"In-game ads are the way of the future" is the opinion of many industry analysts and pundits. Whether or not they're really necessary is fast becoming a moot point: publishers are signing up for them left and right. With the chance to recoup funds from consistently ballooning game development budgets and add roughly 25% on top of a game's revenue, there are few quantitative reasons not to.

Two such companies are Midway and THQ. Both companies are some of the largest developers in the U.S., but the two companies appear headed in different directions. THQ, focusing more on mainstream titles based on SpongeBob and the WWE license, have prospered in recent years. Midway, on the other hand, known for its staple of classic and hardcore titles such as Spy Hunter, Blitz and Mortal Kombat, has been in the red for the last several years. Two companies, two approaches to the market, yet both decided that in-game ads (and Double Fusion) were for them.

GameDaily BIZ recently caught up with THQ's executive vice president of worldwide publishing Kelly Flock, Midway's chief marketing officer Steve Allison,
and Jonathan Epstein, member of Double Fusion board of directors. We discussed what these deals meant to the respective companies, how in-game ads will affect the future of the industry and why "Clucky's Chicken Shack" doesn't cut it.

As stated above, Midway's financial situation has not been stable this millennium. Six straight years the company has been operating in the red. These losses were recently capped off by a posted loss last year in excess of $100 million. That said, Midway CEO David Zucker recently stated publicly that the company was perking along well and the company landed the deal with Double Fusion late last month.

When asked about the losses last year and the necessity of this deal with Double Fusion to shore up the company's porous financial situation, Allison responded, "This deal is not vital to the success of Midway in the future. The loss comes from our massive investment in next generation games targeted to 2007 and on. We are committing now to step into the new platforms with true next generation software when the systems have the right amount of home penetration - something Midway didn't do very well with the current generation. Most of these new titles are unannounced with the exceptions of John Woo Presents Stranglehold and The Wheelman. That said this deal is one of the ways we look to offset the realities of building true next generation products and Double Fusion is a key partner for us in the years to come."

"I have absolute confidence in the Midway executive team and their product lineup for the next few years shows the team's commitment to excellence and innovation in game design and marketing," said Epstein.

As for THQ, the company had a great 2005. The company reported solid sales with titles like Destroy All Humans!, Juiced and WWE Day of Reckoning 2. While revenue and profits were down due to a soft fourth quarter that affected the entire industry, the company's future prospects look bright. The company is also betting that in-game ads are going to be very important and successful, because they not only signed a deal with Double Fusion earlier this March, but they also secured a deal with Massive in late 2005.

"As evidenced by our announcement with in-game advertiser Massive late last year, THQ intends to be very aggressive in the in-game ad space. Our brand directors are in constant discussions for in-game ad placements for some of our key franchises," said Flock, adding about Massive and Double Fusion: "We think both companies present a compelling value proposition and look forward to working with them in the future."

When you've got in-game ads, they must be handled the right way or it will upset the gameplay experience. If Mortal Kombat's Scorpion flashed a soda can at the screen and said "This match brought to you by Mountain Dew!" before every match, it would rip away whatever atmosphere the game had. On the other hand, if you see a Mountain Dew vending machine in the hallway in a game with a contemporary setting, then you've added to the realism of the locale that something like a "Mingus Dew" vending machine could not.

"What's important to Midway and Double Fusion is not just doing what I call 'virtual outdoor,' which is billboards tacked up in the games everywhere rotating in different ads from partners," said Allison. "We will do some of that where it makes sense in city based games. Outdoor advertising in the real world is a supporting tactic to bigger campaigns, on its own it's not a very effective way to market - so we should carry that over to the virtual space as well. What does that mean? We'll look to dress our characters in real clothes, drive real cars, drink and eat real foods, use real objects as part of the game that make sense and allow advertisers to get in front of our target consumers. We may have TVs on in rooms, or levels that you enter in a particular game that may have programming on and then lead into a real commercial. With Double Fusion's technology we can bring real video into the world in a variety of creative ways and we can change that content over time to line up to an advertiser's campaign at the right times. Research shows people make a greater connection to real products if they get to use them, in some of our games they will get to use them virtually as long as it makes sense. I'm excited about the possibilities."

He continued saying, "We are also committed to real world branding in our games going forward. The majority of our new titles for next generation consoles are grounded in real world places with a focus on open city/open environment game spaces - these kinds of games not only lend themselves to be logical places for the in game dynamic and static advertising, they benefit from them. It's much better to be in the city of Chicago and see the real Burger King, just as an example than to walk down the street and see "Clucky's Chicken Shack" because our consumers know Clucky's doesn't exist it actually takes believability out of the worlds, which are more and more photo realistic."

As stated earlier, many believe in-game ads to be the future. For some, it's an offset of rising developer costs and for others it's a natural progression of the way the industry works. Regardless of personal thoughts on the issue, GameDaily BIZ acknowledges that in-game advertising is likely here to stay.

"In-game advertising is key to the future of this industry," said Epstein decisively. "It enables new levels of profitability for the game publishers at a time when development investments continue to increase for the premium products. It enables whole new business models for distribution for other games, and allows for amazing cross-promotional opportunities with leading brands."

"It makes a ton of sense for us to explore this emerging business to see how it can provide us with more revenue potential from our titles," said Allison. "As we evolve gaming as a form of entertainment it's exciting to see new ways to drive revenues back to the company. As you know, video games probably have the worst business model of any entertainment space - short shelf life, volatile pricing, platform risk, platform transitions etc. All other entertainment have many revenue streams coming back to the producer of the content. Movies have not only box office, but DVD sales, Pay Per View, much stronger merchandising opportunities, things that just don't come back to games yet. Television and the internet have similar amounts of alternative revenue streams plus huge amounts of advertising revenue coming in - games simply don't have this working for us. It's retail and that's it. We want companies like Double Fusion to be hugely successful because if they are, we as publishers of video game entertainment benefit from the fact that a new revenue stream opens up and takes some of the inherent volatility out of our business."