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For an industry that relies on cutting-edge technology and animation, video game makers have been slow in coming up with an enticing formula for advertisers.

Ad and product placements have been a staple in video games for years, but they have generated little revenue. Advertisers just weren't sold on the idea that video games were viable places for ads, and they ran into technological hurdles that prevented them from delivering their message in a timely and relevant fashion.

But that has changed. Advertisers are paying closer attention to the industry now that it has become a $24 billion behemoth. And more importantly, as game consoles and PCs gain high-speed online connectivity, companies finally have a way to deliver time-sensitive ads.

Revenue from in-game advertising was $56 million last year, but that figure is expected to grow to at least $732 million by 2010, according to the Yankee Group. The influx of money couldn't come at a better time for the game software industry.

Developers have been increasingly pinched by rising production costs. Operating budgets for current generation titles used to top out at $10 million to $15 million. Now budgets have ballooned to nearly $25 million for next generation games made for the Xbox 360, which was introduced in autumn, and the PlayStation 3, which premieres in November.

By contrast, there has been a modest retail price increase in games from about $50 for the last generation to $60 for the latest games.

Until recently, game developers received a small amount of revenue from an occasional ad or product placement. For example, a user might see an auto advertisement in the form of a car or perhaps a billboard or sign in the background of a game.

Offers more timely

Because some ads had to be written a year or more before the games came out, there was often no way to sell a specific product or make timely offers to customers.

As game consoles and PCs began going online, though, advertisers found they could rotate ads in a game anytime a player competed. Billboards in Ubisoft's latest game, And 1 Streetball, might feature a Honda Element one week and T-Mobile the next.

Flexibility is key to this so-called dynamic advertising. An ad can play for a set period, feature a recently released product and be tailored for one geographic region. Developers can price ads based on user patterns in the game and charge a premium for ads in high-traffic areas of popular games.

"Games are in a unique position because it's a medium where there are hundreds of millions of hours being played," said Jon Epstein, chief executive officer of San Francisco's Double Fusion, one of the leading in-game advertising firms. "We know they're paying attention and leaning forward. With dynamic ads, you now can reach this audience in large numbers in a targeted way."

Dynamic advertising is still in its infancy. It is expected to begin in earnest next year after the release of the PS3. Microsoft already has made it clear it plans to be involved in the sector with the purchase of in-game advertising leader Massive this spring for an estimated $200 million to $400 million.

The big companies are still feeling their way, mindful of avoiding any pitfalls that will antagonize their core audience. The last thing they want is to create negative reactions to a game because of jarring or distracting ads.

Many gamers, however, are open to in-game advertising, even welcoming it if it adds realism. "In some games, ads can make it more realistic; it can look more like real life," said Albert Chae, a 19-year-old student at UC Berkeley and an avid gamer. "I don't have a problem as long as it doesn't really interfere with the play. You can't be in the way."

The money in video game advertising still pales next to the $60 billion to $70 billion spent annually on television ads. But it represents the wave of the future as advertisers seek innovative approaches in an industry that is seeing the effectiveness of television ads diminished by digital video recorders like TiVo.

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