Q&A: Massive Inc. CEO Mitch Davis

Mitchell Davis is among a handful of individuals intent on creating advertising models that tap trechnology designed to stream ads over the Web and into game environments. With technology catching up with dreams such as these, the time may be right for an in-game network such as Massive's to be big...very big.

GameSpot spoke with Massive's CEO just a short time before today's news announcing the advertisers who are giving his business model a try.

GameSpot: When did the kernel of this in-game ad idea occur to you?

Mitch Davis: That would be three years ago, when I was interested in the video game space for all the obvious reasons--fast growing, phenomenal entertainment, so exciting. The online growth was starting to happen in the industry, and I thought this thing was going to take off.

I was playing Grand Theft Auto actually, for research. That probably doesn't sound legitimate but it was.

So, I'm playing GTA and I'm driving down the street in the car and there are ad units all over the place and they were all fake ads and I thought, "Oh my God, what if these were real ads? It would be phenomenal." Not only for the publisher and for the advertiser but you know, it would make sense--it would be kind of cool.

We pretty much started development about two weeks later and took the first version off to E3 in 2003. Since then, the market has just gotten hotter and hotter and hotter--for the reasons we talked about before

GS: What do you think the biggest misconception is about in-game advertising currently?

MD: Within the industry, I think that there's a misconception that adver-gaming and advertising in-game are the same thing, and they're not. Advertising in-game is what we're talking about, the ability to run advertising campaigns like television, like the Internet…that is a multibillion dollar market

GS: And adver-gaming?

MD: Adver-gaming is designing a game for a client that is purpose-built, and it's a thin-client game. That's like a sales promotion. That market will never exceed $40 or $50 million dollars a year, so you can't compare the two.

GS: Why do you say that?

MD: Because when I was at Britannica and I had a $45 million dollar ad budget, I would spend 95 percent of that on television and cable--what I spent on things like adver-games, or promotions, or product placement was maybe less than 10 percent, probably less than 5 percent.

GS: You know we talked about...you can decline to answer, but I'm curious how the Massive solution differs from other in-game ad network solutions. Are you able to address that?

MD: Well I can tell you that Massive runs an advertising network. We sell the advertising into a network of games. We have over 40 titles in the network this year, probably 65 titles slated for the network for 2006. We have offices in New York, Los Angeles, San Francisco. We're opening London this month, and we're opening Austral-Asia halfway through the year as well. We are extremely well funded, and we have about 35 staff--and we are looking for 20 more staff so we're well placed.

GS: Is there a live operation today?

MD: We've been live since October, so our system is fully operational and working and we have significant advertisers. We've got Verizon, we've got Realplayer, we've got a lot of business out of Hollywood, which is a huge category. We've got quick-service restaurants like Dunkin' Donuts, and players like that, so the ad dollars are starting to flow, and what we're already seeing is revenue per unit for our publishers north of a dollar.

GS: How big is the in-game ad beast going to be?

MD: This is truly a media. It's like broadcast television, and it's like cable television. It's like the Internet.

GS: Explain.

MD: I say it's truly a media for two reasons: One, about 70-plus percent of 18- to 34-year-old men are playing games as their prime entertainment source. They're doing it in prime time, between 6 and 11pm, and they're doing it instead of watching television.

They're playing about 20 hours a week, which is more than they watch television--a lot more. So that was 30 billion hours of game-playing last year, probably about 35 billion or so this year.

If you were to take that, then you have airtime. If you put that in TV terms, assume that you're selling the same amount of advertising, that's a $4-5 billion market from a revenue standpoint.

This is a major media, by anybody’s standards.

GS: The dollars and cents for the publisher look like what?

MD: Basically, total ad market in the US is roughly $300 billion dollars depending on how you look at it in any given year. It's definitely growing; and most of the agencies and clients are increasing their budget on the low side of 20 percent this year, but probably more like 50 percent. The growth is phenomenal.

