Zynga CEO Mark Pincus said earlier this week that he intends to make sure his company’s games don’t include scammy offers in the future. Our full background on this story is here.

But what he didn’t say in that blog post is that Zynga has been scamming users from the beginning quite intentionally as part of their revenue model. Rather, he pointed much of the blame at middlemen offer companies: “We need to be more aggressive and have revised our service level agreements with these providers requiring them to filter and police offers prior to posting on their networks.”

Last spring, though, he gave a much clearer explanation to an audience at a Startup@Berkeley mixer, admitting that scamming users was part of Zynga’s business model from the start. And it was all caught on video. I think everyone sort of knew that this was exactly Zynga’s gameplan. But to hear it said so directly is just shocking.

The full 30ish minute video is here. We’ve taken the relevant section of the video, roughly starting at around the 10:40 mark, and embed it below. From the video:

I knew that i wanted to control my destiny, so I knew I needed revenues, right, fucking, now. Like I needed revenues now. So I funded the company myself but I did every horrible thing in the book to, just to get revenues right away. I mean we gave our users poker chips if they downloaded this zwinky toolbar which was like, I dont know, I downloaded it once and couldn’t get rid of it. *laughs* We did anything possible just to just get revenues so that we could grow and be a real business…So control your destiny. So that was a big lesson, controlling your business. So by the time we raised money we were profitable.

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Zynga changed their lead gen scam policy this morning (the whole Scamville background is here, see updates at bottom as well). And now RockYou is taking steps to clean up their act to, according to an email we’ve been forwarded.

In an email to RockYou’s publishers, they say that they will begin complying with Facebook’s rules on offer scams (and like you, we’re not sure why they haven’t been complying all along, but lax enforcement is likely the cause).

Two interesting nuggets from the email though. First, RockYou says that from now on you’ll only see “clean, safe surveys from top tier brands advertisers.” All of the surveys we’ve seen are mobile subscription scams, so I’m not sure there’s such a thing as a clean, safe survey.

Second, the email says “the Facebook compliance team will be keeping a very close eye on offer walls starting tonight.” We’d heard that Facebook is coming down hard on app developers around scams right now, but Facebook won’t comment about it other than to say that they have always been monitoring application offers and enforcing the rules. From what we’ve seen, that enforcement didn’t bring much in the way of results, but perhaps they’re more serious about the situation now.

The full email:

Subject: RockYou Offers: Facebook Offer Wall Compliance Update

Hi RockYou Publishers,

You may have heard the recent controversy around the types of offers that are being run by most offer wall providers (Offerpal, SuperRewards, etc.). If you haven’t heard, take a look at this post on TechCrunch:
http://www.techcrunch.com/2009/10/31/scamville-the-social-gaming-ecosystem-of-hell/

The Facebook compliance team will be keeping a very close eye on offer walls starting tonight.

Since the RockYou Ad Network is the largest display network on the Facebook platform, we have a long history of working directly with the Facebook compliance team to ensure that we always maintain the highest standards of compliance and ad quality.

We will apply the same level of quality assurance to our RockYou Offers platform.

Some thing to keep in mind that set us apart from the other offer wall providers:
* 100% Facebook compliance starting this evening, and on an ongoing basis
* Clean, safe surveys from top tier brand advertisers
* High quality brand campaigns ranging from video ads to free sample offers
* Cost-per-install campaigns for other Facebook applications

We believe we will continue to outperform the competition based on our diverse advertiser base, and we will do so while always maintaining full compliance with Facebook policy.

Our technology provider for RockYou Offers, PeanutLabs, has also posted an interesting research study they ran over the weekend that clearly outlines how users feel about the scammy offers that have been so prevalent on offer walls:
http://peanutlabs.wordpress.com/2009/11/02/survey-finds-arrington-has-a-point-given-choice-users-overwhelmingly-prefer-direct-payments-and-research-surveys-to-cpa-offers/

We believe the new Facebook policy enforcement is in the best interest of Facebook users and the entire platform ecosystem, and we look forward to working with you as a safe and effective monetization partner.

If you have not yet switched over to RockYou Offers, all you have to do is:
1. Log in to your publisher account at ads.rockyou.com
2. Click on the RockYou Offers tab
3. Follow the 4-step integration process

If you have any questions or issues with integration, please contact Chris or Aaron:

Chris Akhavan
[redacted]

Aaron Choi
[redacted]

Thank you,
RockYou Offers Team

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A big part of the debate about the lead gen scams plaguing Facebook and MySpace via social games is over how much money is being made on these “offers.” Zynga, by far the most successful at building and monetizing these games, is now telling us exactly how much – 1/3 of total revenues, according to Andrew Trader, a co-founder of Zynga:

Andrew Trader, co-founder of Zynga, said the company makes about a third of its revenue from advertising and another third from virtual goods transactions. The last third comes from companies that provide commercial offers, trading Netflix memberships and marketing surveys for in-game cash.

