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As game publishers look for more ways to pull in revenues, in-game advertising is catching on. Today, game publisher THQ is announcing that Microsoft’s Massive division will become the exclusive provider of in-game ads for THQ’s Xbox 360 and PC games.

The multi-year, multi-game deal means that Massive has landed a big account and that its business proposition is looking better for publishers under economic pressure. THQ has had a tough year and has had to close a bunch of studios because its games haven’t sold as well as those of its rivals. The deal with Massive will bring in more revenue for each game.

Massive was the pioneer of in-game advertising. Developers use Massive’s tools to insert places in games where ads can appear. The ads can be natural parts of the game, such as a billboard in a cityscape or a sponsor message on the side of a van. Since the games are often connected online, Massive can run dynamic ads. That is, it can cycle new ads into a game. Massive has its own network of more than 300 advertisers whose ads appear in games developed by the industry’s biggest publishers, such as Electronic Arts. And dozens of games use Massive ads.

The Obama campaign used Massive’s in-game advertising to put political ads in billboards inside Electronic Arts’ Burnout Paradise game before the election. Theoretically, on a $60 game, the ads can add a buck or two of profit that goes straight to the publisher’s bottom line. For advertisers, the attraction is that they can target the hard-to-reach young male demographic that plays more games and watches less television.

While the deal will make Massive THQ’s exclusive in-game ad partner for its PC and Xbox 360 games,  the game company is free to turn to competitors to deliver ads for its Sony PlayStation 3. Massive’s rivals include Double Fusion, IGA Worldwide, NeoEdge Networks and Google’s AdSense for Games. It’s not known whether Massive guaranteed money to THQ in order to seal the deal.

The deal is a good one for Massive, which has been relatively quiet since it was acquired by Microsoft for an estimated $200 - $400 million in 2006.

Most casual game ads are predictable. They run a 30-second video in between levels in a game, or roll the video after you’ve finished. But NeoEdge Networks has introduced a way to make those the placement of ads much more flexible — and possibly quite annoying to gamers.

NeoEdge Networks allows game companies to insert ads into their downloadable PC games and it finds advertisers who want to put ads into those games. Today, it is announcing that it will be able to insert ads — dubbed NeoEdge Brand Overlays — into any part of a game. It can thus be just like a TV advertiser that sticks ads into shows just after a cliffhanger.

Nolan Bushnell, chairman of Mountain View, Calif.-based NeoEdge, says this isn’t about maximizing annoyance for gamers. Rather, it is about making the ads as effective in games as they are on TV.  There is potential here, since the amount of time spent with games is approaching that spent with TV, yet the ad dollars associated with TV are far greater, Bushnell said.

“Advertisers are figuring out they’re getting screwed with TV ad rates,” Bushnell said.

Chief Marketing Officer Ty Levine says that it’s an innovation that will help set the company apart from the pack. That’s important because NeoEdge is surrounded by giants.

While NeoEdge dominates the market for ads in 20-minute casual downloadable games, competitors are moving in around the edges. Google last week entered the market for in-game ads for casual Flash games, which take a shorter time to play. NeoEdge also plays in the Flash in-game ad market.

There are rumors the online advertising giant plans to expand into NeoEdge’s market. With new technology, NeoEdge could offer more opportunities for advertisers to get their message across in each game. It will face competition from others, including IGA Worldwide, which just announced it has reached 30 million gamers with in-game ads, as well as Double Fusion, Microsoft’s Massive, and Mochi Media. (The latter does Flash in-game ads.)

Levine said that game developers don’t have to plan on having ads in sections of the games. Rather, NeoEdge wraps its own proprietary layer of interactivity around the game so that it can insert ads anywhere it likes. The good thing is that NeoEdge doesn’t need game developers to do anything to their games in order to add the NeoEdge Brand Overlays. This is significant to advertisers, since it means they can wait until after a game comes out before they decide to do an ad campaign with the game. The advertiser can wait to see if the game is a hit first; if it is, the advertiser can launch a NeoEdge Brand Overlay campaign quickly.

The action of the game doesn’t pause unless the gamer clicks on the ads. Testing shows that well-placed ads inside the action of the games can have significantly higher click-through rates, Levine said, while there is no measurable impact on gamer satisfaction.

“We realize that we can’t have ads intrude on the intensity of the action, but there are many parts in games where the action is arrested,” Levine said.

Sometimes the pauses in the action aren’t long enough for a 30-second spot, so a shorter ad has to suffice. Levine said there are usually about six regions of a screen where it’s OK to put an unobtrusive window for a logo, product, or other kind of ad in a game screen.

