Last summer, while tracking some of the world’s most notorious cyberterrorists through Southeast Asia, Adam Warner noticed something peculiar: the soft neon glow of a Coca-Cola machine. In everyday life, Warner wouldn’t have given the vending machine much thought. But this wasn’t everyday life. He was a secret agent on a reconnaissance mission—in the videogame Splinter Cell Chaos Theory.

In everyday life, Warner wouldn’t have given the vending machine much thought. But this wasn’t everyday life. He was a secret agent on a reconnaissance mission—in the videogame Splinter Cell Chaos Theory. He chuckled at the cinéma vérité, then slunk back into the murky world of international espionage. The encounter lasted just seconds, but what Warner, a 26-year-old graphic artist, considered a cool new design element, Massive Inc. counted as an ad view.

There are at least 132 million gamers 13 years and older in the United States alone, says a Yankee Group report. That’s a lot of eyeballs. And they belong to some of advertising’s most coveted consumers—men aged 18 to 34. According to ratings giant Nielsen, young men play an average of 12.5 hours of videogames each week (compared with less than 10 spent in front of the TV). Last year the market for advertising to those gamers inside their virtual worlds totaled about $56 million. Now—thanks to new ad-serving technology, next-generation gaming consoles and new metrics to measure both—Boston-based technology research and consulting firm Yankee Group projects the in-game market will explode to $733 million by 2010. It’s a mix of demographics and technology that has the likes of DaimlerChrysler salivating. The company has launched ads in games like Lara Croft’s Tomb Raider Legend and will do the same in the coming "Desperate Housewives." "Will it lead to a sale?" asks Vanessa Kelley, manager of Cross Brand Gaming for DaimlerChrysler. "We don’t know yet. But we want to find out."

In-game ads have been around for nearly 20 years, but two problems kept the market from growing very large. Before 2005, ads were "static," meaning they were built into the code when the game left the factory and couldn’t be changed or updated. Game makers were missing out on at least 50 percent of ad dollars that came from time-sensitive promotions for products like new movie releases. The second problem was metrics. How would advertisers know if a gamer ever proceeded to level 10 and actually saw the ad they had paid for?

Now both problems have been solved. Next week Nielsen will announce a new videogame-measurement service that will track gameplay and in-game advertising to give the Procter & Gambles of the world an analysis of videogame consumption and the impact it has on other media, such as television and the Internet.

While Nielsen was focusing on metrics, a start-up called Massive Inc. devoted itself to creating a videogame network for serving dynamic ads. Through the technology of dynamic ads, Massive was able to insert and change ads in real time as long as the gamer was connected to the Internet via a PC or console. Only months after Massive went live in March 2005, it had big-name advertisers like Coca-Cola, T-Mobile, DaimlerChrysler and Honda pumping ads onto its network. "Their technology is amazing," says Kelley. "They can tell you down to the nth degree how long your ad was looked at, from what angle and who was looking at it." And in a TiVo world, advertisers say that’s not a bad deal.

Previous generations of gaming consoles had various degrees of connectivity, but the next-generation consoles like the Xbox 360 and the PS3—due out this fall—are built to do everything the PC does. They’ve been built from the ground up for broadband support, making dynamic ads just as viable as they already were on Net-connected PCs. And because the console market is a larger market than the PC gaming market, the pool of gamers that companies, such as Massive and competitor Double Fusion, can serve ads to will expand yet again.

Next to advertisers, game publishers stand to benefit the most from the in-game trend. Mitchell Davis, general manager of Massive, which was acquired by Microsoft earlier this year, says developers are making between $2 to $3 of ad profit for each game played on an Internet-connected machine.

Still, there are doubters—like Activision, the second largest third-party gaming publisher. Says senior executive Dave Anderson, "I think the Yankee Group … and a lot of these other research entities are very bullish in their market-growth assessment. That’s not to say we don’t hope to heck what they’re saying comes to fruition." Game giant Nintendo is also waiting on the sidelines to see how the market develops. Yet Davis calls Yankee’s estimate conservative and thinks the market will top a billion dollars by 2010, based on the demographics and the technology.

The ultimate test, of course, will be whether companies who shell out the dough for in-game campaigns believe their ads affect consumer behavior. Warner, the fearless secret agent (who plans to buy the new Splinter Cell game for Xbox 360 just as soon as it comes out), says they might. "I don’t think players will look at an ad of Coke and then go out and buy a 12-pack, but they might think Coke sounds [cool]," he says. "It’s good in-game advertising if it impacts you enough to change your perception of a brand."
Whatever the size of the market ultimately, in-game advertising will come with its own set of constraints. A Harvard study found that most gamers don’t mind the new attention from advertisers. But Joshua Robinson, 23, says that will change if the ads get in the way of how he games; "I don’t want to play a medieval game and see a McDonald’s." In other words, consumer tolerance isn’t unlimited in virtual worlds, either.