By Sarah E. Needleman

Four years after it stopped putting ads in its mobile videogames because it suspected they were too disruptive, King Digital is testing them again in a new format, a move Wall Street analysts think could generate $1 billion in revenue for the company by 2019.

King Digital earlier this year began tests of ads from Nestlé SA, Visa Inc. and others in a handful of mobile games including “Candy Crush Soda.” The reversal, which the game developer set in motion soon after Activision Blizzard Inc. acquired it in 2016, reflects new thinking about ads in the mobile-game industry.

Rather than treat ads as a necessary evil, a mandatory toll booth players have to pass through, developers increasingly are embedding them into games as an optional experience that players can choose in exchange for rewards.

The shift in strategy has lifted the gates on a torrent of mobile-game ad revenue. This year, mobile games are on track to generate $39.8 billion in ad revenue world-wide, up almost 90% from $21.1 billion in 2015, according to App Annie Inc., an app data and analytics firm. It projects the number will climb to $49 billion in 2018.

Game makers hope “rewarded ads” will extend the boom in mobile-game advertising and help them continue diversifying beyond players’ in-app purchases. These purchases generate considerable revenue for game makers but are dependent on a minority of dedicated players who are big spenders on virtual goods.

Rewarded ads are an alternative for them. Players who engage receive in-game perks such as extra lives or virtual currency. A recent promotion from Electronic Arts Inc.’s “FIFA Mobile,” for example, gave players the option to acquire free virtual characters and other items if they shared an ad from Coca-Cola Co. through the soccer game’s messaging system.

Dozens of brands including Ford Motor Co. and McDonald’s Corp. advertise in EA’s mobile games, up from just a handful five years ago, said Dave Madden, head of global brand partnerships. The company doesn’t report ad revenue but it “is definitely a growth area,” he said.

Mobile games are especially attractive to brands “because they’re highly engaging,” said Tom Goodwin, head of innovation at ad agency Zenith USA, a unit of Publicis Groupe SA. People are spending more time on mobile devices, and brands need ways to reach them, he said.

In the first half of 2017, 78% of the top 50 grossing games on Apple Inc.’s and Alphabet Inc.’s U.S. app stores featured ads, up from 45% a year earlier and 29% in 2015, according to analytics firm Apptopia Inc.

Still, even today players dislike many of the ad formats in games. Video, for example, is potentially more engaging than traditional banner ads, but it is also riskier. During a 15- or 30 -second video, players have ample opportunity to close the app and open another.

Parallel Space Inc. chose not to include any ads in “Hades’ Star,” a game about space exploration released in July — the Canadian startup’s first. “Ads are very disruptive,” said company founder Andreas Papathanasis, a former game developer with Supercell Oy, of Helsinki. “If you want a long-term relationship with players, ads don’t make any sense.”

That is why rewarded ads are changing so many developers’ minds. Some 62% of developers said player retention increased or stabilized after they introduced video ads with rewards, according to a 2016 study from Unity Technologies Inc., whose game-creation software includes tools for advertising.

Jamie Lynn, a 21-year-old Florida college student, says she spends about 15 minutes a day playing games like King’s “Candy Crush Saga” and Supercell’s “Hay Day” and tolerates ads that offer rewards. “They make me feel as though my time is more worthwhile,” she said.

When Chris Akhavan arrived in 2013 at Glu Mobile Inc., publisher of games such as ” Kim Kardashian: Hollywood,” the chief revenue officer discovered a lot of resistance to ads at Glu Mobile. That has changed. In the second quarter, Glu had $12.4 million in quarterly ad revenue, up from $2.4 million in the same quarter of 2013.

The secret to making ads work, he said, is to be strategic about when they run and who sees them. Glu often serves ads after a level of play has been completed, because there is a natural pause then, Mr. Akhavan said, and it serves them more frequently to players who don’t make in-app purchases.

Analysts routinely press King on when it will move from testing to rolling out ads to all games for its 314 million monthly active users. They cite Zynga Inc., which last year generated about $194 million from ads with roughly a fifth as many users as King has today.

Evan Wingren, an analyst at KeyBanc Capital Markets Inc., said, “People from the investment community are looking at that, saying if Zynga does it, why can’t King?”

This article was originally published on Wall Street Journal. Read more.

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