The Business Model behind In-Game Advertising

Traditionally game publishers like Electronic Arts, Nintendo, and Ubisoft, sell their games for a fixed price including profit. This is known as the basic Product Sales business model or Experience Sales business model. From this basic transaction, a lot of companies look for new value propositions and revenue streams to add. In-Game Advertising is a very strong example of a revenue stream that has been (increasingly) added over the last years. Think of virtual billboards, branded drinks or stores, or a branded Soccer League name – all within the gaming environment.

How to apply the in-game advertising business model?

From the initial transaction on the top (experience for money), a new flow is added with attention going from the gamers to the advertiser, compensated by a cash flow from advertiser to game publisher. Attention is the new currency! This is a straightforward example of an advertising model in which you sell the attention of your audience to an advertiser. Important to note is that the advertising is integrated into the user’s gaming experience, which makes it less offensive and more effective compared to TV commercials for example.
For the game publishers, in-game advertising offers an important new revenue stream that covers for part of the game development cost (which is expected to grow to $20M per title for a 7th generation console game). Pricing can vary from up-front flat fees, conditioned to sales volumes, to cost per unit settings. Industry reports suggest that in-game advertisement can increase profits by an extra $1 to $2 per game unit sold, which is an important increase over the current $5 to $6 profit per unit. The total income from in-game advertising is expected to top $2 billion in 2012. In-game advertising can also completely replace the purchase price to an extent where the game becomes free for the user (more on that later).