A (hopefully) comprehensive write-up to explain not just what actually happened Arringtongate but why it happened and more importantly some thoughts on how to make it better.
Setting the Stage. Literally.
By now, almost everyone it seems has heard of or actually heard the the unique verbal sparring that took place two weeks ago at the end of the Virtual Goods Summit. The sparring took place between two well-known Silicon Valley names - one the founder and chief muckraker of the most well read internet / technology publication, the other, a co-founder of a platform company at the heart of social media monetization with a large exit already under her belt. The exchange was the result of a recent revelation Michael Arrington had regarding the monetization of social media traffic, specifically, third-party Facebook applications.
What Arrington "discovered" is not new to those in the performance marketing space (that iq quiz, fka crush, offers make up a large amount of the virtual goods revenue), but it emboldened him with a sense of urgency to report on his findings. To paraphrase his words, he told his sparring partner and the rest of the audience that it's a topic he will be writing a lot about, and true to his word, he has, starting with 'Scamville' (image left from TC). The exchange itself will live on in infamy, certainly for those who geek out on this stuff, because while fewer than one hundred people saw it in person, the video made its way to YouTube, and thanks to posts on PE Hub, Techrunch, and links in countless inboxes, more people than work in the internet advertising space have seen it. Nothing new to those operating in the space, it could become an unintended watershed moment for the space as a whole.
For those not familiar with the 'Scamville' series of articles, the issue comes down to this: Many of the ads running within the third-party applications provide limited to no or even negative value to the user. They are form fitting function (marketers monetizing traffic) as opposed to a service the user might truly want.
The Accidental Intersection
This is one big pre-mature market accident. No one could have predicted or prepared for the current hoopla involving Facebook, Third-party Applications (Zynga having been singled out the most), and Alternative Payment Platforms / Managed Offer Platforms. While some might have guessed Facebook's growth, none could have predicted a) the volume of installs /activity on stupid simple games ( 70% of Facebook's 300 million active users engage with applications each month), b) the amount of inventory / transaction opportunity it would create ($1bn/year in less than three years), and c) that people would willingly subject themselves to offers for such a non-monetary service, i.e., virtual currency for stupid simple games. It's almost as though putting that paywall in makes the games more valuable to the users, like why hazing or boot camp increases dedication to greek life, the military respectively.
Large amounts of inventory that is not well-understood + rapid growth outpacing demand = a hotbed for misbehavior in an attempt to monetize. Those first to heed the call to help monetize - performance marketers. That they would be the key driver to 40% or more of the $1billion virtual currency market in US was no one's plan. There simply wasn't and hasn't been anyone else around.
Square Peg, Round Hole.
Even the performance marketers who have embraced the social gaming inventory didn't know what to do with it. That's why they've been stuck trying to adapt a system clearly ill-equipped to makes of social media. They have been using the ads and infrastructure from the Free iPod days. Those ads were meant for an audience of a much different sort. They weren't designed to accommodate a micro-payment environment. They were meant for single use not as part of an ongoing system that will see the same users over and over again.
Brands are meant for users to see over and over again. That's for later, though.
Explaining why it can work for a select group of advertisers is Justin Smith in his Future of Offer Monetization in Social Games piece. Smith writes:
"...it’s important to note that many of the most sophisticated performance advertisers – who have been around the block a few times – are investing in this space, and have been for some time. The Netflixes and Equifaxes of the world have well-developed methods of evaluating lead quality and adjusting bid prices accordingly, and if you look on your favorite offer wall today (in the US), they’re still there near the top of the list. It’s unlikely that Netflix doesn’t understand how its ads are showing up in social games.
Smith concludes with, "At the end of the day, the most fundamental question facing the industry is whether incentivized marketing in social games is providing real value to honest advertisers and users." And, "The best thing all offer networks can do for themselves, users, and the industry overall is to keep adding more offers that provide more value to users and advertisers, while eliminating any deceptive ones."
What You Should Know (regarding the current intersection of performance marketing and social gaming / social media monetization)- It's not lead gen - Read any of the articles relating to the Scamville / Arringtongate and you will see the words lead gen throughout and in such phrases as "lead gen scam policy." It's not lead gen. As a lead gen guy, this hits close to home, but personal feelings aside, there is a big distinction. The offers in question here are as MySpace points out in their terms of service change, opt-out offers. These are subscription services, continuity programs with negative option billing. They fall into the broad categories of performance based marketing, performance marketing, and online customer acquisition but they do not qualify as lead generation. Lead generation does not involve any direct billing. It involves only data when users express an interest in a good or service. There is a multi-billion dollar ecosystem of expressed interest that does and should not get lumped in this fray.