If games were to get their share of the ad dollar, it would be a multibillion dollar market Moreover, the video games own the 18- to 34-year-old male. Television doesn't have it, cable really doesn't have it, print, Internet--forget it. It's all about in-game advertising, so it stands to reason that that market is going to grow.

GS: Who else is with you in thinking the sector can grow this big?

MD: When you talk to the analysts in the media space, they know the story, and they think that this will hit $2 to $2.5 billion dollars by 2008/2009 type of thing. So $2.5 billion against $7 billion dollars of software sales today is a huge number.

GS: What does that do for the game publishers?

MD: It fundamentally changes the economics of the game industry...fundamentally changes it. On a per-unit basis, you are talking about $2 to $3 per box sold. That's not revenue; it's contribution, it's profit: $2 to $3 of profit. Take a $49 box product, and by the way, the price is obviously falling as you know, but take $49.00, the publishers are ending up somewhere between $17 and $10 profit.

With this advertising, if I'm giving them $2 to $3 per unit--that's all profit. So we are talking about the ability to increase profits for the company 40 to 50 percent.

What's obvious to the publishers is that development costs are going up. We are working on next-generation targets that are costing $25-27 million dollars, and prices continue to fall.

GS: How is it going to affect the gaming experience?

MD: It has a positive impact for gamers. Why? Because it adds realism to the game. We've seen an independent study with Harvard Business School that found [that in-game ads] fundamentally improved the gaming experience with gamers over 85 percent, nearly 95 percent of the time.

GS: What do you find yourself coming up against when you pitch this business model?

MD: Well, in the first instances, it was definitely, "What will the gamers think?" Would gamers have a positive or negative reaction to it? And publishers--rightly so--want to make sure that their gameplay experience is always positive.

The data, and all the research that we've done--and other players like EA, Activision, and Nielson have done--certainly supports the theory that advertising is a net positive for gamers.

That was the first hurdle.

The second hurdle was, from a technical standpoint, does it interfere with gameplay, does it slow the game down, those types of things. Hosting ads in real time doesn't affect bandwidth, doesn't slow the game down, and those are the key issues.

And I guess the other point is--and this maybe is where you get into the product placement versus dynamic advertisement argument--making changes in the software is really hard and timely and expensive and puts the release date at risk, or so it has been said.

GS: Which is or is not true?

MD: With us, with our software, it's a one-time integration, and it takes a couple of days of work by a single developer. Then it ships and then we change the advertising post-ship so we're not slowing the development process down. That's key.

GS: Do the ads surface only as billboards, or can you project other objects into game?

MD: Absolutely.

GS: Such as?

MD: We're releasing [solutions] at the right point and time because it's driven by advertiser interest; the first implementations of billboards, posters, T-shirts, clothing, computer screens--those types of environments. We're also doing audio advertising, so the ability for characters to do things in the game and talk about it is possible. We're also doing full set of motion, and we will launch, and already have the technology for, 3D rendering in real time.

GS: What's the end product of 3D rendering in real time?

MD: For example, let's say that we have a car that's in three or four different games. In the month of October, that manufacturer can release, in real time, the new car model. In that group of games, that car, in the game, changes. Then the next month, they do the next car model.

Or let's say characters are drinking a can of soft drink and we change the packaging design over time, from October, November, that type of thing.

GS: Certainly you have to get some sort of OK from the publishers, correct?

MD: The publishers are our partners; we work very, very closely with them. All the way from the development cycle, all the way through going live with the game.

GS: But you actually manage it?

MD: We manage the whole bit, yes. We supply the full turnkey solution for the publishers. But they do retain approval rights, and we need to be cognizant of that because not all games look the same.

GS: What is your background, Mitch?

MD: I have been an entrepreneur since the age of 24. And I have [created] a number of media and software companies. One is a company called Digital Riots, which was eventually listed publicly. Then I came to the US and I ran Britannica.com, Encyclopedia Britannica's Internet and CD businesses, both here and overseas. I had responsibility for both of those business units.

GS: Thanks, Mitch, and good luck.