‘IGA Worldwide, the operator of an in-game ad network, announced on Monday that it has closed a new investment round, led by T-Venture Funds with participation from previous backers Kreos Capital and Easton Capital. The amount raised in the investment round was not disclosed.’ 

I find both in-game advertising as well as the sale of virtual goods in games very intriguing elements of the gaming eco-system. The main players are standard across any software based value chain – (game) developers, publishers, aggregators/ distributors, web portals. The hardware vendors are replaced by console providers. And then we have the monetising services - there are the advertisers, ad agencies, ad networks and virtual good vendors. The first two are outside the scope of our discussion. Let’s start with ad networks.

Ad networks or In-game advertising

Game ads can be categorised as:

•   Around the game ads,
•   In the game environment ads (banners, billboards) or
•   In the game immersive ads (branded items).

The strength of in-game ad network is the number of game publishers and developers they have signed on because that in turn dictates the available ad inventory. In fact, one of the intriguing factors is that in some cases ad networks had guaranteed payments to game publishers for inserting ads into their games. Of course, as the ad industry went through a slump starting 2008 all the revenue projections went for a toss.

In terms of their pricing model gaming ad networks are partly similar to the online model – CPM (mille), CPC (click), CPA (action), CPS (session), CPV (view). The rates too may be similar with CPM in the range of $0.5. Where they differ is in exposure – this may be in terms of time, angle of view or size on the screen. Also online ad networks such as AdSense pay a higher CPM to web portals (~70%) whereas those like Mochi have a higher CPM for the game developers (only fair).

So now a look at a few gaming ad networks – first the guys who started this whole discussion:

IGA: IGA’s system dynamically serves ads targeted by demographics, time of day and geography in a variety of ad formats to be placed within games. The firm had revenues of $3 million in 2007 with losses of $11 million. 2008 losses were around $26 million on revenues of $3.4 million (Source: VentureBeat)

They’ve been in fund raising/sale mode since early 2009 with the current round being their fourth since 2006. The previous three were cumulatively close to $47 million with an armada of investor names - Easton Capital, Morgenthaler Ventures, DN Capital, Intel Capital, GE/NBCU’s Peacock Equity fund, KTB Ventures, Itochu Technologies, Translink Capital and Sumitomo/Presidio STX.

IGA’s publishing customers are EA, Atari and Valve. However there was some news earlier this year that Electronics Arts is initiating an internal division to manage in-game advertising. That possibly couldn’t have been positive news for IGA Worldwide.

And what’s happening in the market around them - the competitors for IGA are Microsoft Massive and Google Adsense. Another one of its competitors, Double Fusion, raised money from Jerusalem Venture Partners earlier this year though the amount was not disclosed – not sure if that’s growth or survival. Neoedge Networks which has a higher focus on video ads in games and is capable of inserting ads post production raised $4 million in Q4 2009. But the VCs who have exit with decent timing are Accel and Shasta Ventures with the acquisition of Mochi Media by Shanda Games, China’s largest operator of online games - $60 million in cash and $20 million in equity for an investment of $14 million.

Finally a number from Screen Digest – they estimate the in-game advertising market will be $1B by 2014. I’m not sure if that includes mobile game advertising but in any case that’s not too big, is it?

There are a few players such as Wild Tangent bridging the gap from plain advertising to virtual goods related advertising. They have raised close to $80 million from WPP, Granite Global Ventures, Advanced Technology Ventures, Greylock, Madrona and IDG. In any case that brings us to...

In-game virtual good sales

In terms of market size, the virtual goods market just in the US is estimated to top $1.6B this year 2010. A significant driver has been the growth in social networks and social gaming. Suddenly the market had a deluge of virtual currency platform providers. And well you know a market segment is big when the accountants arrive with rules on revenue recognition for the sales.

