However, industry analysts suspect that Sony will have a more aggressive advertising strategy than Nintendo.

"I think Sony has been fairly straightforward about the fact that in-game advertising will play a very significant role in the PlayStation 3's future," comments Michael Cai, director of broadband and gaming for Dallas-based Parks Associates. "As for Nintendo, I haven't heard that they have a corporate policy on that yet. But I suspect that its focus will be more on retail revenue than on alternative resources like in-game advertisements. I don't think Nintendo has a very strong ad initiative in mind for its Wii console."

But, at Microsoft, there exists a corporate-wide initiative to focus on advertising. In a May 4 speech at the MSN Strategic Account Summit 2006, Microsoft CEO Steve Ballmer expressed his company's commitment to "an ecosystem for online advertising of advertisers and agencies and search engine marketing companies."

"Like everyone else, Microsoft isn't immune to the increasing cost of developing games, and so they're looking for new revenue streams," says Michael Goodman, senior analyst for the Boston-based Yankee Group. "This is all part of an aggressive push across-the-board to have more ad-supported products and to take some of the financial burden off of the consumer. For example, instead of your having to pay a few hundred dollars at retail for Microsoft Office, there could be an ad-supported version. Buying Massive was just the first step in the company's push into ad-supported games."

Oddly enough, the Cadillac campaign doesn't make use of Massive Networks' dynamic ad-serving capabilities, which are used, for example, to change in-game billboards from, say, "Drink Coca-Cola" to "Wear Nike Sneakers."

To be precise, "Cadillac Elite" is not an "in-game" ad campaign, but an "around-game" ad campaign, according to Saneel Radia, group director of Play, a division of Chicago-based ad agency Denuo, which facilitated the program for Cadillac. Online gamers are invited to download a separate "Cadillac V-Series Collection" pack that inserts three Cadillac V-Series vehicles into the Microsoft racing simulation "PGR3." Any gamer who places within the top 100 on its Nurburging F1 racetrack with one of the three Cadillacs will be rewarded with an exclusive badge that will be visible to the other online players.

"You will be recognized as an elite player," says Radia. "Eventually that may give you access to exclusive online events or downloadable content that is only available to these 'Cadillac Elite' players. That's the ultimate vision of the program."

He added that it is too early to discuss how successful the campaign has been or how many packs have been downloaded.

To anyone who is used to seeing potato chip and cola commercials associated with video games, advertising on Xbox Live may seem to be an odd choice for Cadillac to have made. But Radia dismisses that thought: "Cadillac's global director of marketing said she wanted to show people how badass the Cadillac V Series is," he recalls. "And I think there's potentially a stigma among some young folks about who drives Cadillacs. But these V Series cars are ridiculously impressive vehicles; they belong in a game like 'PGR3' which only contains ridiculously impressive vehicles. It's a game about style and speed ... and there's no arguing that these three cars offer both. Cadillac wanted to reach out to people who would want to drive these cars if they are financially able to."

The Cadillac program was carefully designed not to offend gamers who have been known to balk if their fun is interrupted by commercials.

"We believe that any marketer who enters this space needs to do two things," says Radia. "First, he needs to create an opt-in model with which gamers can voluntarily engage. If you force your ad down their throats, it's only going to hurt your brand. Second, you need to add value to the gaming experience. It's not enough not to have a detrimental effect on the game. You need to increase the enjoyment, which is what our adding new content accomplishes."

He would not discuss what Cadillac paid for the commercial time. But Microsoft's Kevin Browne believes that, in general, if ads can help offset the financial risks that plague publishers, it will result in better, more creative games which can only benefit the industry.

How much of the increasing costs can be offset?

"When a game retails for $50, the wholesale price is typically $37," Browne explains. "If that game costs you $15-20 million to build and you sell a million units -- which is a very successful game in today's economy -- that's $15-20 per unit for development plus $7-10 million for marketing and advertising. So out of the $37 wholesale, if you get to keep $5-7 dollars per connected unit, you're doing pretty well. If the ad business can bring in $1-2 per connected user, that represents a 25-30% bump in profitability. We see that as a really attractive addition to the current business model."

It will be especially attractive if the optimistic sales data supplied by industry analysts proves to be accurate.

Parks Associates expects PC (not console) in-game ad revenue to rise from $80 million last year to more than $400 million in 2009. And the Yankee Group anticipates that approximately 200 PC and console games will contain in-game ads by the end of this year, while revenue will rise from about $165 million this year to over $700 million by 2010. Neither company has reported yet on console revenue alone, saying that the numbers aren't high enough.

While Radia reports that Old Spice and other of his clients intend to follow Cadillac's lead, industry analysts say that there needs to be a much larger audience if online console video game advertising is to go mainstream.

"Part of the reluctance of advertisers is due to the audience size," says the Yankee Group's Goodman. "Until you've got an audience of at least 20 million, an advertiser is still operating out of his 'special bucket.' That's the bucket down at the end which you use after all the other money has been spent everywhere else. And the console industry is nowhere near 20 million gamers yet.

"Until that happens, ads in this industry are still going to be perceived by advertisers as an experiment, the money they use when they have a little bit left to play around with. On the other hand," Goodman adds, "if I'm, say, a Ford Motor and I have hundreds of millions of dollars that I'm going to spend on ads in the coming year, that 'special bucket' is going to hold a few million dollars at least. I'd say that's a number that no game publisher is going to sneeze at."

Courtesy of The Hollywood Reporter