Can the Advertising Offers Business Find Redemption In Social Networks?

The entire social gaming industry has been criticized in recent weeks for running deceptive advertising offers. But how bad has the problem been, really? After all, low-quality ads for weight loss, teeth whitening, and a range of other dubious promises run in major ad networks and appear on prominent web sites all over the web. So here is the result of our investigation into the past and present problems with offers as they have affected social games and other applications on social networks. Based on our research, we believe that offer companies have run many deceptive offers. Yet the majority of offers have not been deceptive, but rather legal and also low-quality. These offers have been some of the most lucrative for offer networks and developers. However, a meaningful minority of offers have been high-quality, and point the way forward for the concept of incentivized advertising in social networks. To really understand the scope of the problem, one has to first understand how it fits into the larger, yet still-young social gaming industry. Here, we'll lay out the history of offers on social networks, include what most offer companies who are active on Facebook and MySpace told us about the issues, discuss ongoing enforcement measures, and look at what's needed to improve the ecosystem. A Brief History of Offers How long have offers been running within social networks? Since the rise of social gaming. Games began getting traction on social networks starting when Facebook launched its developer platform in May of 2007, but developers needed revenue to support themselves. Many users had never paid for virtual goods before, and they didn't necessarily want to start paying out of pocket -- and anyway, most developers had little or no experience building virtual economies. So offer companies sprang up, or in many cases migrated over from the advertising industry. In social networks, these companies let users earn points to buy things like virtual currency by signing up for a Netflix subscription... or a mobile quiz subscription. To make this possible, offer companies, at their simplest took (and still take) advertising inventory from dozens if not hundreds of ad networks, then display that inventory within "offer walls" that appear in the payment page on social games. At its most basic, an offer wall is simply targeted ad inventory displayed within a window on a game. Like "scotch tape between two pieces of string," as one industry source described them; it's not as if many offer walls are fine-tuned technological marvels, although some companies are more sophisticated than others. But how bad were offers in the beginning? As another person in the industry told us, it was not as if offer companies and developers said "how can we scam users." Instead, many of the more legitimate advertisers who found their ads running within social applications also found themselves being burned by some users. A game player who wanted to get points didn't necessarily care about the offer, so they'd sign up for the offer, get the points, then cancel -- or some variation of that scheme. A few big advertisers, like Netflix, have internal methods that allow them to survive in this harsh environment, but others cut off social offers due to these issues. So what sort of advertisers were left entering this environment? Mostly the ones that have been dealing with hard-to-monetize users for many years on the web: performance advertisers. Over a decade in to this industry, you can still spot their handiwork in such places as in the remnant ads of well-respected tech companies like Google and Yahoo, and on major news sites. Many of the ads that you'll see in these locations are exactly the ones being criticized for appearing in offers: mobile ringtone subscriptions, IQ quiz ads, etc. They are not all illegal, or even necessarily deceptive, but when you see them, you wonder who would want them. What Offer Companies Told Us We reached out to almost every company in the space about these issues, and we heard back from most, including the largest ones. But not every company was willing to speak to us on the record -- and most of those who did gave incomplete responses. Also, in order to define how big the scam problem is within offers, you first need to define what a "scam" is. On Facebook, for example, a variety of offers are permitted as long as they clearly disclose payment terms, and include an opt-in checkbox when asking for payment information. Here are the aggregated, anonymized answers. We believe they are the most detailed information published yet about the current (and recent) state of the offer industry. Around 20 percent of offers have been clearly legitimate brand ads, along the lines of Netflix subscriptions. Another 60 percent have run a wide quality range, from the sorts of ads that aren't illegal but also aren't clearly valuable (like some ringtone subscriptions) The last 20 percent have been offers that willfully trick users into things like paying more than advertised or providing private personal information Of course, these numbers are according to the offer companies themselves. Regardless of what happens with scammy ads elsewhere on the web, the industry's own estimates do not reflect well on offer companies, or on application developers that have been running offers. However, people should not think that social gaming revenue only comes from offers. We have estimated that about 30% of overall revenue for social gaming companies comes from offers. The other 70% comes from some form of direct payment, like PayPal, credit cards, mobile payments, prepaid cards, and other methods. Beyond the stats mentioned above, here's what companies told us: Where have the ads come from? Most companies we spoke said they have worked with many, many different ad networks, including Azoogle, Adteractive, Valueclick, and dozens of others. There are literally hundreds of ad and affiliate networks out there whose ads could show up in social media via an offer wall. Many offer companies also said they work directly with major brands. But when we asked each offer network to specifically provide us with the names and contact information of their advertisers, only a couple did. It's not clear to us how many offer networks actually have very many direct advertiser relationships. Meanwhile, the brand advertisers we have spoken with say they are having some success, but they want the overall offer quality to improve in order for the space to become a safer place for them to invest. As you can