The news: Microsoft is rolling out ads in its free Xbox Cloud Gaming service, marking its first major foray into non-mobile, in-game advertising. The company debuted the free tier this week. It allows users to stream for one hour, with a two-minute ad preroll before playing.

Players will have access to owned Xbox titles, free-to-play titles like Fortnite, Xbox’s retro game catalog, and a rotating selection of free, weekend-only titles.

Why this matters: Shortly before Microsoft closed its $69 billion acquisition of Activision Blizzard (the costliest tech merger in history) in 2023, a leak revealed Microsoft expected to make $1.4 billion from in-game advertising by 2030. That deal gave Microsoft a tidy source of mobile game ad revenues from King, publisher of mobile games including Candy Crush Saga.

But non-mobile games have resisted common ad formats across other digital media. There are nearly 3 billion worldwide digital gamers, per our forecast (including mobile gamers), but non-mobile games are largely unexplored as an ad channel.

• Video games’ focus on long, uninterrupted activity makes typical ad formats like midroll ads or banners difficult to pull off and abrasive to players, and ad acceptance varies significantly across genres.
• Some games have welcomed brand sponsorships and product placements predating even 1999’s Crazy Taxi. Recent attempts at in-game advertising have included in-game programmatic billboards, and competitors like Electronic Arts are exploring other in-game ad formats.

Why now? After its mega-merger costs and tens of billions more in AI investments, Microsoft investors are pressuring the company to generate new revenue streams. $1.4 billion by 2030 is a drop in the ocean of AI spending, but cloud gaming ads are part of that new revenue effort.

The question is: How big is the audience for cloud gaming, really?

The answer is unclear. Microsoft said in November that hours spent on cloud gaming by Game Pass subscribers jumped 45% YoY—but didn’t say how much time that amounts to. Additionally, the number of Game Pass subscribers is foggy: Microsoft last said the service had 34 million subscribers in early 2024.

Implications for marketers: Advertising in video games is a prickly prospect. On one hand, it offers brands access to a highly engaged consumer segment and a presence in popular media. But on the other hand, ads are not as natural of a fit in games as in other media, requiring brands to create unique strategies that may not apply across channels.

Preroll ads for a certain length of free, uninterrupted play time is a happy medium. Microsoft and its brand partners can test the waters of in-game advertising through a familiar format in preroll video before deciding whether to invest further in a gaming-specific strategy.