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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.

Mochi Media is making a name for itself, and it’s not just because of the Puzzle Farter game alone. That’s a cute game that appears in a lot of places on the web and Mochi Media makes sure that the game’s creators get paid when it gets played.

Mochi Media has created a lucrative ad and analytics platform for Adobe Flash-based online games. The San Francisco company now runs a network of online games that draws more than 60 million unique visitors a month. And that explains why it has raised a $10 million second round of funding.

Shasta Ventures led the round and previous investor Accel also participated. The company will use the money to expand its platform of tools and services for makers of casual online video games, such as Pet Tomato, which made Puzzle Farter. (Here’s a link to a video montage of Mochi games).

A lot of web sites are discovering that games are sticky, keeping users coming back and sticking around on a site longer than they otherwise might. Mochi Media is kind of an arms dealer, providing white-labeled games to any site that decides it wants them. And those games are free to play because Mochi Media puts video ads into convenient loading scenes or between levels of the games.

Jameson Hsu, chief executive of Mochi Media, said that the funding shows that the interest in social gaming and simple web games is heating up. He pointed to last Friday’s Social Gaming Summit, which Hsu participated in and which drew almost 400 attendees. Hsu will use the money to further the company’s goals of monetizing, distributing and providing analytics for web-based games.

Mochi Media got started in 2005 and launched MochiAds, its flagship game distribution and ad network, in October, 2007. The company inserts small video ads into the Flash games that can run on any web browser. It tracks exactly how many times the games get played and on which web sites. It can thus collect ad revenue and pay the developers their share. That has helped a vibrant community of Flash game developers who have enough revenues to develop more online games.

Since it can track games wherever they are played, Mochi Media has help developers monetize games that were previously being pirated. Web portals such as MSN Games can improve their audience engagement by putting widgets on their sites where visitors can play the white labeled games from Mochi’s network of thousands of game developers.

The business model is similar to the one used by NeoEdge Networks, which has an ad platform for more complex downloadable games. But Hsu said Adobe’s improvements to Flash have made higher-quality games possible on any web browser, since Flash’s penetration of the web browser market is near universal.

Hsu has also been filling out the management team. He recently hired former Yahoo executive Eric Boyd (who appeared in the book “Bringing Down the House” about a ring of MIT card counters who in turn were the inspiration for the film “21″) and former MySpace vice president of sales Carol Werner. Mochi Media previously raised $4 million from Accel.

Jameson said that he knows why he needs to keep running hard and filling his war chest. Google is expected to enter the market at some point. A year ago, Google bought in-game advertising firm Adscape for $23 million, just after Microsoft bought the in-game ad firm Massive for $200 million to $400 million. Google has yet to make a splash with that technology, which was aimed at the console space. But since Google is present in almost every other ad market, Hsu expects competition from the giant soon.

Mochi Media has a small staff of 22 employees. That’s why the company would be easy to squash. And it’s why Hsu has to think like a mammal among the dinosaurs.

1) We’re hearing rumors that AOL and News Corp. were looking to acquire ValueClick
2) TubeMogul to sell online video analytics
3) German Facebook-clone investors back again
4) Facebook settles New York child-safety probe
5) Mochi Media launches MochiAds for casual games
6) Google, Microsoft and Yahoo all reportedly courting Facebook
7) AdMob poaches Google engineer
8) California adds a further $125M to clean transport
9) San Francisco’s New Resource Bank receives $10M kick-start

We’re hearing rumors that AOL and News Corp. were looking to acquire ValueClick – We checked with the companies last week, and they declined to comment. ValueClick’s value, and thus attractiveness, has just tumbled now that the online-ad company has said it will bring in less revenue than expected.

TubeMogul to sell online video analytics – The Berkeley, Calif. start-up supplies video-viewing data to Web publishers, so that they can track what videos are being watched. It a sort of Google Analytics, only for video. It has raised a seed round from NetService Ventures.

German Facebook-clone investors back again — The Samwer Brothers, famed for their propensity to back German companies that copy American models, have invested in Jimdo, the website creation tool. Not surprisingly, Jimdo’s tool (coverage here) looks quite similar to Weebly. This comes shortly after their investment in a Scibd copycat, Dotkus.de.

Facebook settles New York child-safety probe – Facebook, like MySpace, has been in the spotlight because pedophiles have used these social networks to contact children and expose them to porn. While a working group of attorney generals from all 50 states is still looking into the issue, New York state attorney general Andrew Cuomo announced today that his office had reached a settlement with Facebook. Cuomo had announced his own probe of Facebook’s privacy measures last month (previous coverage here). Under the agreement, Facebook will begin addressing complaints within 24 hours of being notified, responding to the the aggrieved party within 72 hours; it has also agreed to let an independent examiner oversee how it handles complaints.

Mochi Media launches MochiAds for casual games – The San Francisco company lets casual video game developers embed ads within their video-game creations, and includes analytics for measuring how much money the ads are bringing in (see screenshot, below). The company is just now launching to the public but it has already accumulated some impressive numbers. While in private beta, says it has already been working with 1000 game developers, serving over 100 million ads per month that have reached over 50 million gamers in total, worldwide. The company announced an undisclosed amount of funding from Accel Partners in August.

Google, Microsoft and Yahoo all reportedly courting Facebook – All are reportedly offering to invest in Facebook at a valuation of $15 billion. Details here.

AdMob poaches Google engineer — The stream of employees leaving Google has turned into a river. Google’s stock price has broken $600, we’re at the top of an advertising market cycle, and smart employees have to wonder how much short-term upside there’s left in that stock. Kevin Scott, a former engineering manager in search and advertising at Google, is now managing both the software and hardware infrastructure at the San Mateo, Calif., mobile ad company, Admob. The steal comes just as Google is starting to offer mobile Adsense.

California adds a further $125M to clean transport — California’s Governor Schwarzenegger signed a bill that will provide a further $125 million each year to clean vehicle and fuel technologies. The money could go towards new startups or existing companies like Tesla, which is based in the state. The bill, AB 118, follows a package Schwarzenegger signed into law last Friday which, among other initiatives, encourages the use of solar water heaters and attempts to cut energy usage.

San Francisco’s New Resource Bank receives $10M kick-start — The New Resource Bank, a so-called “green bank” that will provide loans for new cleantech projects to either consumers or businesses, has also benefitted from California’s embrace of all things cleantech. Treasurer Bill Lockyer approved an initial state investment of $10 million in the bank. Earlier this year, the new business passed $100 million in assets.