Truth and Lies: Facebook, Offers, Scams, Farms and Fish

There’s been a bit of a firestorm recently (at least in Silicon Valley) about the nature of revenue for companies like Zynga, Offerpal, and the use of “scammy offers” to make money.

For those not in Silicon Valley (and even for some who are here), this brings up some interesting questions:

-Who is Mark Pincus and Zynga, and are they scamming Facebook users?
-What is Offerpal and Why Does it Matter?
-Are all Offers Scams, or is there a Legitimate Advertising Channel Here?
-How do web 2.0 companies make money?
-What the hell is an offer, anyways?
-Does anyone (other than Silicon Valley types) really care about this story?


The recent media firestorm started when a TechCrunch (for those out of the valley, this is kind of like a local gossip blog/newspaper, where local entrepreneurs, vc’s, bloggers and other technorati all compete to be the “big man, or woman, on campus”, as in: “Hey guess who tech crunch talked about today? Let’s fund them!”) reporter questioned Anu Shukla, the (then) CEO of Offerpal, about whether the monetization of social games was an “ecosystem from hell”. She answered rather colorfully (“that’s shit, double-shit, and bullshit!”). You can read the original article and the dozens of follow-ups, not to mention and hundreds of comments at: www.techcrunch.com, just search for Zynga or Offerpal or Facebook.

He was referring not only to these three companies: Facebook (as the leading social network and social game platform), Zynga (the acknowledged leader, at least in terms of number of users and revenue, of social games which sell virtual goods and virtual currency, like Texas Hold ‘Em Poker and Farmville and Mafia-type games), and Offerpal (the leader in using offers rather than cash to pay for these virtual goods). Other companies like MySpace, Playdom, Adknowledge and Double-ding were also being implicated as well.

Within a few days of the Techrunch article, Zynga issued a sort-of apology, first reduced then (at least temporarily) shut down all offers, and Offerpal replaced its CEO. Were these events related?

With all the rumors and blog posts floating around about the key players, including Mark Pincus (CEO of Zynga), Anu Shukla (CEO of Offerpal) and Michael Arrington (TechCrunch blogger) - it’s hard to know what the hell is really going on here?

So why am I weighing in on this? Turns out I do know a little bit about this – I was an angel investor in Offerpal, and helped them build their Facebook strategy back in 2007.

-First of all, who really cares?

The general public? Not likely - I bet you could walk down the street in any major city in the US (that is not San Jose or San Francisco) and while most people would have heard of Facebook or MySpace, very few, if any, would have any idea who Zynga or Offerpal are, two of the companies front and center in this controversy.

How about Facebook users? Incredibly, probably not. While many Facebook users play games from Zynga and other 3rd party game developers, less than 10% of those users actually spend money on virtual currency within games, and less than 1% of those actually fill out 3rd party “offers” – (i.e. 1% of the 10%).

My guess is less than 5% of those (OK we’re now down to the 5 percent of .1% of the total users in a game, a number small enough that I can’t do it in my head) probably filled out the offers which have been called “scammy” in the recent firestorm.

The bigger complaints you’re likely to hear from Facebook users are the “spammy” notifications they keep getting like: “ Jane just beat Fred in a game of Texas Hold ‘Em – You should play Texas Hold ‘Em as well!” This is something Facebook has been cracking down on and has very little to do with the recent offer controversy.

What about Facebook game developers? Yes, these are the people who really care - because “offers” has become a primary mechanism for making money from their games, which are all free to play.

Mostly, though, this is a story that is interesting to Silicon Valley insiders (and wanna be insiders), since Zynga and Offerpal were two of the fastest growing companies here over the past few years, riding the wave of growth of social networks like Facebook, and the Virtual Economy (virtual goods sold inside games).


-Are all offers scammy?
The answer is no.

“Offers” refers to some action that a customer must take to sign up for a service, to buy something, or to fill out a survey to see if they’re qualified for some promotion.

It turns out that many offers are pretty legitimate – for example sign up for Netflix, or Blockbuster, services that are well known. These are usually referred to as CPA advertising (“cost per acquisition” – where the A could mean acquiring a lead, or acquiring an actual paying customer) as opposed to CPM (cost per impression, used for banner ads) and CPC advertising (cost per click, used by Google and others to make money).

CPA advertising has been around for a while – in direct marketing even before the web (remember those “sign up for Columbia House DVD club and 6 movies free?”).

What Offerpal and other companies did was tie CPA advertising to a “virtual reward” – you get a reward in the virtual economy – virtual poker chips, or “Farmville dollars”, which can be used inside games, for filling out the offer.

-So Who’s fooling Who? And Where’re the Scams?
I’m getting there... in my own slow-paced way.

Incenting people to do things is also not new - there were a bunch of companies, for example, that were giving away “free ipods” for filling out offers in 2000-2003.

These sites were “scammy”, in my opinion, because it was almost impossible to ever get your reward – you would go through what’s called a “regpath” – where they show pages and pages of crappy offers, and you got so frustrated that you gave up – never getting your ipod. Not only was the user frustrated, but these companies hid their identities behind vague domain names like “freeipod.com”, so there was no one to call or contact. Their whole business model, which we now often call “incentive 1.0” was built on users NOT getting their reward.

Offerpal and other “incentive 2.0” companies tried to clean this up – they wanted the user to get the rewards (in this case a virtual reward), and so they actually gave you an email address and a phone number to call if you didn’t get a reward for taking an action.

