Yes, there is product placement already, but MS is looking at allowing advertisers to update their ads in games. If any game models Time Square, it can have real up to date ads. I can only imagine what the next version of Duke Nukem 3d would be like...
Also, this is interesting:
I realized that online games are lucrative if popular, but I just didn't do the math. $1 billion per year is astounding.Why? Keep in mind that if a game is compelling, people will pay for it. Look at the online game "World of Warcraft," which charges $15 per month and has over 6 million subscribers. Yes, that's a cool $90 million per month, or $1 billion per year. Sure, ads will contribute some revenues, but likely only a small percentage of the overall amount.