Will Google Take On Xbox Live?

Google’s $23 million deal to acquire Adscape—first reported by Red Herring last week—gives the search giant a patent that could mean trouble for Microsoft’s Xbox Live online gaming service.

Ownership of Adscape gives Google access to a patent portfolio that could position the company well in a battle against Microsoft to deliver advertisements in video games. Redmond became the king of in-game ads after buying New York-based Massive in 2006 for an estimated $200 to $400 million (see Microsoft’s Massive Purchase).

The most interesting patent, however, could create some headaches for Microsoft’s Xbox Live effort to fuse console gaming with online gameplay. Google’s new intellectual property includes a patent granted to San Francisco-based Adscape—then called BiDamic—in 2005 for a “system and method for interactive on-line gaming.�

“You get a patent that could cause Microsoft some trouble,â€? said Allonn Levy, intellectual property attorney, Hopkins & Carley in San Jose. “It certainly does sound like Google is looking at getting into an area where we know Microsoft is in and interested in. Whether or not the patent works, you’d have to look at the patent closely. It certainly suggests that there is a fight coming.”

Invented by Adscape CTO Dan Willis, the patent is for a complex gaming system that sounds similar to Microsoft’s Xbox Live service, which lets owners of the Xbox console play games and download multimedia via the Internet. BiDamic filed the application in September of 2002, mere months before the launch of Xbox Live.

“The customer located equipment is connected to the gaming service provider through a broadband access network, and includes a gaming console,� according to a description of the patent from the United States Patent Office.

“You would expect a client in this position to be leveraging this patent portfolio,� said Adrian O’Donnell, a patent agent at Freedman & Associates. Freedman filed Mr. Willis’ patent in September, 2002. While he wouldn’t give many details on how the patent stacks up against related technologies on the market—like Xbox Live—Mr. O’Donnell believes a business owning the Adscape IP would look to enforce it via things like cross-licensing deals. “It doesn’t necessarily have to be a head-on collision,� he said.

Google’s Adscape acquisition comes at a time when big consumer brands are searching for new ways to connect with the coveted 18- to 34-year-old audience, and video games are emerging as a tantalizing way to do that. Google’s likely been feeling pressure to offer video games to its suite of advertising options, Mr. Taylor explained, to potentially counterbalance the Microsoft/Massive combination. “The entry of Google with a portfolio of patents and a Rolodex of big-time advertisers has a lot of people really excited,� he said.

The stakes are high. Yankee Group forecasts the market for advertisements in video games will hit $732 million by 2010, up from $56 million in 2005. While still a paltry sum compared to the $10 billion Google earned from online ads in 2006, video games could prove to be a lucrative new frontier for the Silicon Valley icon.

In addition to several pending patents, Google also gets access to Adscape’s AdverPlay and Real World/Virtual World Gateway technologies, which make it possible to deliver dynamic advertisements like billboards in Internet-enabled games and lets advertisers communicate with gamers via email or SMS text messages, respectively.

The acquisition marks Google’s first foray into the in-game advertising business and comes as it has been amassing deals and technologies to deliver ads across many different types of media, including newspapers, radio, and TV. While Mr. Willis said he was unable to discuss the aforementioned patent and Google refused to comment on any Adscape deal, this week the search giant did explain how it views video games. “In-game advertising is an area where we believe Google could add a lot of value to users, advertisers and publishers,� said company spokesman Brandon McCormick.

Many are wondering how Google plans to do just that. “That’s the $23 million question,� said Kelly Hyndman, a Washington, D.C.-based partner with IP law firm Sughrue Mion. Mr. Hyndman believes the search king is likely to use Adscape’s patent portfolio defensively against companies like Microsoft while marshalling the expertise of executives including Mr. Willis to build its own game ad delivery system.

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