Microsoft has confirmed that it set to acquire Massive a Company that first started in Australia but is now New York-based. The company specialises in placing advertisements inside video games through an online connection.

Robbie Bach, president of Microsoft’s Entertainment & Devices Division said “Massive will become a key part of what we’re doing in this space,” at the conclusion of Microsoft’s two-day summit for online advertisers.

Microsoft declined to disclose financial terms of the agreement, but insiders  put the potential value of the deal between US$200 million and US$400 million. ($500 million Australian dollars). Massive Inc,was  founded by Australian businessman Mitch Davis. The SMH reported that Mr Davis, originally from Sydney, developed the idea of in-game advertising while playing the popular Grand Theft Auto in 2002.

He figured he could make money selling advertising space in the background features of video games, such as roadside billboards in car racing games. The advertising, designed to be incidental to the main action, has been placed in games on pizza boxes, TV screens and soft-drink cans.

He set about convincing video game companies of the value of the software and in the past two years has secured contracts to include advertisements, that are downloaded from the internet, in dozens of games.

The company, with 68 employees, will maintain its headquarters in New York, said Joe Doran, a senior director in Microsoft’s advertising business. Its offices in London, Los Angeles, San Francisco and Sydney, Australia, also will stay open.Massive’s technology lets advertisements and product references get updated regularly inside video games, as opposed to the static approach now common. That broadens the market by making the ads more timely.

At Microsoft, the technology will be used initially within the Xbox Live and MSN Games online services. In addition, Microsoft said it has been exploring ways to use Massive’s technology to add to the existing advertising system for its online services, MSN and Windows Live.

But Doran said Microsoft also hopes to see the Massive technology used for games on competing video-game consoles. “We would love for Sony to be a customer,” Doran said, referring to the company behind the dominant PlayStation game console franchise.

Microsoft CEO Steve Ballmer told online advertisers at the Microsoft conference that R & D spending in the MSN unit would rise to $1.1 billion. “We will invest as much in this online opportunity in R & D as any of the other big players in the market,” Ballmer said. The planned spending for online research and development compares with $500 million last fiscal year and $700 million during the current fiscal year, which ends in June, according to figures shown by Ballmer during his presentation.

In addition, he said, the company is boosting related capital expenditures to $500 million next year, from $300 million in the current fiscal year. Among other things, the company is building data centers around the world, including one in Quincy, to support its online services.

Ballmer made the statement as Microsoft announced the U.S. launch of its new online advertising system, adCenter, which replaces technology that the company has been licensing from Yahoo! Microsoft, which trails Google and Yahoo! in the Internet search business, is seeking to persuade advertisers to use the system by showing them that it’s serious about its online investments.

The Microsoft chief executive told the audience that the company is “committed to really having a more significant footprint in the advertising arena.”

Microsoft shares tumbled 11 percent Friday after the company disclosed that its companywide research-and-development spending next year will be as much as $2 billion higher than some analysts had expected, as it invests in new technologies.

Goldman Sachs analyst Rick Sherlund, who quizzed Microsoft executives about the spending boost last week, said Thursday that he understands the company’s desire to try to tap into the $16 billion worldwide online advertising market.

“That’s a huge market opportunity,” Sherlund said. “I think they ought to chase the heck out of it. It’s just that they caught everyone by surprise by how much it’s going to cost initially.”

In a memo to employees last week, Ballmer singled out investment in adCenter as key to the company’s online efforts. He wrote that the goal is “to create the Web’s largest advertising network, giving us an engine that will enable us to monetize our services and compete against Google.”

AdCenter is starting with text-based ads next to results within the company’s MSN and Windows Live search services. But Yusuf Mehdi, the company’s senior vice president for advertising, told the audience that the service will expand to deliver ads in the context of MSN Web pages and services, starting with a pilot this summer.

Ultimately, the company said it expects to expand adCenter to work with other forms of digital advertising, including Massive’s video-game ad system.

Mehdi also showed the audience some of the company’s advanced advertising research for identifying products in online videos and placing a related ad on the screen when someone is fast-forwarding through commercials.

During the Thursday session, Ballmer listed Microsoft’s overall Microsoft research and development spending at $6.2 billion.


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