Xbox's new bet on advertising could shake up gaming — if players don't revolt

Xbox's new bet on advertising could shake up gaming — if players don't revolt INA FASSBENDER/AFP via Getty Images With little fanfare, Microsoft's Xbox made a move last week that could shake up the gaming ad market.Xbox is testing a way for users to stream games they own for free by watching ads, rather than paying for a Game Pass subscription. There's no word yet on what exact ad formats will be available or which brands will participate.Xbox has trialed limited ad offerings in the past, but this effort signals that its new leadership team is serious about finding ways to make advertising work as it pursues profitability, said Itamar Benedy, CEO of the gaming ad platform Anzu."Xbox has the opportunity to be an advertising powerhouse," Benedy said. For CMOs, Xbox has scale, premium environments, and hard-to-reach audiences."It's going to be a motivation question" as to how far Xbox wants to test its users' appetite for ads, Benedy added.Jessica Leong, director of programmatic at the media agency PMG, said pre-game advertising creates a high-attention environment without disrupting the player experience, which has historically been one of gaming advertisers' biggest challenges.That won't be enough to build a scaled ad business, though. "While cloud gaming solves legitimate use cases — playing while traveling, accessing games without dedicated hardware, or avoiding large downloads — it's still complementary for many players rather than their primary way to play," Leong said.In short: Will Xbox have enough inventory to move the needle?Xbox's jump into ad-supported gaming comes as it embarks on a radical turnaround. This month, Microsoft said it was cutting 3,200 jobs from its Xbox business, divesting studios, and reshuffling leadership."Our business today is not healthy," the recently appointed Xbox CEO, Asha Sharma, wrote in an email announcing the layoffs. "We are operating at margins that are 3-10x lower than comparable platform and publishing businesses."Xbox will need to tread carefully as it broadens its advertising ambitions. Gamers are a passionate, vocal audience and are notoriously averse to advertising."Passion is a double-edged blade — it's what makes gaming media powerful and something which must be implemented with care," Jonathan Stringfield, VP and GM of Xbox Media Solutions, wrote on LinkedIn.Microsoft already has a ready-made adtech stack, plus the gaming know-how it inherited with its 2023 purchase of Activision Blizzard, and its Activision Blizzard Media ad sales team. The company had also previously offered limited ad placements outside the games themselves, including static banner ads on the Xbox homepage and within the Xbox store. Microsoft, which also runs ads on LinkedIn and across its Bing search engine, and owns the Monetize publisher monetization tool, is forecast by EMARKETER to generate $19.26 billion in digital ad revenue this year."Microsoft's identity and measurement capabilities give it a strong foundation to build a differentiated advertising offering that stands apart from traditional digital video or gaming media," PMG's Leong said.Its long-established ad business should also help it attract a broader array of advertisers beyond endemic gaming brands.Ads offer a high-margin way for Xbox to offset its streaming game costs. Joost van Dreunen, founder of the data intelligence firm Aldora, estimates that Xbox spends about 45 cents for every hour each user streams a game.The gaming industry itself is also coming around to new monetization models. Some 80% to 90% of the industry's digital revenue comes from microtransactions and expansion-pack purchases, according to Aldora."That was also very much regarded with skepticism early on: Why would you give your game away for free?" van Dreunen said.While it can be technically challenging to insert ads into premium games themselves — not to mention risking the ire of both players and publishers — this early test offers a different type of ad entry point: advertising as an alternative payment model for cloud gaming."Gaming has long been the only form of art or the only cultural industry that did not have advertising," van Dreunen said. "Its moment has now seemingly come." Read next Lara O'Reilly is the anchor of the CMO Insider newsletter.She is a senior correspondent who has covered the digital advertising, marketing, and media industries since 2010. Her current beat includes big tech companies like Alphabet, and Meta, and adtech firms, agencies, publishers, the creator economy, and CMOs.Lara has previously worked as a reporter and executive producer at titles including The Wall Street Journal, Digiday, Yahoo Finance, and Marketing Week. She was previously Business Insider's senior global advertising editor from 2014 to 2017.Lara was named "Digital Journalist of the Year" by the London Press Club in 2016.Lara is a regular guest on TV and radio and has appeared on outlets such as the BBC, NPR, SiriusXM's Wharton Business Daily, and CTV Television Network. She also frequently speaks on stage at major events such as Web Summit, IFA, VivaTech, Advertising Week, and Cannes Lions.To get in touch with Lara O'Reilly, email loreilly@businessinsider.com or contact her on Signal at @loreilly.71Check out Insider's source guide for tips on sharing information securely.Read some of Lara's recent work below:Inside Amazon's plan to clobber rivals The Trade Desk and Google in a key area of advertisingMeet Cindy Rose, the former lawyer and top Microsoft exec set to become CEO of ad giant WPPHow X CEO Linda Yaccarino went from Elon Musk's fixer to out of a job in 2 yearsInside the political reckoning shaking up the ad industryMeet the 'reclusive' tech billionaire making an audacious bid to buy TikTokTop marketers are under a ton of pressure. They told me how they're trying to make themselves recession-proof.Big Tech workers got too used to perks. The pampering is over. Xbox Gaming