- Mobile is not the problem - A couple of companies come out worse for wear, such as Tatto Media, but the real loser is mobile. The knee jerk reaction by most applications implicated looking to clean up was simply to ban mobile related offers. Mobile isn't the problem. Ringtones, which has had its share of issue in the past, is all things considered, well regulated and very different from the quiz offers. The quiz offers added very little value to the user. And, it's quite likely that many users agreed to be charged because the connection between phone and wallet is not strong. We can go into a whole slew of conjectures as to whether it is kids billing their parents, people who sign up but intend to cancel, etc., but either way two things hold true. A push based text service will have a hard time defending the the $9.99 monthly price point, and you have to be really unsophisticated to know you aren't getting charged. Today, all opt-in messages are explicit; they have to be if companies want to keep their short code. The text explicitly
- Facebook is no co-conspirator - In his articles Arrington at times accuses Facebook of turning a blind eye because of the advertising revenue they receive. The truth is that like Google, it isn't that Facebook doesn't care, it's that they really don't understand online marketing. Ask Zuckerberg about IQ Quiz, and he will have no clue. Ask him how developers make money, and he can answer in general terms, but the nitty gritty is not what they think about. Even their head of platform development or monetization doesn't think about these things. Once on their radar, they like Google will crack down. They will turn down $50mm in revenue any day if it means harming the users. They've done it in the past and are doing it again.
- People don't work for free - Monetization for developers and all players in the food chain has dropped. There is a good amount of money that has just exited, and its impact could send ripples which lead to layoffs, less support, and less talent working on the social media / gaming ecosystem. That monetization is needed for valuations, and it causes people to do stupid things.
- Better offers - It's not the developers, social media sites, or offer platforms. At the end of the day, it's the offers that lack. We can and should criticize the race to the bottom, but that's just human nature. Fake blogs are the same. People copy the one that monetizes the best so that they can compete. Hence the IQ quiz ads get run by all and they get more and more deceptive in order to monetize the best. Running the vast majority of Free iPod holdovers is trying to fit a square peg into a round hole. Again, they are there because no other offers dare to figure it out. That said, the same offers that ran during the Free iPod era shouldn't run now. But they are. The real opportunity is in bringing a new generation of advertisers and teaching them about incentives. Gurbash "G" Chahal of Blue Lithium fame, writes on his blog, "Bringing large brands and agencies into this space requires an extensive amount of education. You have to teach these players how to create value; you have to create specific social media offers that are different from traditional advertising or affiliate network buys." Until that happens, we're going to see the performance guys make it work - square peg, round hole.
Where Do We Go from Here
The Scamville related pieces started with, and the straw that breaks the camels back are select mobile subscription services. The savvy performance marketers for the most part ran compliant campaigns (they couldn't have had their short codes otherwise), but that doesn't mean they weren't guilty of really bad, completely unsustainable, and absolutely unjustifiable behavior.
The struggles faced by advertisers, developers, offer platforms, and the social media framework home to it all is not a story about greed, conspiracy, or good applications not winning because they don't run certain ads. It's the same story that has existed for years and years - a Wild West of trying to maximize yield, doing whatever they can until rules are set. The good part about Arrington stirring up this pot as that it can lead to greater awareness and ultimately greater accountability.The bad part though is that he has in one broad stroke completely miscategorized an industry and while enabling some change, it wasn't a true step forward.
Bring in The Brands
I had an eye opening conversation with Nir Eyal, founder of AdNectar, a technology platform and business that focuses on the insertion of branded virtual goods. I'm paraphrasing, but I believe his data suggests that people will actually spend more of their virtual currency to buy a branded item than a non-branded item. Brands increase the experience. Imaging playing a driving game and not having a Porsche to play, or a sports game but not getting to be your favorite team. Games reinforce our brand preferences and brands make the experience more enjoyable. In a social environment this gets magnified and the benefit to the brand is enormous, because people's preferences get shared without having to create an inauthentic experience. Facebook pages are necessary, but they don't compare to an experience that is more powerful and safer than Second Life. For example, 65mm and growing virtual farmers should all be using Miracle Gro to plant, John Deere tractors to till, and Whole Foods to sell their food to.
Here are the perfect opportunities for brands wondering how to leverage digital and social to do so. Now is the time to be engaging brands further and making sure they understand the opportunity. That is what will end the "scams." This ecosystem isn't meant to be ruled by performance marketers. They deserve a presence, but they are like plutonium - a great energy source (money for developers when no one else is around) but also a potential danger (bad offers due to short term thinking by all). The key is that these events shouldn't scare brands away. They should be a call to action for more to join. I'm by far the first to suggest this. It took Nir to make me realize it, but it's so important that any chance to make the call to action needs to take place.
Further (Required) Reading
- TechCrunch guest post by Alex Rampell, CEO and founder of TrialPay whose business also operates in the alternative payment space but didn't start as a managed offer platform for social gaming. A supplier of offers to Playfish.
- Andrew Chen's detailed analysis on the Scamville series.
- Nick Gianos, the public face at the intersection of Facebook and third-party apps. Hard to nail down in person but prolific on paper.
- Playfish by EA for $400mm acquired.
- Top Social Games in November 2009 (so far), Inside Facebook.
- Future of Social Gaming, Justin Smith, Inside Social Games.
