Worst week ever for Zynga

Zynga, the leading social games company and creators of popular games that you’ve probably have played (such as FarmVille, Mafia Wars, and Café World) is officially having the worst week ever.

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Zynga, the leading social games company and creators of popular games that you’ve probably have played (such as FarmVille, Mafia Wars, and Café World) is officially having the worst week ever.

It did not start out that way. In fact, October was probably the best month ever for Zynga, or any video game company since the launch of the Atari console system!

Zynga’s FarmVille launched as the fastest growing online game of all time, attracting more than 60 million users by the end of October. Zynga’s public relations machine was in full throttle, generating stories in Time, Newsweek, and even on Gamezebo, that promoted Zynga as the poster child of all that was good in the casual and social gaming world. The buzz around Zynga was not if it would file to go public next year, but when.

But then, it all began to unravel.

During a session at the Virtual Goods Summit in San Francisco on October 31, Michael Arrington asked Anu Shukla, then-CEO of Offerpal, to explain the ethics behind her business and that of social games, to which she responded publicly with a series of expletives.

Bad move. Michael Arrington runs TechCrunch, a leading high tech blog for Silicon Valley, and his response was to publish a series of articles detailing the unethical way that Facebook games make money entitled Scamville: The Social Gaming Ecosystem of Hell.

You can click the link above to see the series of articles (there are 10 posted in one week) but here’s the gist of it:

Social games that you play for free on Facebook make money by offering you the opportunity to purchase virtual items in their games to move ahead. If you are not willing to pay, you can still earn points to buy items by clicking on and signing up for offers paid for by advertisers to game companies. Some of these advertisers are legitimate, like Netflix.

Other advertisers, however, are not legitimate, will spam you, sell your email address to spammers, and if you hand over your credit card, will charge you for products and services that you unknowingly agreed to purchase but did not notice since you did not read the fine print. If you have played a game on Facebook in the last year where you signed up for an offer to get points, and now you are getting tons of spam, this is probably why.

It’s estimated that up to one third of Zynga’s revenues are generated through paid advertising and offers (though I think the number is actually much less). I do think it’s fair to say that for a sizeable number of social games companies, up to half of all revenues are generated from such scammy offers.

Zynga’s response was quick and brilliant: They immediately announced they would not take such scammy offers for their games in the future, thereby taking the high road.

Unfortunately, a video then surfaced where Zynga’s CEO told students at the University of California at Berkeley that he “did every horrible thing in the book to get revenues,” purposely funding his company in the beginning by taking scammy offers. (The video is here. Warning: there are expletives).

Zynga launched its new game FishVille this past weekend in beta on Facebook, attracting 800,000 players in two days. There were scammy offers that snuck into the game, however, and Facebook made Zynga take the game down until they could remove them. As of now, FishVille (think FarmVille meets Fish Tycoon) is back up online and could very well become the most popular social game of all time since Zynga’s own FarmVille.

Fortunately for Zynga, their worse week ever is over and the company can continue to move forward in their quest to be the most successful high tech public offering since Google.

There are two storm clouds that hang over the horizon:

1) Somewhere in the USA, there is an Attorney General that reads TechCrunch and realizes that going after Zynga is a tailor-made case to get them headlines and use the publicity to eventually run for higher office. Given that Zynga’s first popular game was Texas Hold’Em Poker (formerly known as Zynga Poker), which treads in the gray area that is gambling, and the infamous video mentioned above is public, I would bet my own money that a case is already in the works.

2) So far, this is only an industry-wide scandal. Game players do not read TechCrunch and given the amount of users playing Zynga’s and other Facebook games, no one seems to notice or care, so far. Companies like Zynga, Playfish, Playdom, and other social game companies have created games that attract millions of users by leveraging the amazing viral qualities of social networks like Facebook. Bad news travels faster than good, and the same viral forces that have allowed them to grow like a rocket shooting into space can bring them down back to earth just as quickly. As the saying goes, “Live by the sword, die by the sword.”

For game players and game developers who create casual and social games for Facebook, the exposure of these scammy offers is the best thing that could happen and we should all applaud TechCrunch for bringing light to this story.

The reason that Facebook games are so popular is not that they have the best graphics or game design, or that there is some magic secret sauce to uncover.

They are popular because these games are free to play, there is 10% unemployment now in the US alone, and game players do not have money. Casual gamers have so little disposable income now that the games downloads market is not growing even while the average price per game has dropped from $20 to $7 per game!

If someone is willing to click on a scammy offer to play a game, that means they are either under the age of 18 (another scandal!) or too poor to pay to play. In the same way Wall Street and the banks should be penalized for taking advantage of people with scammy practices, game companies should not be given a free ride.

The sooner the social games industry can get rid of scammy offers, the faster the industry can mature and become legitimate.

It may hurt the bottom line of a lot of social game companies in the short term, but in the long run, it’ll make the industry healthy. In this sense, the worst week ever for Zynga may be the best thing to happen to the casual and social games industry, Zynga included.