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Microsoft acquired in May 2006 Massive Inc., one of the leaders in in-game advertising market. Katherine Hays, a senior director with Microsoft's platform and services division — and the co-founder of Massive — offered Wall Street analysts and other interested parties an update on what Microsoft has been up to in this space, via a Web-conference meeting on March 15.

Microsoft has made no bones about the fact that it is expecting a combination of ads and subscription revenues to fuel its company-wide "Live" software + services strategy.

Massive, a startup that specializes in placing advertising into videogames, is one of Microsoft's secret weapons on the consumer side of this space.

Via in-game advertising, major advertisers, ranging from Coca-Cola to Fox News, can have ads for their products and services inserted right into videogames so that they will appear a natural part of a game scene. The CPM (cost per thousand impressions) rate for these ads is at a premium because they reach a hard-to-attract demographic — males between the ages of 18 and 34. And unlike TV ads, in-game ads cannot be skipped over or time-shifted, giving advertisers a truly captive audience.

Hays cited Yankee Group-Parks Associates data from January 2007 in claiming the in-game advertising market as being worth $589 million by 2010.

Hays told March 15 conference-call participants that her division currently has more than 200 active ad campaigns running across 53 game titles. She said Microsoft expects to have in-game advertisements in place in more than 100 game titles before the end of 2007. Massive has relationships with more than 100 "blue-chip" advertisers, Hays said, including the likes of ABC, TMobile, Gillette and TLC.

In-game ads give Microsoft access to three potential customer segments: Game publishers, advertisers and gamers themselves, Hays said. Massive, and now Microsoft, is focusing on three types of ad units: 2D dynamic ads; 2D video ads; and interactive ads, she said.

"Games fit within Microsoft's broad advertising strategy," Hays said.