The report found spending on traditional advertising media (television, newspapers, radio) grew $3.6 billion last year while spending on Internet advertising grew 4.3 billion. Because of the shift in advertising expenditures in new media, in-game advertising budgets and networks serving these ads are also growing.

"As ubiquitous connectivity continues to reshape the media and entertainment landscape, media fragmentation and clutter are a result, making traditional advertising channels less effective," said Michael Goodman, director of digital entertainment in Yankee Group’s Consumer Research group.

"Advertisers are increasingly finding in-game advertising to be a greater investment value because of the variety of opportunities that exist in and around games. Video games represent an ‘above the line’ opportunity, which means that video games should be used to build brands and not as a call to action that distracts from the game play."

The report also said dynamically placed 2D ads will cannibalize static in-game ads, but fixed product placements will continue to grow through 2011. The number of games with in game ads will double annually through 2008.