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Microsoft Explores a Potentially Risky New Market

Microsoft  (MSFT) – Get Microsoft Corporation Report is moving forward quietly. 

The software giant is the only company to keep pace with Apple  (AAPL) – Get Apple Inc. Report. The  iPhone manufacturer’s market capitalization at last check stood at $2.71 trillion, but if the group, led by Chief Executive Tim Cook, has managed to draw in everyone, this is not the case with Microsoft. 

The producer of the Windows operating system has a market cap of $2.1 trillion, which makes it one of two companies — the other is oil giant Saudi Aramco ($2.26 trillion market cap — that could to catch up with Apple right now.

Unlike its California competitor, Microsoft does not like spotlights. The company, co-founded by Bill Gates and run by CEO Satya Nadella, seems to prefer to let its products and services speak for themselves rather than making flashy announcements.

One of the few times Microsoft made headlines outside its financial results this year was when the company announced the acquisition of videogame publisher Activision Blizzard  (ATVI) – Get Activision Blizzard, Inc. Report for $68.7 billion in January. This takeover, the largest in the group’s history, is under review by regulators.

Ads in Video Games

The Xbox maker is now quietly exploring a new opportunity.

Microsoft is creating a program that would enable companies and various advertisers to advertise in free-to-play Xbox games, according to Business Insider. Ads could appear in these games as digital-rendered billboards in car-racing games, the outlet added, citing sources close to the matter.

The company is considering creation of a private marketplace, where only select brands would be able to buy ad space and display ads in ways that don’t disrupt gameplay. The goal is to avoid an outcry from gamers.

“We are always looking for ways to improve the experience for players and developers but we don’t have anything further to share,” a Microsoft spokesperson told TheStreet. The spokesperson didn’t dispute the report.

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But outcry from such an initiative could be lessened if Microsoft limits ads to free-to-play games.

A freemium business model offers consumers free partial access to gaming, to entice them to subscribe to more elaborate, and paid, gaming. 

In contrast, free-to=play gaming enables players to enjoy almost the entire downloaded game experience at will. The publisher of free-to-play earns revenue indirectly, from, for example, advertisers: product placement, integrated advertising, or even development funding, in the case of an advertising game, known as an advergame).

Revenue can also come from the players themselves, when they acquire cosmetic skins, which enable players to personalize their avatars; credits for faster replays, since some FTP games require players to wait before playing again; or even virtual objects, which give an advantage in a competitive game. (That latter revenue stream is also known as pay to win, a model particularly criticized by players.)

What’s in It for Microsoft?

Paid item packs with random content, based on the model of playing cards called loot boxes, are also the norm now. 

According to Business Insider, Microsoft has no intention of taking a cut. The company plans to let developers and ad-tech companies share this advertising revenue. 

In this case, why would Microsoft take such a risk of alienating certain players? One possibility is that Microsoft, which aims to buy out Activision Blizzard, wants to attract developers by offering them additional sources of income. 

While the software giant has yet to approach advertisers to tell them about its initiative, it still plans to launch this new service in the third quarter, according to Business Insider. 

Many brands could be interested because they will gain access to an audience that they would have had a hard time reaching otherwise. Additionally, videogame players are accustomed to paying for items and other services they deem useful to enhance their experiences.