@andrewchen

omg she’s getting scammed by a duck!

Techcrunch on social gaming scams
As everyone knows, Techcrunch recently published a provocative article called Scamville: The Social Gaming Ecosystem of Hell. Most people will have already read this article, but just to summarize, Arrington argues the following:

• Social gaming companies (particularly Zynga) are making their revenues in a “completely unethical” way
• Users are getting scammed by the offers
• There’s harmful cycle where the scammiest companies earn more revenue, then buy more ads, then scam more people
• Similarly, some users opt in to offers and then cancel, lowering their value, driving out advertisers
• And finally, the industry is in total denial about this

It’s a compelling article, and I would encourage everyone to read it. There’s also another followup article on publishers who decided not to go the offers route, HotOrNot and PlentyOfFish.

Let’s dig in
I am very sympathetic to Arrington’s views, and investigated the issue over a year ago – here’s my blog post from August 2008 on the topic: Super Rewards and the leadgen side of Facebook virtual currency – can it last?

The more I dug into the issue, the more nuanced I decided it really was – things weren’t all bad, actually. In fact, I’ve come to believe that there are plenty of advertisers where this is working for them, plenty of consumers who are happy as well, though these offer guys are leaving a trail of unhappy users.

It’s clear that of all the issues, the user experience must be fixed. And after the user experience is fixed, I think we’ll still be left with a thriving industry, though people may be making less money than they are right now.

I want to drill into some of Techcrunch’s assertions and go one level deeper to look at the evidence.

It does makes the user experience suck
First off, I think everyone is clear that the way offers run right now, they are very confusing for users. If you search for “zynga sucks” on the Facebook.com domain, you get lots of angry complaints, most them about offers. In fact, I did an article a long time ago and got a bunch of random angry comments that clearly had just been searching for SuperRewards, completely unsolicited.

This was a long time ago, so I hope their service has changed a lot – but here’s a sample:

The post is in regards to Super Rewards. From a game user standpoint, I did the offers more when Super Rewards was not managing the offers. Super Rewards is slow to respond to problems from users, and requires proof of the completion of the offer in ways that the offer itself does not require you to do. For instance, to receive points a mini-game was played, many many offers were reviewed, then the game results were given. The offer states that the points would be awarded once the user reached the results page. If the points are not received, you are supposed to file a request for review. Well, Super Rewards would not take as proof of completion all the information from the results page. They even argued with what the results page displayed, even though it was cut and pasted directly from the site complete with the web address. Instead, they wanted two emails, one confirmation email and one confirmation of the confirmation email EVEN THOUGH DOING EMAILS WAS NOT REQUIRED BY THE OFFER.

Here’s more:

I got stung by them 10 days ago. 440 points for a Discover Card application. I applied, and I am holding the card in my hand RIGHT NOW. They say Discover has no record of recieving my info. Really? Well why did they send me a card then? A$holes.

As one of the ripped off customers of Super (assholes) Rewards on Facebook, I have to say that thier service is a total and utter crap to say the least. Of the offers I have spent time filliing in I have only recieved points for 2 out of the 20 or so offers that I have completed.
Any complaints either get a automated response or no response at all.
There are now groups being formed on Facebook complaining about this type of action. I hope the group action gets up and going, these crooks need to be shut down.

Clearly this is not what SuperRewards wants, nor their game publishers, nor Facebook. And like I said, I hope SuperRewards has cleaned up their service since then.

The folks over at Gambit have written a solid article addressing these issues head on, where they discuss 3 game ending user complaints:

1. “I did your offer but didn’t get my points.”
2. “I completed this offer even though it took forever and now I’m getting spammed.”
3. “I completed this free offer and now I’m being charged all this money.”

The article goes on to discuss why resolving these issues is an important part of the game developers job, and how they can’t just say “oh that’s monetization” and not care about it. These user feelings ultimately come back into the game, and create problems long-term.

I would like to see more of the offers companies directly discussing and addressing the user experience problem openly – I think that will ultimately be the positive result of all of this dialog.

Everyone should be in agreement that the offers experience sucks, but no one is willing to do much because making these changes would mean a short-term monetization hit. It’s a Prisoner’s Dilemma where as long as the big offers providers continue in their ways, everyone wants to match them for competitive advantage. Thus my argument that the only player that’s able to get everyone in line would be Facebook.