Accounting:

In the case of virtual goods there are two types of sales – goods with a single consumption or else durable goods which can be re-used. Revenue recognition is simple for the first but far more tedious for the second case. Therefore there is a growing trend towards single use or rentals of virtual goods – a method that simplifies inventory management, old trend elimination, reselling and accounting.

Monetization:

In addition the platforms have various forms of monetization as well. Facebook recently launched Facebook Credits which is structured along the lines of a prepay option where Facebook gets close to 30% of the revenues. Google acquired Jambool in August 2010, a white label virtual currency platform intermediary between publishers and developers with a 6-10% share of revenues per transaction.

A few other names that come to mind are Kwedit (pay later in stores or by mail), Offerpal Media (transactions funding the virtual currency), $uper Rewards/ Ad Knowledge (monetization platform with virtual goods/ currency exchange), Boku (via mobile phone number; the negative is that mobile phone companies charge a 20-50% fee per transaction!), Sponsorpay (the European guys behind GameForge), TrialPay. The leader of the pack continues to be Paypal (virtual good transaction fee of 5c+5% of sale) because it can be directly integrated by the developers without any intermediary.

In addition the general trend seems to be that the publisher of the game gets 15%, the developer makes about 80% and the platform provider 5% of the revenues from the sales of virtual goods.

Venture capital investments:

In terms of investments, most of the big names have already dipped their fingers into the pie. Places where some data is available are:

•   Offerpal Media - $19.6 million from D.E. Shaw & Co., InterWest Partners, North Bridge Venture Partners; a significant part of this capital raise(~$15mil) was in Feb ’09 at the height of the financial crisis). Offerpal Media stated early on in 2009 that they make about $30-40 million annually with an average application on their platform making about $150k per month.
•   Sponsorpay – Like most tightly funded European stories a simple $4.6 million from Hasso Plattner Ventures, Kite Ventures, Team Europe Ventures. Most of this was in June ’10 and it may have been to fund the acquisition of GratisPay. In terms of revenues the two firms are in the range of €5 million each and control a majority of the European game publishers.
•   Playspan – They have raised $28.3million from Easton Capital, Menlo Ventures, Novel TMT Ventures, STIC International. The last round was in 2008. Other than their white label monetization platform, after the acquisition of Spare Change, the firm has established a storefront on Myspace and Facebook for the sales and trades of virtual goods, gaming items and virtual currency. They are also extending the micro-payment platform to videos, news and other markets. While there is no info on their revenues, an interesting nugget of information was the average ARPU of their American users: $22.76. And who says you have to sell the game for money? – just focus on the monetization.
•   Trialpay – This one is slightly more than virtual goods since it also doubles as a cross marketing platform. Capital raise of $15.8 million from Atomico Ventures, Baseline Ventures, Battery Ventures, Index Ventures, Bob Pittman, Ron Conway, Skype, Google) with the last round in 2008. That’s quite a roll call of investors, isn’t it?

Various other names – Orca, Sometrics, Viximo, Zuora....the list can go on and on...

In summary there has been a lot of investment in the virtual currency platform arena and investors continue to support their growing portfolio companies. The aim will be to grow their gaming inventory while ensuring ease of usage and increase in user pick-up.

What I would be interested in knowing however is that - after the revenue distribution across all the players of the value chain, how much revenue are these intermediaries actually generating? If they charge 10% of a transaction value and we say that the value of the industry will be $1.6B by the end of the year, we are looking at a market of $160 million. Let’s assume that the transaction fee from cross-marketing by companies like Offerpal is not included here. So we include another 10% to balance the share and we still have $320 million split across a host of players in the market.

So what does that signify?

Consolidation – we are already seeing the first trends in that direction as micro-payment platforms are acquired either by game publishing platforms or portals.

Horizontal market expansion – Pure-play virtual game payment platform providers are restricting themselves and will gradually have to expand to new sectors such as music, news, services.

I wonder if we can even see some integration between mobile payment platform vendors and virtual currency platform providers. But that is the subject for another blog another day.