Offerpal Moves Further Into Mobile Social Monetization with Tapjoy Purchase, Publishes Mobile Ad Policy

Key social gaming mechanics — free games, viral growth, virtual goods — are still being figured by mobile app developers. But social monetization company Offerpal is trying to get a jump on the market with its purchase today of mobile developer TapJoy, as Offerpal chief executive George Garrick tells us. Like others in mobile and social gaming, he sees virtual goods monetization on mobile devices being at the same place as it was on social gaming a couple years ago — there’s a lot of room to grow. And, to avoid further issues around questionable offers and other forms of online advertising, the company also just released a set of mobile advertising guidelines.

Although Tapjoy began life building games like TapRevenge, it has morphed into providing services to other developers. These include a software development kit (SDK) that provides a virtual goods storefront, including processing for virtual goods purchases, a few types of advertising services, and e-commerce analytics.

Offerpal is best known for providing offers to social gaming companies that it gathers from third-party online ad networks; however, a substantial part of its business includes providing a customizable offer wall for games  that also includes various direct payment options, and alternative payments like pre-paid cards. And, it already provides additional services, like analytics. Although it has been running mobile offers already, the product has been more of a test so far.

So, overall, the fit between the two companies is pretty clear.

But the advertising, in particular, has a few key differences. Incentivized advertising offers have until now not been a significant portion of developer revenue on the iPhone or other mobile platforms, while they were a formative and still-substantial way for developers to monetize games on Facebook and other social web platforms. Social game developers typically make between 15% and 20% of their revenue from offers, with the rest being direct payments, as we estimate in our Inside Virtual Goods report. Offer revenue in mobile apps is still small for most developers simply because they are not widely used.

With a big caveat — as with social games, mobile developers have found it valuable to buy ads based on a cost-per-install (CPI) basis, or sell space in their apps so other developers can reach their users. Tapjoy has turned this form of advertising into incentivized ads on mobile ads, meaning a user could install a free app or three in exchange for virtual goods, such as a song download in one of Tapjoy’s games. This appears to be where it makes most of its money. Companies like RockYou have led the CPI model on Facebook, and Offerpal has focused more providing incentivized ads from ad networks. Tapjoy’s service means it will be getting deeper into CPI for mobile.

Mobile Advertising Issues

The norm, for mobile, is traditional online banner advertising. A wide variety of companies, including AdMob, Quattro, Greystripe, Adfonic and others run ads directly from brands and agencies, or provide them through third-party online ad networks, or let advertisers run their own, self-serve style. However, Apple and other mobile platforms do not appear to be regulating these ads for quality.

Progress has been made on this issue on Facebook, and mostly because Facebook itself has made a series of changes to weed out various forms of deceptive advertising over the past year. Today, Offerpal, and basically all of its offers competitors, as well as banner ad networks on Facebook, are forced to comply with Facebook’s rules prohibiting deceptive or otherwise inappropriate ads from third parties, or risk being banned themselves. MySpace has pushed similar requirements.

The situation is murkier on mobile platforms. Many of the leading advertising service companies do not appear to be monitoring the quality of their ads, as TechCrunch reported last week; the result is that some of the same type of deceptive advertising that has been removed from Facebook is appearing on iPhone apps. Indeed, Tapjoy, which has been testing out offers from Offerpal for months, was running questionable ads for mobile quiz subscriptions until the report, and similar ads can still be seen on other networks. Offerpal suspended those ads pending review, after the report, but the bigger question is how the mobile ad industry plans to regulate for quality.

Offerpal says is trying to get ahead of the issue. It released an extensive set of mobile advertising policies yesterday, clearly stating that it will pre-screen advertisers and ban them if it spots bad behavior. It also says that it is in direct contact with Apple about maintaining quality on the platform. Presumably, the many other companies that serve ads in apps from third parties are working hard to do the same, lest they face public disgrace and platform punishment.

Regulations around mobile offers will still ultimately depend on the particular mobile platform, of course, as it does on the web. As Garrick tells us today, some social platforms — whom he didn’t name — are less restrictive on quality than Facebook and MySpace. The result is more questionable ads, potentially higher-short term revenue for developers, and longer-term user and advertiser dissatistfaction, and eventual self-destruction for the platform. Apple and other platforms will need to do a better job of clarifying their advertising policies. For example, some platforms may be okay with a small 9-point font for disclosures about ads for mobile subscriptions, while others may demand a clearer 12-point font.

Mobile Advertising Opportunities

Aside from the nature of offers, monetizing virtual goods on mobile platforms has a few key differences. With Apple, for example, the company wants direct payments for virtual goods going through its own iTunes payments system — a reason it introduced the possibility of free-to-play games with virtual goods sales, last fall. Big developers, like Ngmoco, are already seeing success here, as we’ve been covering. An equivalent platform payment service does not exist on Facebook, at the moment, so direct payment options in offer walls, like what Offerpal has, are the main way that companies make money. The difference, at the moment, is that Apple takes a 30% cut of revenue while third-parties like eBay take much less. Facebook takes a 30% cut from its Credits virtual currency, but does not currently make Credits the mandatory direct payment option, and Credits do not otherwise have the market penetration that iTunes has with users.

So, direct payments per se are not where Offerpal’s opportunity is. Instead, it’s what the company can do in terms of optimizing everything else for developers. Can its virtual goods store and analytics system — a simple set of e-commerce stats — make more money for developers? And what can it do with ads?

Garrick says the company wants to do things like targets ads based on specific information like a mobile user’s GPS location; locally-focused ads can be quite valuable to users, and could mean higher payouts to developers. He also believes that new mobile devices, like the iPad, could bring in a lot more subscription money for media publications. These companies are also starting to experiment with virtual goods monetization concepts. Perhaps we’ll see iPad owners taking offers to gain a New York Times subscription, one day soon?

For developers looking to try out Tapjoy, the company typically takes around 30% of revenue, Garrick says (a norm for App Store services, although Offerpal doesn’t necessarily take as big of a cut from its social gaming partners). The company already works with more than 1,000 developers and reaches a total of 25 million users, so it is likely making good money for itself and partners. Tapjoy founders Lee Linden and Ben Lewis will be joining Offerpal, and helping to lead its mobile efforts. Look for Offerpal’s resources and know-how — and new mobile market presence — to help make it into a bigger competitor in the emerging market for mobile virtual goods monetization.

Also, be sure to check out our Inside Social Apps 2010 conference happening next month, where Garrick and other industry leaders will be discussing the future of virtual goods monetization.