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Caris & Co. analysts Mark Stahlman and Tim Boyd (pictured right) sent a note to clients today reacting to Microsoft Corp.'s (NASDAQ: MSFT) acquisition of Massive Inc. Excerpts:

· Today’s article in the Wall Street Journal about Microsoft’s pending acquisition of Massive Inc., a start-up that places ads in video games, is the second WSJ article this week highlighting the growing froth over dynamic, in-game advertising.

· Earlier this week, the WSJ did a write up on Viacom’s (VIAB) purchase of Xfire Inc., a start-up that operates an instant-messaging service designed to connect gamers over the Web. And back in September, News Corp. (NWS) announced its acquisition of IGN Entertainment Inc., a company that operates a portfolio of gaming websites.

· According to today’s article, the Yankee Group predicts that in-game advertising could be a $700MM market by 2010 (vs. $56MM in 2005). So we decided to run some numbers and see how this kind of growth would look relative to the reigning growth juggernaut of U.S. advertising, paid search.

· So is the hype really justified? We don’t think so. The near- to intermediate-term benefits just don’t look big enough and there are more compelling opportunities in which to invest today. Should Microsoft, Google and Yahoo! be opportunistic over the next several years vis-à-vis increasing their exposure to this advertising medium? Of course, and we would expect that all of them will be.

Today’s article in the Wall Street Journal about Microsoft’s pending acquisition of Massive Inc., a start-up that places ads in video games, is the second WSJ article this week highlighting the growing froth over dynamic, in-game advertising. Earlier this week, the WSJ did a write up on Viacom’s purchase of Xfire Inc., a start-up that operates an instant-messaging service designed to connect gamers over the Web. And back in September, News Corp. (NR) announced its acquisition of IGN Entertainment Inc., a company that operates a portfolio of gaming websites.

According to today’s article, the Yankee Group predicts that in-game advertising could be a $700MM market by 2010 (vs. $56MM in 2005). So we decided to run some numbers and see how this kind of growth would look relative to the reigning growth juggernaut of U.S. advertising, paid search...

The 66% 5-year CAGR [of in-game advertising] is highly impressive, and the Y/Y acceleration in penetration is key – going from less than half of one percent in 2005 to nearly 3% in 2010 is no small feat. But how does this compare to our expectations for search advertising? If our estimates prove to be near the mark, search will account for around 75% of total U.S. online advertising by 2010 and will have been the primary driver of an effective doubling in overall online ad spend from current levels. Even if in-game advertising grew at a 5-year CAGR of 100% and amounted to $1.5 billion in 2010, it would still only account for 6% of the online advertising market.

Granted, $1.5 billion in incremental advertising revenue is nothing to sneeze at, but it’s not going to move the needle all that much at Microsoft, Google or Yahoo! – even if one of them were to capture as much as 25% of the market (very unlikely, in our view). Remember, we’re talking about the 2010 top lines for these companies – which (based on current consensus estimates) we eyeball at $65-billion-ish for Microsoft, $20-billion-ish for Google, and $10-billion-ish for Yahoo!. Clearly Yahoo! would have the most to gain, but there are other nascent markets where a company like Yahoo! can get a lot more bang for today’s buck, e.g. online video advertising, where $1.5 billion is an ACTUAL 2010 estimate (eMarketer).

So is the hype really justified? We don’t think so. The near- to intermediate-term benefits just don’t look big enough and there are more compelling opportunities in which to invest today. Should Microsoft, Google and Yahoo! be opportunistic over the next several years vis-à-vis increasing their exposure to this advertising medium? Of course, and we would expect that all of them will be.

Source: With Microsoft's Acquisition of Massive Inc, is the In-Game Advertising Hype Justified? (MSFT)