This makes the ad model even more viable, since the ads are more effective and more plentiful. That’s important because there is a flood of casual games being launched, but the revenue associated with those games is being stretched thinner and thinner.

NeoEdge has the ability to insert ads during game production. But so far, NeoEdge isn’t going to take its technology to console games or to games where the game developer has to bake the ad into the game ahead of time. That turns out to be costly and it has yet to pay off in spades, Levine said.

NeoEdge rolled the new ads out to its advertisers a few weeks ago, and almost every advertiser has responded positively, Levine said.

IGA Worldwide said its in-game advertising network now reaches 30 million gamers on four distinct gaming platforms: the PC, Mac, Flash, and the PlayStation 3.

That makes the New York company a force to be reckoned with in the nascent market for advertising inside games. IGA has released the fourth version of its software development kit that lets game developers take sections of their games and designate them as capable of displaying ads.

The ads are then piped into the game through an Internet connection. IGA’s own network of advertisers conceives of game-appropriate campaigns that fit in particular games. IGA can measure the exact amount of time that an ad is viewed by a gamer and then report that data back to the advertiser. Advertisers include 20th Century Fox, Gillette, Intel, McDonald’s, Puma, Toyota, and Unilever.

While advertisers experimented with $150,000 budgets in the past, they’re now running full campaigns for $400,000 to $500,000 each, said Justin Townsend, chief executive of IGA, in an interview. He said that more campaigns are running through the entire network rather than on just one platform. At the moment, Townsend said that games are proving to be counter-cyclical, which means they prosper in tough times because people stay in and entertain themselves. (Futurist Faith Popcorn called this “cocooning.”)

Townsend said that the core games business is doing very well with in-game ads that are placed on billboards or vans in the environment of racing games such as EA’s “Burnout Paradise.” Those ads make a bigger impression and generate more revenue than the less-frequently watched casual game ads, Townsend said.

Barak Obama’s campaign got a lot of publicity for inserting an ad into a billboard in Burnout Paradise and a bunch of other EA games. Microsoft’s Massive negotiated that deal for the Xbox 360 with the Obama campaign. But if the ads move to the PS 3 or the PC, IGA would handle them.

Townsend said that IGA’s strength in core games will cushion it from the effect of Google moving into the casual in-game ad market for Flash games, which are much simpler than hardcore games. But he said he wouldn’t be surprised if Google expanded to other platforms as well. Still, IGA is doing so well that it may not leave a lot of room for the slow-moving search engine giant. Other rivals include Double Fusion, Massive, and to some degree NeoEdge Networks and Mochi Media. (NeoEdge does in-game ads for downloadable casual games as well as Flash games, while Mochi Media does ads for Flash games).

The company also has a stable of game publishers who are using its SDK, helping the company reach a wide group of gamers. The publishers include Electronic Arts, Sony, Atari, Codemasters and Activision. It also has developers id Software and Valve on board. Full told, more than 80 games can now receive IGA in-game ads.

Gamers don’t seem to mind ads when they’re relevant to the world of the game. A Nielsen Games study showed that 80 percent of gamers felt games were just as fun with ads as without. And Nielsen said that consumers’ positive views of a brand increased 33 percent after viewing in-game ads for the brand.

IGA’s financial backers include GE/NBCU, Intel Capital, Morgenthaler Ventures, Easton Capital, DN Capital, KTB Ventures, Translink Capital, Itochu Technology and Sumitomo/Presidio STX. Altogether, the company has raised nearly $30 million in two rounds. The company has 70 employees. Townsend said the company is anticipating raising money, but it may wait until the environment is better.

After months of testing, Google is publicly launching the beta version of its AdSense for Games software. The product represents the company’s first push into a fast-growing new market — the ability to insert ads into games, either as they are being played or just after they finish.

The plan is pretty much what I reported in July, when word surfaced that the search giant was testing the ads. Its decision to enter the market with a public beta test is a big deal because it means that the game advertising market is becoming lucrative enough to attract an industry giant.

“It’s a huge stamp of approval for a major company to come in and say they believe in the online games ad market,” said Jameson Hsu, chief executive of Mochi Media, a game ad network operator which is partnering with Google. “It should awaken all of the major media companies.”

Google is initially targeting the sweet spot for its technology: games based in Adobe’s Flash platform and which run in a web browser with no download. These are free casual games that are like snacks compared to the full course meals of hardcore console or disk-based PC games.