It does seem to be working for advertisers
Arrington also makes the argument that the offers industry isn’t working for advertisers, and will eventually cause the monetization to crater. After talking to a lot of people on the issue, I just don’t know that it’s true, to my surprise.

Here’s the quote from the Techcrunch article:

And some users aren’t dumb, either. For every user who gets tricked into some fake mobile subscription, there’s another who can beat the system. That’s where the legitimate advertisers, like Netflix and Blockbuster, get hit. Users sign up for a free trial with a credit card, get their game currency, then cancel the membership and start over.

I specifically asked Jay Weintraub to look into this problem earlier in the year, and was genuinely surprised by the results. I figured that it was all a house of cards, but Jay came back to me with the idea that in fact it’s probably working (at least somewhat).

This is definitely required reading for anyone thinking about these issues. Jay did a great job breaking down the issues.

To summarize his analysis:

• The offers ecosystem on Facebook shares some surface similarities with the “Free iPods” incentivized offers industry that ultimately imploded (just read about Adteractive, Gratis, and similar companies for background)
• The volume of leads being produced by Facebook apps is so large that it’s unlikely that the crappy performance is just being hidden in the volume
• However, the pricing on Facebook will likely go down, and companies will make less money in the long run
• The offers may actually be performing, with the working hypothesis being that users actually choose the offer to fill out, versus the “Free iPods” case where they are run through a forced set of offers
• Also, long-term gameplay encourages accountability and repeat purchase

I think all the above points are surprising, and probably right.

Advertisers may reprice, rather than leaving Facebook
Arrington’s also argues that the bad leads will ultimately drive out all the advertisers. He writes:

Netflix has a policy of only paying for a user once. But game developers use a complex set of partner chains to launder these leads and try to get them through for payment. Netflix sees an overall lowering of quality and pays less for leads. Game developers, desperate to monetize, then search for ever more questionable offers to make up the difference. In the end, the decent advertisers are out, and only the worst of the worst remain.

My question is, why they won’t simply be repriced?

If an advertiser is buying leads at $3, but half the users cancel their orders, then why not just reprice down to $1.50? In fact, the best advertisers probably have the best products, and you might argue that their danger of cancelation is actually less than companies selling niche crappy stuff. Similarly, the Facebook leadgen infrastructure is now a big enough animal that advertisers may want to participate just to drive up volume. Even if an advertiser ends up with an additional $10M with no margin, they might do it anyway just to get more heft into their business.

So I agree with Jay’s argument that in the long-run, these leads just all get repriced, and the same set of advertisers (plus or minus) will remain.

Part of my positivity here is my direct experience buying Facebook advertising, which has actually been high-quality and high-conversion, for the most part. I think that the fundamental traffic is good, and thus the offer advertisers can see the same results, if they aren’t obnoxious about it.

It does create value, through product bundling
The other question is whether or not there is actually any underlying value to offers. And as I wrote in a post yesterday, offers theoretically should be good for everyone, the same way that Amazon and Netflix recommendations are good for consumers. The problem has been the execution, due to user experience issues.

Arrington seems to think, however, that getting users to pay more for the offer to subsidize the virtual good is a bad thing. He writes:

[...] Most of these offers are bad for consumers because it confusingly gets them to pay far more for in-game currency than if they just paid cash (there are notable exceptions, but the scammy stuff tends to crowd out the legitimate offers). And it’s also bad for legitimate advertisers.

I think the above statement doesn’t correctly describe how and why offers can add value overall. I won’t repeat the entire post here, except to give the outline of the argument:

• Amazon recommendations is good, and product bundling as a whole is good
• How do you define a “good bundle” versus bad? How will we target offers in the future?
• How does offer + virtual goods bundling actually work?
• Only 1% of people buy at an ecommerce site

If you haven’t read the article, check it out here.

What will happen next?
My working hypothesis is that the following things will happen – and it might take less than a year:

• The offers industry will continue to grow, the # of players will continue multiplying
• This will mean that the competition for doing leads will be cut throat, and no one will think long-term
• Ultimately, Facebook will intervene to preserve the user experience and make users feel safe in the checkout line
• If they decide not to do it themselves, they will heavily regulate the situation
• Otherwise, they will just make their own “clean” version, potentially by building out the Facebook ads into having landing pages, transaction forms, and redirects, rather than just sending clicks

Either way, I predict it will not end well for most of the leadgen players, unless they clean up fast.

