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The market for virtual goods, and the CPA offers that many consumers complete to purchase them, is under attack. The first salvo was fired by TechCrunch's Michael Arrington and the battle has now spread to the mainstream media.
The fallout was quick. And it continues: after being the target of no less than six TechCrunch posts in the past week relating to these 'scam' offers, Zynga, one of the most prominent companies in the space, has removed all of its CPA (lead gen) offers while it seeks to work with the third party networks that provide them to root out the types of offers that have come under fire.
Not surprisingly, there are a lot of people railing against companies like Zynga and criticizing any media outlet who fails to cheer Arrington's apparent crusade to protect consumers. Case in point: former Financial Times reporter Tom Foremski criticized the New York Times for not writing about the controversy in its recent article about virtual goods. Fake Steve Jobs, Newsweek's Dan Lyons, went even further. He has argued that the Times' failure to do the sort of hard-hitting reporting he thinks Arrington is engaging in is a good example of why newspapers will die.
What both of them, and others, are missing: virtual goods aren't in and of themselves scammy. Although the idea that people would pay real money for virtual items seems crazy to many, users willingly open up their wallets. The scam: some of the companies that sell virtual goods display offers from CPA networks and some of these offers aren't on the up-and-up.
Before you can turn that into a subject for award-winning journalism, some background information, and perspective are needed. In other words, one needs to quantify just how big of a problem these scam offers are.
To start, it's worth recognizing that, in most cases, most users of applications and services that sell virtual goods will never actually buy any. They're happy to live with what they can earn for free. The reports I've read indicate that only several percent of Zynga's users, for instance, actually purchase virtual goods. Of those who do, the majority tend to pay cash for those virtual goods. The rest complete CPA offers. CPA offers accounts for 20% of total company revenues, meaning that 80% of the company's revenue doesn't come from CPA offers [see note below].
Granted, a third is a big number given that Zynga is said to be on track to pull in $250m in total revenue this year. But that doesn't mean that a sizable chunk of Zynga's users are being ripped off. That's because, of those users who complete offers, many complete offers that are completely legitimate. For instance, many of the CPA networks Zynga and others rely on carry trial offers from well-known brands like Netflix. The fact that there are plenty of legitimate offers makes it difficult to state with any certainty how much revenue the scam offers are really generating.
Making it even more difficult: 'scam' means different things to different people. If an offer has associated charges which are disclosed in fine print, for instance, is a user who doesn't read the fine print being taken advantage of or does he bear some responsibility too? What about underage users who don't really care to understand the offers they accept -- scams or not -- because they know their parents are footing the bill? In my opinion, at least some of the scammy offers are better described as scummy offers. They may not be illegal, but you wouldn't provide them to your grandmother. They're also not just relegated to CPA networks. You can find scammers and scum exploiting everything from AdWords to late-night infomercials.
I think a few conclusions are in order:
- Virtual goods are not in and of themselves scammy.
- Most users are not actually paying for virtual goods.
- Of those who do pay for them, most will pay with cash.
- Not all of the CPA offers made available to those who would rather complete an offer than pay are scams.
In short, it seems pretty clear to me that the number of users who fall victim to scam offers is likely to be a small fraction of the hundreds of millions of users who are exposed to the virtual goods ecosystem.
All of this said, there's no doubt that scammy and scummy offers exist and companies that are in it for the long haul should do what they can to avoid them. After all, these offers do have the potential to cause problems if they come to dominate parts of the virtual goods ecosystem. If consumers begin to associate virtual goods with mysterious charges on their mobile bills and credit card chargeback nightmares, virtual goods will eventually lose their luster.
But the fact that the virtual goods market is doing so well and only growing in popularity with consumers hints that the drama and controversy over scam offers may be a bit overblown. Obviously, virtual goods have not become a global multi-billion dollar a year business based on scams. While there are certainly offers that the market could do without, the story about scam offers probably means a lot more to the bloggers pushing it than it really means to the market itself.
As I see it, the attacks on virtual goods, companies like Zynga, and CPA networks are throwing the baby out with the bath water. These attacks have completely lost sight of the fact that the scams make up a relatively small fraction of the market, not the whole market. And while that doesn't mean that we should ignore these scams and that companies interested in remaining legitimate shouldn't clean up their act, the drama and controversy that has been drummed up strikes me more as a scheme to boost certain bloggers' pageviews and public profiles than they do a genuine effort to make the virtual goods ecosystem safer and stronger.
Photo credit: sashafatcat via Flickr.
Author's Note: Zynga has informed us that 20% of its revenue comes from CPA offers, not 33% as had been reported by a third party I originally cited. This post has been updated to reflect the company's figure.