The Flash market itself is a fast-growing segment, with roughly 200 million games played each month for a total of billions of minutes. It’s a good way to reach younger people or those who are hard to reach because they don’t watch TV commercials anymore.

Christian Oestlien, senior product manager at Google, said that the company has been testing the in-game ads for months with partners such as Playfish, a maker of casual games such as “Who Has the Biggest Brain?” on Facebook. At the end of a game session, the Google software will roll a 30-second video that includes a game character saying that the free game was brought to you by a sponsor.

Oestlien said that Google’s advertisers can use the software to insert ads into games or videos for YouTube, making the ads more versatile. Developers of games can use Flash software development kits to designate the points in a game that make an “ad request.”

“We’ve tried to integrate this in a user-friendly manner,” Oestlien said.

Advertisers participating in the trials so far include eSurance, Sprint, and Sony Pictures. Other partners include Demand Media and Boonty. Partners such as Mochi Media can help Google by supplying highly trafficked games that can receive ads from Google’s network of advertisers. Google’s main advantage in this business is its large ad sales force, which may generate more advertising inventory than any single player can handle. That’s why it’s important for Google’s ads to be able to run on a variety of sites.

Besides Playfish, other game publishers that will incorporate AdSense for Games technology include Zynga, the hot social gaming company, and Konami, one of Japan’s biggest game companies. The latter will publish a line of Flash titles — including “Track and Field,” “Frogger,” and “Dance Dance Revolution” — with the Google in-game ads.

Full told, more than two dozen games will use Google AdSense for Game at the outset. Oestlien said that the games have millions of users and can create several hundred million ad impressions over time on sites such as MySpace or Facebook.

Sebastien de Halleux, chief operating officer at Playfish, said that Google’s technology is a good match for his company’s social games and that the pilot went well. Google takes a cut from the ads and the rest goes to the game publishers, distributors or developers.

Oestlien declined to say whether Google would expand beyond the Flash casual gaming segment. But Google’s entry into Flash web games is likely just the first step. After this, you can expect to see the company move into PC downloadable games, console games, and then mobile games. Rivals in those markets include NeoEdge Networks, Microsoft’s Massive, Double Fusion, IGA Worldwide.

This is one more ad market where Google and Microsoft can duel. But all of the competitors had better watch out. Google’s technology is based on a foundation from Adscape, which Google bought for $23 million in 2007. Oestlien said it took time to make that technology compatible with the rest of Google’s ad technology, dubbed AdSense.

The Yankee Group predicts the market will be worth $971.3 million by 2011. Proponents of in-game ads believe that gamers will embrace them because the ads can be integrated into storylines or environments. You can, for instance, put an ad into a billboard inside a game. That ad can change every time the user passes by the billboard. Of course, it’s hard to do that in genres such as fantasy games.

Google is a bit of a slow mover in this market. In buying Adscape, Google reacted to Microsoft’s own move into in-game advertising. In May 2006, Microsoft bought Massive, the pioneer of in-game ad networks that was founded in 2004. Since the acquisition, the market gathered steam. Alison Lange Engel, global marketing director for Massive, said this summer that the company had more than 200 advertisers in its network and there were dozens of games using Massive’s technology.

The company launched Lively by Google, its 3D rooms and avatars, earlier this summer. Lively by Google would be a natural vehicle for the AdSense for Games product, which could insert ads into the rooms of users, but Oestlien said there’s no connection yet.

Google is the sleeping giant when it comes to advertising in video games. While the company dominates search advertising, it has yet to make a big splash in video games. That could change soon, as the company has been quietly testing its “AdSense for Games” product for months.

Sources close to the matter said that the company has developed an in-game advertising technology that allows it to insert video ads into games. In demos of the technology, a game character can introduce a video ad, saying something like, “And now, a word from our sponsor,” before showing a short video at the end of a sequence in a game. Since testing has been going on for some time, Google could launch the technology fairly quickly, if it so chooses.

But it’s not clear why Google hasn’t already launched its in-game advertising business, given that the seeds of AdSense for Games were planted in early 2007. Google did not respond to a request for comment this morning. I’ll update if that changes.

“I don’t know what’s taking them so long,” said one source close to the matter. “They could move into this market very quickly, given what they have shown off.”

If the company enters the market, it should stir up the competition the way it has in other ad markets. Companies such as Double Fusion, IGA Worldwide, Microsoft’s Massive, MochiMedia and NeoEdge Networks have been carving out niches with in-game or wrap-around ads for some time.

