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Billboards in videogames serve two purposes: one is gameplay related while the other is a form of advertisement.
Billboards are usually an important part in any video game that is set in a city. They can serve to immerse the player in the game world with fake advertisements. The GTA series has been particularly good at this, using the billboards for humorous parodies of real life objects. An example of this is the in game ad for "Sprunk", a fizzy drink that is in fact the parody of another popular fizzy drink Sprite.
Sometimes billboards are just one of the many things that must be found and destroyed in the game world. This is usually found in games with cars and can quickly become the completionist's nightmare. An example of this can be found in Burnout: Paradise where you must destroy the big red billboards that have "Burnout" written on them.
Video games have quickly become a popular medium, touching a wide range of people. Marketing teams have quickly caught on to this and putting their ads on in-game billboards is probably the most natural way to advertise their products. So marketing teams started to negociate with the development teams to put their ads on those virtual billboards. Diesel, Burger King, Mini Cooper and even Dr Pepper started popping up in the game world. Thanks to updates, some ads change from week to week, as seen in Pain. Thanks to ads, video games got political with the 2008 presidentiel campagne where Barrack Obama had his campagne ad plastered all over Paradise City.
If advertising on billboards is surely a great way to get your product out, it sometimes destroys any sort of immersion a game is trying to build. Seeing Mini Cooper ads all over the place while your trying to shoot people feels weird and takes you out of the action.