Zynga revenue guesses range all over the place, but are likely $250 million a year or more. That means $80+ million/year is being brought in from legitimate offers like Netflix subscriptions, as well as the really smelly stuff like recurring mobile phone and learning CD subscriptions that trick users into paying big dollars for little or no return value.

What percentage of offer revenue is scammy? We believe it varies over time, and is heading in the wrong direction. Legitimate advertisers like Netflix and Blockbuster, hit with countless laundered subscriptions from repeat subscripers, are said to be dramatically lowering bounty fees paid on signup. Far less scrupulous advertisers like Video Professor and Tatto take their place.

HotOrNot cofounder James Hong said it best in a comment to our post yesterday outlining the scams: “In a nutshell, the offers that monetize the best are the ones that scam/trick users. Sure we had netflix ads show up, and clearly those do convert to some degree, but i’m pretty sure most of the money ended up getting our users hooked into auto-recurring SMS subscriptions for horoscopes and stuff.”

Offerpal and others, who provide these offers to game developers, try to downplay the percentage of revenue that comes from scams. Clearly they are obfuscating the truth, to put it kindly.

Facebook and MySpace must takes steps to address this.

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CrunchBase Profile	Zynga	Playfish	Playdom
Location:	San Francisco, CA	London, UK	Mountain View, CA
Money Raised:	$39M	$21 Million	$0
Revenue:	Estimated $200M	Estimated $75M	Estimated $60M
Rumors:	Strong 2010 IPO candidate	Possible acquisition talks with EA	Raising Venture Capital
Key Apps:	Facebook: Farmville-61M Mafia Wars-25.8M Yoville-19.8M Texas Hold Em’ Poker-18.3M	Facebook: Pet Society- 20.5M Restaurant City-17.3M Country Story- 8M 135 million total installs for all games	Myspace: Mobsters -14M Bumper Stickers-11.7M Own Your Friends-10.1M; Facebook: Sorority Life-7.1M Mobsters 2-3.5M Poker Palace- 1.5M

So much for the first generation of big Facebook/MySpace social application startups. Slide and RockYou both got huge valuations in venture rounds. But a new generation of application developers has taken center stage and are racking up big revenues and their own eye popping valuations: Zynga, Playfish and Playdom.

All three own popular social games on Facebook and MySpace. Zynga’s Farmville has 61 million monthly users. Playfish’s Pet Society has 21 million monthly users on Facebook. And Playdom has 16+ million monthly users of Mobsters on MySpace and Facebook Combined.

All three companies are getting a ton of press and investor attention. Zynga wants to go public next year. Playfish probably already got bought by EA for $400 million or more. And Playdom probably raised an unannounced big chunk of venture capital over the summer.

These three companies may be generating as much as $300 million annually on sales of virtual goods. Need a shotgun to do that next job on Mobsters? No problem. Pay with a credit card, paypal, or your mobile phone and it’s all yours. And people are obviously very willing to buy these virtual goods. Nothing new there.

The goal of all of these games is to get to a higher level, and generally have more fun growing things or killing things faster than your friends. Get addicted to the free version, then start spending to move things along more quickly. Once people are committed, it’s easy to get them to pay. You can read all about it on Business Week.

Except Business Week didn’t mention the dark side of the business at all.

All three companies are willing to give game currency in exchange for offers. Sign up for Netflix. Buy a ringtone subscription. Or energy drinks. Sign up for a credit card. Get car insurance. Take an IQ survey that requires a $9.99/month mobile subscription to see the results. We even found one for arthritis medication. Here’s how it all looks. One executive we spoke with says that 70% of total revenue from these applications may come in from lead generation, not direct payments. Netflix alone will pay $30-$40 for a free trial (requires credit card).

Three companies control most of these lead generation offers: TrialPay (appears to have the most legitimate offers), Offerpal and SuperRewards.

There’s nothing wrong with basing a business off of lead generation, although some of the offers are pretty sketchy (long term credit card or mobile subscriptions for little or not value). And the FTC does tend to take a swipe at them periodically. But the bigger problem is that advertisers may not be getting much for their payouts. As the higher quality advertisers bail, pressure to add the scam artists increases.

The cycle of all of these games is pretty standard. Get new users playing for free, give them incentives to message all their friends to signup, hit them hard for cash or lead generation for revenue, and move them up the levels. Rinse. Repeat.

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