If Facebook regulates, I would like to see them do something like this. Think of it as the FDA food packaging guidelines, but instead of calories it’ll talk about total cost to the consumer.

More reading
Here are some of the related articles that I would recommend anyone interested – they are from the view of the monetization gurus, and looking at advertiser-related performance, rather than user experience.

• Will social payment platforms really work long term? (guest by Jay Weintraub, leadgen expert)
• F*** your game offers (by Noah and friends at Gambit)
• Incentive Promotion 2.0 (also by Jay Weintraub)
• The impending doom of Facebook apps (by Niki Scevak, Jupiter Research)
• The economics of app monetization (with Noah Kagan, Gambit)

and two recent posts I just did related to the same Techcrunch article:

• How social gaming offers create value for everyone
• How Facebook could clean up the offers industry

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If Facebook doesn’t clean up the offers industry, then this guy will

As a quick follow-on of my last post on How social gaming offers create value for everyone, it strikes me that what the industry needs to survive for the long-term is for one of the big players to break out of the stalemate of zero information sharing, and start advocating for sustainability.

Why all the advertising and leadgen companies hide their information
One of the big problems for the advertising and leadgen industries is the massive lack of information sharing between different parties. The reason is that ultimately, there are really just two parties involved:

• The paying customer
• The company providing the end product or service

But then lots and lots of middlemen get involved, including:

• Agencies / SEMs
• Ad networks
• Publishers
• Infrastructure providers
• Data providers
• etc.

Everyone in that extended chain are just middlemen, and their job is that for every $1 of profit, they want to outmaneuver everyone else in the stack to get as much of that dollar as possible. So if an ad campaign is doing really well, the agency doesn’t want to tell the ad network, for fear that the ad network will raise their rates. On the other hand, the ad network can’t figure out which of the publishers in their ad network actually deliver good performance.

This all sucks, and requires a central party to think long-term. That player might ultimately just be Facebook, but could be a publisher like Zynga (though I doubt it).

What information could be worth exposing
In general, I believe the key to thinking long-term on the offers industry would be to expose all sorts of feedback information, out in the open, at a granular level.

Users would also be able to get information like:

• What are they actually signing up for?
• A standardized view of every offer, like a checklist, similar to FDA mandated food packaging guidelines:
  • What is the 12-month cost of this offer?
  • What is the $ value of this offer to the advertiser?
  • Is this a subscription, yes or no?
  • Am I going to get emails?
  • Am I going to get a phone call?
  • Is my information getting shared with any other parties?
  • How can I cancel? (and this should be standardized too)
  • How do other users feel about this offer?
  • What is the cancelation rate?
  • How do I get customer support if I opt in to this offer
• Every offer should link to an “advertiser profile” on Facebook, with comments, ratings, etc.
• Facebook should be able to instantly ban specific advertisers and offers from ever coming up across all of Facebook

For advertisers and everyone else, they would get to see information like:

• Where are my offers showing up? (by app)
• What kinds of users are filling out my leads? (demographics, geo, etc.)
• What is the $ incentive for users? (by app, by $ amount)

Similarly, there is soft information like:

• How are users rating the app?
• How do they feel about the particular offer?
• How often engaged are users? How much churn is in the app?
• How often do they repurchase virtual currency?

For all of the above, I think a lot of companies would hate it in the short run, and a lot of dollars might be banned, but long-term, this would be better for the overall ecosystem.

Let’s hope that something like this happens!

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The happy meal is the quintessential version of great product bundling

How offers add value
There have been a lot of conversations about the evils of offers in social gaming, and one thing that’s getting lost in the conversation is the potential for offers to actually generate value overall.

Ultimately, offers are about “product bundling” and it adds value to the economy the same way that any product bundling adds value – by giving people more of what they want, often for less. And naturally, some configurations of different bundles are more effective than others, as we’ll see below.

This post will touch on a couple topics:

• Amazon and “relevant” bundling
• How to define good product bundles
• What’s actually happening with offers and bundling
• Solving the 1% ecommerce problem at the Point of Sale

Let’s get started:

Amazon.com and product bundling
When you are shopping at Amazon.com, and you’re in the process of buying a book, and different book is recommended, how do you feel about that? And even more, if you happen to decide you like both books and want to buy them, and Amazon is willing to give you an aggregate discount, how do you feel?