The system was meant to be self-policing, sort of like eBay – if advertisers (not just Blockbuster or Netflix, but thousands of individuals advertisers) were trying to defraud users, Oferpal would start getting lots of complaints from users, and would shut down that advertiser.

If users were defrauding the advertisers (i.e. signing up for Netflix, getting their reward, and then cancelling prematurely), then advertisers would stop paying per user, and they wouldn’t use this form of CPA advertising.

So which way do you think the complaints went? Was it advertisers taking advantage of users, or users taking advantage of advertisers?

Actually, while individual users had issues with some offer or another, it turns out that most of the fraud was from users defrauding advertisers (buying things and returning them, signing up for items they never had any intention of using) and Offerpal, as an example, had to "block" these users.

In the middle, though were the hundreds of legitimate advertisers, and millions of users who filled out offers happily, bought something, and got their rewards.

-So what’s the brou-haha about? Or, why can’t we “save the children” from the evil moneymakers?

The real issue happened when some advertisers didn't display their terms and conditions clearly.

Some advertisers, for example, asked users to submit a phone number at the end of a quiz. Then, users received a text message with a code in it – the user had to enter that code at the end of their quiz to get their results.

The charge was that users who did this were unknowingly signing up for $9.99 per month premium SMS service, which was billed to their cell phones. After signing up, users would start getting text messages each week with random stuff like “interesting facts” or “your horoscope”, depending on what they signed up for.

Was this a problem? Some advertisers hid the terms and conditions in very small print on the screen. This led to allegations that kids were singing up for premium SMS subscriptions billed to their parents cell phone bills.

Sounds like a legitimate complaint. So I tried a few of these myself to check this out. Turns out some of the fine print on the screen is very small. Most of them, after you enter your phone number, send you a text message with a code, like this: “Enter PIN CODE: 1234. $9.99/month. Txt STOP to stop”.

Honestly, if the twitter generation can’t figure out that this means that 1) they have to enter the pin code somewhere, 2) that they will be billed $9.99 per month if they do enter the code and 3) that they have to text “STOP” to stop the monthly billing, then I guess I understand what the fuss is about. More likely their parents are the ones that can’t figure it out.

Honestly, this might actually be a bigger issue around mobile premium SMS services that goes well beyond Offerpal and the social gaming ecosystem: is giving someone a cell phone like giving them a credit card?

But back to the main attraction:

-So, who did what when?

When investigating Watergate and any good conspiracy, you’ll be told to “follow the money”.

In this current in-the-valley mini-controversy, I’ll give you similar advice: “follow the platform”.

The real story is that Facebook, well before the TechCrunch article, put out very stringent guidelines for advertisers inside Facebook apps, and they threatened to shut down apps which were showing offers which were “misleading” – namely ones where the T&Cs weren’t clear, or cryptic.

Companies like Zynga and Offerpal (and their competitors), spent over a week scrambling to reduce the number of offers in their system to those which followed the new strict guidelines, clearly displaying T&C’s.

Many brand name advertisers like Blockbuster, Netflix, and others, had no problems at all. Some of the premium SMS offers, particularly some of the Quizzes which required typing in a code (like the example above), didn’t meet the guidelines because they weren’t clearly letting users know what they’re getting into. It’s also important to note that other mobile SMS offers passed these guidelines and are running fine on many other Facebook apps.

The reason Zynga (and Offerpal) were able to change their offers within hours of the original TechCrunch article was because they’d already started changing them the previous week (because of the actions of Facebook).

The reason Zynga shut down all their offers this weekend was again, because of the actions of Facebook, which shut down one of their games (which was running offers from Double-ding, an Offerpal competitor that Zynga itself was funding).

Having a game shut down is a disaster for a gaming company, so I guess maybe they’re justified in over-reacting by shutting down all offers for a time. Offerpal did a reasonably good job of getting rid of offers that were “bad” and keeping the ones that were “good”, but took the brunt of criticism in this story anyways, though the new CEO, George Garrick, added a post to their site about Offerpal's own role (www.offerpalmedia.com)

Techcrunch is of course taking credit for “exposing this story”, and they do get some credit for focusing the spotlight on what’s happening, but it may have spun a little out of control well beyond big companies in this space, affecting the little guy: making facebook users pay cash for virtual goods they could've gotten via offers, and reducing revenue of small independent 3rd party game companies struggling to stay afloat by making them afraid to show offers.

But as usual in Silicon Valley – you have to take what you hear with a grain of salt to get at the real story: Mostly TechCrunch has been following the real story, not “instigating it”.

As I said earlier, the people who should really care are other Facebook game developers (of which there are thousands in Silicon Valley alone). That whole industry is freaking out because they’re not sure how to make money by giving away free games anymore if they don’t have offers (Welcome to the Internet, by the way, this was the same problem we faced with Web 1.0 back in the 90’s).

In this case, the answer is not that difficult though: just use the legitimate offers that Facebook has approved.

And what did all of this have to do with changing the Offerpal CEO a few days after the orginal TechCrunch article? My only comment is that you don’t decide on a CEO for a company like Offerpal in a few days. A search can take many months.

For those who do care to see where this story will go next, my advice is: “Follow the platform, not the press.”

For the rest of the world (outside Silicon Valley) I doubt many of you were even aware of this little mediastorm, so...I guess... Life Goes On!