The social gaming lead-gen controversy sparked by TechCrunch’s Michael Arrington came to an end this week when OfferPal, the company he singled out for scamming users and advertisers, replaced its CEO and posted a mea culpa for its past and current practices.

Beyond that, Facebook, MySpace and mega gamer Zynga have made moves this week to better regulate gaming offers. Will the move decimate the social gaming industry?

Many of the gaming companies posting excellent revenues on social
networks encourage consumers to pay cash for in game currency so they
advance through the games faster. If gamers don’t want to pay cash for
currency, they can get currency for accepting lead-gen offers. Often
they mistakenly end up paying more for these offers than if they had
paid cash, which hurts users. And if they skip out on the offers after
getting the currency, it hurts advertisers who made the offer to the
game. (TechCrunch has laid out examples of these scams here.)

No one wants to admit that they use scam ads, but the fact is that many gaming companies are earning a lot of money this way. Arrington called out former OfferPal CEO Anu Shukla last week, saying that the lead generation network for Facebook apps was driving up revenues by trafficking in these practices.

Shukla denied the charges, calling them “shit, double shit, and bullshit.”

But now, a week later, Shukla has been replaced as CEO and the new OfferPal chief, George Garrick, has released a mea culpa:

“I have quickly concluded that regrettably, Offerpal has been
guilty of distributing offers of questionable integrity from some of
our many advertisers….
we’ve also made some erroneous communications
to partners and developers about the state of our compliance. In
particular, we recently sent a letter to our Facebook developers which
assured them that we were completely in compliance with Facebook
standards, when in fact we were not.”

The gamers who offer the most lead-gen scams make the most money, like Facebook superstar Zynga. They than put the money back into advertising on the social nets, which is great for social revenues. Zynga alone spends $50 million on Facebook ads.

Meanwhile, companies that don’t engage in such tricks often suffer with their revenues. But the scams are clearly not worth the risk of ruining public
perception, as Facebook, MySpace, Zynga and now Offerpal are making large changes to fix them.

But what will that do to the gaming landscape? Is it ok to traffic in questionable marketing tricks until you’ve established yourself as a leader in your field? That seems to be what Zynga has done. TechCrunch has an old video of Marc Pincus, Zynga’s CEO, giving a motivational speech on how to “control your destiny”:

“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.”

Garrick, meanwhile is hoping that OfferPal’s changes will override their past track record saying “we will do everything we can within reason to lead the industry and set the example in these efforts.”

How about gaming companies that have avoided such things at the expense of their bottom line? Will they get a leg up now? Possibly, since they’ve had to figure out other revenue streams. 

Individual gamers have already learned to shy away from such offers or have become accustomed to the repercussions of selling their info to questionable advertisers. The big change will be in next year’s revenues for companies that have been posting impressive growth rates by leaning heavily on sketchy lead gen offers.

Sean Ryan, CEO of social gamer Meez, explained on his blog why Meez doesn’t use such tactics:

“offers are only a portion of revenue for online publishers, and of that
portion, some of those offers are clearly misleading and need to be
purged.  We all have known this for months and months, and at
publishers like Meez, we individually spend time doing so since the
damage to the brand and the inevitable charge backs/customer service
issues just aren’t worth the cash to keep a bad offer up there.”

But in general, he thinks it will have positive results:

“The key issue is that the misleading offers are often the higher eCPM
ones vs legitimate ones, so some online publishers need to get used to
a lower eCPM than they
formerly enjoyed, but in the longer run, it will be healthier for
everyone (BTW: Meez gets less than 1% of revenue from offers).  The
advertisers will be happier as well since they will be getting more
legitimate buyers, making those CPA deals worth more to them than a
bunch of lousy ones.   And users will be protected from some of the
more scam-like issues that we’ve been seeing for the past 18 months.”

What do you think? Is this a tempest in a teapot or something that’s been a long time coming?

Image: Anu Shukla