see from any offer wall these days, several brands do have ads that run within offers. Are the users who take offers valuable to advertisers? Most offer companies said that advertisers discount offers on social networks, due to people not following through on offers, with the range we heard running between 20% and 40%, depending on the offer company. In other words, because of the incentivized nature of the offers, there are well-known issues that affect lead quality, and so advertisers are still adjusting bid prices accordingly. How do offer companies provide data to advertisers? Some offer companies said they provide specific information about the customer source to advertisers, such as the application the customer came from. Many said they did not always do this. In general, we have not been able to get specific information from any of the offer companies on what data, exactly, they provide to advertisers. In many cases, from our understanding, there are multiple ad networks between an offer company and the actual advertiser, and the data does not get passed through the middle-men. So advertiser visibility is often, but not always, low. Ad industry experts say this is one of the main reasons that advertisers have been slow to invest more intelligently, and thus heavily, in offers. Who handles user complaints? Because many offer companies operate behind the scenes, users typically do not report ad problems to them. Instead, they report to the developer or the advertiser. According to offer companies, the main reason users find and report issues to offer companies concerns virtual points they've earned through offers, that they have yet to receive. In many of these cases, a payment may take hours or days to clear, while users expect their points within minutes -- but this is a small issue compared to users complaining about deceptive or unclear offers themselves. In most cases, there are not automated feedback loops for developers to tell offer networks which ads to stop running. Right now, that feedback happens manually. Given the potentially millions of ads and hundreds of networks that can pipe in ads, accountability is hard to create. What portion of users are blocked from taking offers? The consensus ranged from less than 1% to around 5%. The offer networks are blocking users who are known to be trying to game the system in order to mitigate fraud from the user side as well. Many have large operations teams that handle this. Have offer rates declined in recent months? Netflix hit most offer providers with a rate reduction recently due to the quality of offer leads, we heard from multiple networks, although some say they are seeing higher rates again. However, while some offer rates have been decreasing, others have stayed steady or have been growing -- at least until a massive number of offers got taken out in recent weeks. Offer Providers Here's an alphabetical list of the companies we consider to be offer providers for social games, although some may only run offers as a small and non-essential part of their business. - AdParlor - Boomerang Networks - Deal United - DoubleDing - Firecue - Gambit - Gratispay - gWallet - Offerpal Media - Peanut Labs Media - Q Interactive - RockYou - SocialCash - Sometrics - SponsorPay - Super Rewards - SupersonicAds - Tatto Media - TokenAds - TrialPay Punishment A couple weeks ago, Facebook said it had banned two more ad/offer networks. It didn't say at the time who the companies were, but Facebook recently confirmed their identities to us: Tatto Media and Gambit. The reason in both cases, Facebook tells us, is "repeated policy violations." The company is not providing more detail on what the exact violations were because the bans are a legal matter. Here's what Facebook said last week: In addition to legal notices that have been sent to many ad networks to mandate ongoing compliance on Facebook Platform, today we are disabling two additional offer and ad networks who have repeatedly violated our policies. Tatto Media has a history of trouble. For example, it was fined by the Washington state Attorney General earlier this year for running the deceptive "luv crush" ads where users were shown a fake email interface that tricked them into paying for horoscope subscriptions. More recently, it served as the poster child of scammy ad networks in TechCrunch's "Scamville" offer scam exposé -- for selling similarly deceptive ads within offer walls. Zynga chief executive Mark Pincus followed up by calling it the "worst offender" on Facebook, mentioning that it had already been banned. Gambit is a bit of a different story. The company has articulated itself more clearly than most of its competitors about offer issues, including this in-depth post on its company blog. It has also recently looked to diversify away from advertising offers; for example, a few weeks ago it announced a partnership with online labor services company Crowdflower, where users can earn points in a game through doing online-based jobs for companies. In terms of the ban, the company says that it was "working closely with Facebook employees on compliance, accidentally showed some non-compliant ads, and [was] shocked to learn of Facebook's reaction" -- although we have not been able to verify this claim. A ban isn't necessarily for life. It's possible Gambit and Tatto could return at some point in the future, but Facebook had no comment on the chance of that happening. MySpace recently toughened its terms around offers, too. And Zynga, the largest social game developer, has also taken all of its offers offline until it can be sure of offer quality. Running clean offers, in other words, is now a necessity for anyone hoping to continue on in the business. That means less inventory, at least for the time being. A final point about punishment: Facebook has been disciplining individual apps when they run ads that violate its policies for a long time. The company slaps developers with punishments like turned-off feed stories, etc., often. Most of the time the public never finds out about it, because the developer doesn't want anyone to know. It is our understanding that Facebook has taken at least 50 apps offline in recent months that have 1 million monthly active users apiece. Solutions At its most basic -- and as many industry observers have noted in recent days -- offer companies need to be more transparent with users and with advertisers about how their businesses work. Valuable offers must either be for something that users want to purchase already, and so they will want to buy using the discount provided in the offer, or else