I think that intuitively, the cross-sell and bundling that happens on Amazon is great for the customer experience, and exemplifies the good side of product bundling.

Here’s some additional information about it from Wikipedia:

Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business (for example: bundle a word processor, a spreadsheet, and a database into a single office suite), in the cable television industry (for example, basic cable in the United States generally offers many channels at one price), and in the fast food industry in which multiple items are combined into a complete meal. A bundle of products is sometimes referred to as a package deal or a compilation or an anthology.

The article goes on to say that the strategy is most successful when:

• there are economies of scale in production,
• there are economies of scope in distribution,
• marginal costs of bundling are low.
• production set-up costs are high,
• customer acquisition costs are high.
• consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.

Note also there’s a darker cousin to the above, called Product Tying, in which the consumer is forced to buy the whole set and not just one. This can lead to crappier products becoming more successful, and is the kind of thing you can read about in DOJ monopoly cases.

When bundling is helpful
As mentioned in the list form Wikipedia, there are many situations when bundling is helpful to both the consumer and the business. The bundling is extra helpful when:

• The product being bundled “makes sense” to the consumer
  • “Makes sense” often means a complementary good (drink+burger)
  • Or, it might share the same context (2 of product X are better than 1)
  • Clearly targets the same audience (people who like A also like B)
  • etc.
• Also it can be a great bundle if it was something you were going to buy anyway – like if you put two items in your cart, hesitated and took one out, but were then offered the bundle together

Just as in advertising, you need to “target” your bundles and make sure they are as relevant as possible. If the industry continues to deliver irrelevant offers to consumers, then it’s no surprise that ultimately the whole thing will be written off.

I’m sure I am missing many other examples from above – please write in the comments if you have additional thoughts.

Product bundling in the offers and leadgen world
With the above points in mind, you can imagine what is happening behind the scenes in the leadgen/offers world for social gaming.

The product bundle ends up:

• X dollars worth of virtual currency
• Y dollars worth of bundled product (plus Z dollars of built-in marketing expense)

We can look at this from a couple points of view.

For the product seller, if you’re selling a product for $20, and it costs you $5 to make the item, then you have $15 worth of margin to spend on marketing and still break even. Thus as the product creator, you would be excited about buying up to $15 of virtual currency for the user, if it gets them to buy your product. And if you can buy even less currency for them, that generates profit for you and the leadgen networks and publishers between you and the user.

From the user’s perspective, the above deal can work well if the bundled product “makes sense.” If you were already going to buy a Netflix subscription, and you are being offered the same price and you get some virtual currency to your favorite social game, then that’s great.

So when Michael Arrington of Techcrunch writes that it’s bad for users to pay more for in-game currency than if they paid cash, I think that’s just misunderstanding how offers actually work in the aggregate economy:

In short, these games try to get people to pay cash for in game currency so they can level up faster and have a better overall experience. Which is fine. But for users who won’t pay cash, a wide variety of “offers” are available where they can get in-game currency in exchange for lead gen-type offers. Most of these offers are bad for consumers because it confusingly gets them to pay far more for in-game currency than if they just paid cash (there are notable exceptions, but the scammy stuff tends to crowd out the legitimate offers). And it’s also bad for legitimate advertisers.

How offers solve the 1% problem at Point of Sale
Ultimately, the biggest problem that offers solve for advertisers is the 1% problem of e-commerce. That is, at any given time, the number of people “in market” for anything is actually quite small, and the percentage chance that they will actually purchase something is also very small. As a result, if you are at a “Point of Sale” and they have their credit card out, you might as well try to cross-sell and bundle as much related stuff as possible.

The real skill and value created in all of this, of course, is in actually creating useful product bundles rather than the asinine ones I keep seeing. Social gaming and life insurance don’t mix, the same way that Free iPods and life insurance didn’t mix for incentivized leadgen.

This doesn’t mean that offers companies aren’t totally slimy and the industry isn’t broken
I want to make it clear that all of the above isn’t a judgement on whether the offers industry is working or not working. Frankly, it’s probably pretty broken (I’ll leave that discussion for another post). But I do believe that there is some fundamental value being generated, in the long-run, and someone will build a great company around dynamically creating and targeting product bundles at Point of Sale, wherever you are across the internet.

Whoever does figure that out will make a lot of money, and we’ll forget about all of this social gaming stuff.

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