Looks like Microsoft Inc. might be shutting down their in-game advertising department, Massive. The idea: Let advertisers release specially formatted ads for display in-game so that players get to experience a changing marketing experience (to replace in-game mock ads, graffiti, or other environmental effects.) The venture, however, doesn’t seem to have gone as well as they wanted—according to VentureBeat,

The business seemed cool. Game developers could leave blank spots in the environments of their games, such as a billboard in a realistic car racing game, and advertisers could pipe ads into those spots via broadband internet connections. Gamers would thus see a different ad periodically as they drove past the billboards. But when the recession struck in 2008, it took down the expectations for in-game ads. Rivals such as Double Fusion and IGA Worldwide all suffered for a period. Microsoft stopped talking a lot about the business. In the meantime, Microsoft’s Xbox Live online gaming service has blossomed and is itself becoming a more attractive platform for ads.

“While it wasn’t a horrible failure, it wasn’t a runaway success either,” says SiliconANGLE’s Mark Hopkins. “Microsoft’s media unit, Zune Marketplace, makes around $2 bil a year. If your Xbox related business unit isn’t performing to that spec in Microsoft, it may be a failure.”

And Xbox Live is a brilliant place for this sort of advertising. As consoles approach their own sort of network singularity—by having systems that are always-on connected to the Internet—it would allow for simpler, cost-effective, and bandwidth light ability to import advertisements. The biggest obstacles that I see coming to this system happen to be understanding impression metrics, non-interactivity, and the inability to tell if/what impact the advertisements have on gamers. However, those are all social. The primary technical obstacle is going to be the most daunting: getting game designers to leave standardized shaped spaces within their gaming environments to allow for advertising.

As with any industry, getting standardization to take effect becomes a problem of licensing. Will Microsoft be making “leaving advertising space in game environment” and implementation of the advertisement API part of their licensing agreement with games who want to run on their Xbox console?

Of course, the rescission has hit marketing even harder than retail. With less disposable income, most gamers go back to their staple games and don’t buy new ones, and hunker down into their pre-existing subscriptions. Flashy advertisements might work to let them know the next-big-thing is around the corner, but without the resources to take advantage of that the advertising network really will fall flat for them.

So now it seems that Massive is resigned to the fate of being shut down by Microsoft by the end of October due to no market to sell them off to.

Perhaps we’ll have to wait for the next economic boom or the next-clever-gimmick before the return of this sort of in-game advertising.