be for a product that is actually good, but might require a trial or other incentive to get the users to see for themselves (like Netflix). There are historical examples for what happens to incentivized advertising on the web. The free iPod-style incentivized ads boomed then busted -- or in some cases evolved -- earlier this decade. On the other hand, many ads that appeared in search engines early on were of very low quality. Google succeeded in targeting ads to what users were searching for, then brought on more and more legitimate advertisers. The latter example, in some sense, is what the offers industry hopes to do now. The good news is that users clearly do care about offers as a concept. They have clearly shown, after all, that they are willing to use them instead of paying for a good directly. On the consumer side, offer companies should provide clear descriptions of what, exactly, users are signing up for, as Andrew Chen writes. Is the offer a subscription? Is information going to be shared with third parties? If advertisers have nothing to hide, why not have a Facebook page about their products? Some of these changes already appear to be in the works, driven by Facebook, MySpace and some game developers, but now is the time for every offer company to prove it can self-regulate. The same focus on transparency and self-regulation needs to happen on the advertiser side, too. Many offer companies say they have direct relationships with advertisers, but they should be more transparent with developers about when this is or is not the case. Legitimate advertisers need to clearly understand the value of offers to their businesses. Where are offers showing up? What's the incentive in the app for the user? The first step is for offer networks to improve filtering controls over what offers apper, as many low-quality offers are not valuable to users, and skirt the rules of what platforms and developers now find acceptable. High quality advertisers have told us they don't like showing up next to low-quality ones, and more may get scared away if quality is not improved. And from that last point, there's also the question of how offers can innovate to become more valuable to advertisers, developers and users. Some offer companies have started integrating ads directly into games, associated with relevant virtual goods. See TrialPay's integration of FTD's real-life flower sales into Playfish's Pet Society for a good example of that. And perhaps offer companies should take a closer look at AdNectar, and other companies that integrate branded virtual goods into games. As Jay Weintraub writes, "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." The industry will lose some money as a result of higher standards for offer quality in the short term, but in the long run, advertising must become higher quality if it's going to play a meaningful role in the mass market of social games. Social games are the largest and fastest growing segment of the US virtual goods market, according to our Inside Virtual Goods report, and about 30% of all social game revenues will come from offers this year. We don't know exactly what portion of offer revenues came from scammy offers, but we estimate it could be significantly more than the 20% of offers that offer networks now admit were scammy. And, given that offers have served as an important on-boarding experience in getting users to get engaged enough with games to make direct payments for virtual currency, the decrease in the number of available offers might at least slow down the growth rate of the number of new users who decide to start paying for virtual goods as well. Still, 70% of virtual goods revenue comes from some direct payment method, and the decrease in offer inventory is likely to mean more users use direct payments -- benefitting direct payment providers. And companies that have run a minimal amount of offers, like Playfish, obviously are not being significantly affected. The offers issue has also raised questions for the industry as a whole. The scam problem could have been solved before now. The fact that offer companies were willingly running what they acknowledge to be scammy offers goes to show that regulation is needed. Facebook and MySpace are in the best position to enforce this regulation, as they can put the burden on developers to self-regulate by suspending their apps if bad offers are found. Facebook has been criticized for not acting more quickly. Facebook has said that it will continue to be an open platform, which means that people are free to build applications and monetize as they choose, but they need to follow Facebook's policies. If developers don't, Facebook will try to enforce it. It is also building out its policy enforcement team to weed out more bad ads, and suspend ad networks that repeatedly violate its policies, though it could always be improved more quickly. As it has shown with the two most recent bans, it is quite serious. Indeed, the scammy ads issue is getting more serious in other industries, too. Google recently decided to draw a hard line against violating advertisers, immediately banning any perpetrators; this is after years of softer enforcement. Meanwhile, Congress is holding hearings on a wide range of large brands that have used scammy ads, while European regulators are going after tricky ringtone providers. And, the press also needs to do a better job. Specifically, blogs like ours that cover the industry need to be more focused not just on what companies are doing right, but what they are doing wrong. We and others have covered offer and social network advertising problems that have been long-running issues on Facebook and other platforms. One challenge has been in going beyond pointing out that a few bad offers exist and instead trying to quantify the scope of the problem. So we will continue to investigate these and other industry issues. Finally, some of you may wonder where some of our advertisers stand on these issues. We take this issue seriously. We have rejected some prospective advertisers in the past because they were doing things that didn’t meet our standards, and we are aware of some problems with offers some of our sponsors are running. In recent months, we have been working on gathering more information on how big these problems are. We are continuing to review each advertiser on a case-by-case basis. [Quiz ad images via VentureBeat]

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Can the Advertising Offers Business Find Redemption In Social Networks?

Eric Eldon

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