All of the companies know the potential of the market. Advertisers are turning to in-game ads because it’s one of the only ways to reach young male gamers who have stopped watching TV. The Yankee Group predicts the market will be worth $971.3 million by 2011. Google’s top executives know that search advertising may not last forever, and in-game advertising could become a compelling technology over time as both games and in-game ad technology become more and more engaging. Google would cover its bases by making a small side bet on in-game ads.

Google’s technology can be applied to console games, disk-based PC games, web-based PC games and cell phone games. But those who are kicking the tires on the technology (outside the company) have not seen all of those platforms in action.

One of its options is to keep testing its technology while it waits for the market to get bigger. The company drew attention to its game-ad intentions when it bought Adscape for $23 milion in February, 2007. Bernie Stolar, the former head of both Sega of America and Sony Computer Entertainment America, was Adscape’s chairman. Working for Google, he gave a speech just about a year ago describing “AdSense for Games” at the 2007 Casual Connect conference in Seattle. In the talk, Stolar said Google had no plans to make games or otherwise enter the game portal business; Google just wanted to do ads.

A flurry of stories appeared in November last year that Google was launching its beta test with Bunchball. That involved only pre-roll advertising, not with in-game characters. The Bunchball Facebook games rolled out with the Google ads, but not much else happened. That false move is a reason why some of the partners are wondering if Google is really going to go forward or not.

In buying Adscape, Google was reacting to Microsoft’s own move into in-game advertising. In May 2006, Microsoft bought Massive, the pioneer of in-game ad networks that was founded in 2004. Since the acquisition, the market gathered steam. Alison Lange Engel, global marketing director for Massive, said that the company now has more than 200 advertisers in its network. Those companies can insert either fixed or live ads into games. The live ads are more suitable for short-term campaigns because the companies can change the ads on the fly, using Internet connections to pipe new content into video game consoles. More than 70 games now use Massive’s in-game ads.

The battle lines have been drawn. Yahoo, which draws 18 million gamers a month to its Yahoo Games portal in the U.S., recently signed up NeoEdge and Double Fusion as its in-game ad partners. Electronic Arts has a variety of partners. And Sony has signed up Double Fusion and IGA Worldwide. Sony is thought to be a prime potential customer since it is launching its Home virtual world for gamers in the fall on its PlayStation Network for the PlayStation 3. Among the console makers, only Nintendo has been quiet when it comes to in-game ads. At this rate, there may not be much left for Google. It better not wait too long.

The insider buzz is growing about Google’s plans, particularly since its big sales force could generate a lot of interest in the ad platform. A bunch of Google representatives attended the 2008 Casual Connect show in Seattle last week, but they didn’t answer questions about when Google would jump into the in-game ad market.

Google spilled part of its intentions by announcing its virtual world — or more appropriately virtual room. The company launched Lively by Google earlier this month. Lively by Google would be a natural vehicle for Google’s AdSense for Games product, which could insert ads into the rooms of users. In fact, others expect it to be a proving ground.

IGA Worldwide, a New York-based provider of advertising that appears within video games, has raised $25 million from a collection of venture capital, private equity and large media firms.

The potential market for in-game advertising is big, even as some analysts trying to measure it are prone to hype. It made only $55 million last year, but is expected to pass $800 million in 2012 with total video game ad spending reaching $2 billion that year, according to Park Associates.

IGA claims to be the largest independent in-game advertising company using an ad-serving network. It helps advertisers target video-game players across gaming platforms and genres, and works with game developers to try to make the advertising relevant.

Greg Blonder, a partner at Morgenthaler Ventures who was an early investor in IGA, says that in-game advertising is starting to become acceptable to game players and publishers — even though both groups were nervous at first.

Competitors include Microsoft, which purchased rival Massive last year, allowing it to include in-game advertising as another option for its advertising network. According to Blonder, Microsoft doesn’t have the cultural DNA to put ads into games in a way that users are comfortable with, something he thinks IGA’s executive team understands better because of their backgrounds in game publishing and advertising.

An interesting startup working on a similar idea is Mochi Media’s MochiAds. It lets game developers build games in Flash and include advertising, then splits the revenue with them.

IGA says the market potential is what created interest among strategic investors. The company has run ads for Discovery, FHM, Intel, MTV, T-Mobile and others. It also provides a communications consultancy, called Hive.

A lead investors in this round, GE/NBC Universal’s Peacock Equity, said that the gaming industry has growth potential “that can shape the future of the new media advertising industry.”

It will probably be another generation of video games — one to three years from now — that build advertising in as part of the game, Blonder said.

Other investors in this round include KTB Ventures as well as other existing investors Easton Capital, Intel Capital and DN Capital.