I was reading an article on ClickZ and it is timely as Reflexive considers advertising.
Casual game sites including RealNetworks and Microsoft began offering developers a share of ad revenues. Many publishers earned stronger revenues from advertising than sales.It's nothing that hasn't been said before mind you. However, I've come to question the probable success of advertising and games. Certainly there are some places where it makes sense. However, the word 'some' should probably be replaced by 'few' to give a more accurate account of how advertising mixes with casual games.
Recently I did an article for Gamasutra that compared the different casual game portals. I draw attention to it as one of the things I looked at was whether or not there was apparent advertising at the portal, and if so where it was. I considered the website, webgames and in-game advertising. What I found was that though there is a lot of talk about advertising and games, there are few places using it, and of those few places using advertising, none of them were displaying it prominently. Taken together those points are the basis for my skepticism in advertising and casual games, but let's take a deeper look.
The theory behind advertising is to make more money off of your existing customers. It is OK to lose customers as long as you create enough revenue to make up for the customers lost AND your rate of growth is maintained.
In casual games, there is a misconception that 99% of the customer base is getting a free ride by playing demos. The thought is that if you can find a way to charge the 99% you'll make lots more money.
(btw, if you are wondering why the 99% is a misconception, the reason is in the denominator. 99% is figured by subtracting the 1% conversion rate from 100%. The problem is that conversion is a measure of sales/download, not sales/customer. Customers often try a ton of games in deciding what they are purchasing. Trying to monetize their trials isn't the same as trying to monetize people who aren't buying. Compare it to Baskin Robins. You can go in and taste multiple flavors before buying your cone. Baskin Robins doesn't try to charge you for tasting. Their goal is to monetize each customer, not each taste.)
Where advertising works
Places where advertising makes sense for me are places where customers are not impacted. I can think of only one: web games.
When a player playes a web game, they are expecting it to be a free experience. Most web-games are in fact advertising something else, often either a full-version of the game you are playing or another website. The type of customer who enjoys web-games does not seem to struggle with advertisements being plastered on every side of the game. I believe strongly that you can make money with web games and advertisements. Often, when statistics show that large amounts of money is being made in advertising in casual games, web game focused websites, such as Shockwave, are the focus of the articles. I think it is certainly significant to note who is and who isn't mentioned in articles about the bounties of advertising.
Where advertising might work
Websites and in-game advertising are both places where advertising might work, but each must be considered on its merits.
Website advertising is easy to access and there are still places out there that will pay unreal CPMs to advertise. I continue to believe that very high CPMs disappear overtime and are quite unstable. A recession or economic down-turn quickly decreases advertising dollars. That said, why shouldn't you get money off of your website if you can do so?
When I did my article for Gamasutra I noticed that most of the big players (BFG, Real, Reflexive) did not have advertising on their websites (note: Real has it on the website, but not in their game client, which is where nearly all of their traffic occurs). If you think about a website that is selling a product, it makes sense not to have advertising on your sales page. You want to close the deal and avoid anything that may distract the customer. Ads are a big distraction. The only reason I can think you'd use advertising on a sales website is that you haven't optimized your sales process very well and so you're earning more by sending a portion of your customers away than you are by selling to them.
Of course many advertising aggregators will state that these companies just want 'face' time. They just want to be seen and don't care about anything else. If you hear that, just ask the aggregator if that is what they tell their clients who are advertising with them.
Website advertising makes sense for products that are "free," (news, web games, email, search results, etc.) but not so much for products that you are selling. When you are selling something your hole website should really be one great big advertisement...FOR YOU! From my observing the different portals, the amount of advertising on the portals has been decreasing over the last year, I think that is perhaps very telling.
- In-game Advertising
The parallel is often drawn between games and TV shows, suggesting that interruptions will not hamper the player or change the experience. Some portals (MSN, Real, iWin) have gone this route. (Wild Tangent uses a very similar tactic of having the advertiser pay for your pay session). I disagree with the parallel. I think games are closer to books or movies than to TV. You can't walk into a movie theater and choose the free version of this week's latest blockbuster that is speckled with commercials. That's left for TV. Books don't require you to turn pages trying to figure out what page the story continues on. That's left for Magazines. I see games as premium content that you are paying for. The free model paid for by advertising doesn't make sense for me, except in one case: old games.
Much like new movies commanding a premium, I think new games command a premium. You can't get a new movie on DVD the day it is released in the theater. You can't see it on TV until after the DVD sales have died down. The content is sold as premium until it is common and then monetized by ads when it is common. I can see games following the same model, and from what I see with in-game advertising, that is the model gaming is following.
Go to Real or Game House or iWin or MSN Games. Find the games that are free to play if you watch the advertising. Can you find them? Anywhere? I think the greatest point in all of this is proved by the experience in trying to find the games. If they aren't put in a place where they can be easily accessed, then clearly they aren't that important to revenue.
When you do finally find the games you'll see that the list of free games is old. There are a few newer games mixed in, but for the most part, everything on the list has had a sequel, and none of the sequels are free. I think the approach is the right one, and based on the 'hidden' placement of the free games on the 3 (Game House is owned by Real) companies that offer them
I don't believe that in-game advertising is anything more than a great way to monetize old content that otherwise isn't well monetized. That said, it may be a great way to do that, and a nice supplemental income.
In the rush to monetize the "99%," it would not be surprising to see advertisements popping up in new games and even in game demos. I think that will hurt the premium standing of games. My marketing professor loved to tell us stories about companies who left the niche to access the masses. Companies like Pizza Hut with their 'Bigfoot' who tried to get the Little Ceasar's customers, thinking 'there are so many of them, we can make less per customer' or Pioneer who thought essentially the same thing, have gone from being the best in their class, selling a premium product at a premium price, to losing most of their market-share and becoming 'common.'
Creating a marketplace where new casual games are equally valued with free flash webgames I think would be very damaging.
Proceed with Caution
The other part of this tale is Reflexive's part in all of this. We've been staunchly anti-advertising for quite some time. However, we also run an affiliate program, and that program taken as a whole is much larger than Reflexive itself. So, we work to provide to our affiliates the things they are looking to do. Advertising revenue is something that everyone is talking about, and so many of our affiliates are interested in knowing if we will help provide a solution for them. Of course they can already to website advertising on their own, the real questions are about web games w/advertising and in-game advertising.
We're looking into it. We test everything we consider to see how it works for us, and the actual impact on our customers. We carefully measure everything to see how it goes, and who knows, maybe I'll be proven wrong on this whole advertising 'opportunity.'
Certainly advertising has remained an elusive opportunity for most in the industry, making solid sense for web games and being debatable in other areas. 2008 will be an interesting year for us to see just how much of an opportunity advertising is or isn't. No matter what the outcome, it's worthy of a lot of questioning and debating before adding advertising to casual games.