WSJ (subscription required) says Electronic Arts is joining Microsoft in an ad serving service for video games:

Advertising in games remains a relatively small business, but many game publishers believe there’s a large untapped revenue opportunity in displaying ads to their audiences. Many games are played by 18- to 34-year-old men, a prized demographic for marketers that is spending more time playing games at the expense of traditional ad-supported media like television….In the past, companies like EA have integrated mostly “static” advertisements into their videogames that don’t change throughout the life of the game … EA is currently estimated to earn revenue in the single-digit millions from such ads….Such ads must be integrated into a game six to eight months before the title is released…[vs.] “dynamically” insert advertisements into games on a regular basis…

With hundreds of hours playing a title, ad revenues could hit tens of dollars per player which could be billions of dollars vs. millions. In a competitive industry, this should drive the sticker price of the games down.

There is a chicken and egg problem though. Ad rates for games are too low right now for game producers to make the ads too intrusive. That makes the ads less valuable per viewing.

Look for more freeware titles and 100%-mail-in-rebate deals around late 2008 for Christmas 2007 titles that have ads.