The Risky Legal Waters of RMT in Social Media Games: A Zynga Case Study

Pixels and Policy previously reported on the potential risks of building an online gaming platform around the concept of real money transactions, or RMT's. Customers have proven willing to shell out large sums of money for virtual goods in the form of microtransactions, the $1 – $5 purchases common to games on Facebook and MySpace. So what's the problem?

There's an emerging legal question regarding RMT, and it centers on the growing partnership between online game developers and marketing agencies. What happens when a developer offers "free credits" for filling out "trial" offers? As social gaming titan Zynga found out, offering another venue for RMT is proving far more complicated than planned.

A Financial House with a Questionable Foundation?

Dan Lyons of the website Fake Steve Jobs recently fired a salvo that pointed out the strange divide between coverage of Zynga's marketing in the mainstream New York Times (which recently botched a Second Life fashion article, to its increasing discredit) and on prominent games-industry news websites.

As
it turns out, no one from the New York Times took any note of the fact
that a slew of industry blogs and games industry veterans were slamming
Zynga for its allegedly deceptive contracts and real-money transactions
for virtual currency. Reading the New York Times article, it's almost
as if no one ever said a word against Zynga's methods.

From Lyons' response:

Now, maybe they
did all the reporting before Arrington's stuff broke. In which case
they should have gone back and updated their info. Or maybe, just
maybe, Zynga's PR people teed up a Times story as a kind of rebuttal to
what Arrington was reporting.

Either way, that's what ended up
happening: Zynga used the Times to deflect the bad shit flying at them
from Arrington. They need good press because they're hoping to cash out
by going public next year. That story in the Times will be worth
millions. Many millions.

But what are Zynga's supposedly questionable business practices? According to a critique of Zynga's policies on Techdirt,
the company is far from transparent in its offers of in-game currency
to often underage consumers. In order to receive "Farm Cash," users can
take surveys and receive "free trials" of products – most offers only
require a cell phone number.

The
problem comes along with the cell phone bill. Free horoscopes end up
signing the user on to a cell phone "downloadables" contract, which
offers ringtones and games for a set monthly fee. Failure to return the
"free trial" products within a week can saddle unsuspecting users with
heavy bills. This, Techdirt argues, is the heart of Zynga's financial success, and it's no way to run a company.

Virtual Currency, Real Profit

Techdirt may have a point, and similar offers have taken root in graphical virtual worlds like Second Life, where kiosks offer Linden Dollars to users who sign up for free trials of products
or provide personal information to survey companies. The highest Linden
Dollar rewards, of course, go to those who complete offers that have
the potential to cost them huge sums of money.

Since
Zynga is a private company, there is no way of knowing precisely how
much revenue is generated from questionable surveys and trial offers
like those in FarmVille, but if user participation in Zynga's Haitian
charity drive is any indication, a substantial population of Farmville
users carry large amounts of "Farm Cash." 

This
is hardly just a virtual world issue. As Zynga prepares to offer public
stock, its financial methods become a major issue of concern for
institutional investors interested in riding the booming financial market for online game developers.
If any of Zynga's revenue earning methods come under legal scrutiny, it
could badly damage public interest in the company and shutter its hopes
for expansion through public investment.

Another
question that might interest potential investors: If fine-print and
legal trickery are Zynga's main revenue creating pushes, what of the
much-touted virtual currency market? How many players of Zynga games
purchase Farm Cash outright as opposed to the purportedly "free" option
of filling out surveys?

If
Zynga's currency market is limpid save for those holding potential free
trial time bombs, might the luster of Zynga's social media gaming
operations fade in the eyes of large investors? Faced with serious
questions from other bloggers and industry veterans, Zynga would do
well to respond before taking any further steps towards a possible
disaster.

Offerpal Dodges a Public Relations Bullet

Most
browsers familiar with the Internet are at least tangentially
acquainted with the types of advertising offers Offerpal pushes. The
user fills out a few pages of personal information (marketed to third
parties) and fills out a
"free trial offer" for a product or service in exchange for anything from game tokens to credit towards a Playstation 3.

Enter Offerpal's recent rethinking of its free trial programs.
According to an article from Fox Business News, Offerpal is upending
their previous business model and bringing in layered oversight to calm
agitated participants. Among Offerpal's planned reforms:

Creating a "Compliance Server," which will serve as a 24×7 electronic watchdog to look for any unapproved deviations to an advertiser's landing pages in order to ensure that any violations are caught and removed within five minutes.

Upgrading our Customer Support facilities by adding more representatives and better tools to ensure that every ticket is processed within 48 hours.

Partnering with well-known industry associations and other offer provider platforms to jointly form standards boards and committees that will establish industry-wide standards and regulations;

Refining
the company's multi-step review and approval process to ensure that
every offer it distributes is in complete compliance with the
developers and publishers through whom the offer is distributed.

Most intriguing among the
batch of frantic reforms is the move to create industry standards, with
Offerpal firmly in the driver's seat of any suggested best practices.
It appears Offerpal is prepared to capitalize on the current complaints
by turning a potential public relations disaster into an opportunity
for Offerpal to press other, smaller web marketing companies into
standardizing the process.

By successfully addressing
potential problems early, Offerpal has effectively taken the momentum
out of future complaints by proactively offering to fix any future
problems through calls for standards and best practices. Whether
Offerpal intends to follow through or not remains to be seen, but in
the short-term, it appears Offerpal may have avoided the worst of the
fraud discussion currently surrounding its big partner.

How Zynga's Troubles Are a Boon for Offerpal

With
Offerpal leading any potential meeting on the standardization of "free
trial offer" marketing, no other marketing company will be able to push
for standards that unduly limit Offerpal's ability to continue its
business along the current vastly profitable lines.

This
is both a shrewd business move and evidence of why Offerpal continues
to thrive even as its major corporate customers take hits over the
nature of Offerpal's deals. The development of better customer service
and fraud reporting also helps negate claims Offerpal isn't doing
enough to prevent the kind of deceptive advertising Zynga is now
looking to drop.

Last year Offerpal responded to criticism of its marketing
methods ahead of its rollout on Facebook, and as a result the negative
press fizzled. If only Zynga had approached the blogs and industry rags
with the same awareness of social media's power. It's almost ironic.
Now Offerpal is poised to continue its profitable venture without
fighting Zynga's battles. Cutting their losses by dodging the question entirely could prove to be a shrewd business move.

What
do you think? Will Offerpal slide under the radar of heavy criticism
because of its proactive adjustment of marketing policies?