Facebook Games Face Ethical Advertising Woes

Facebook recently removed social games publisher Zynga’s latest game, Fishville, from its platform, citing questions with some potentially misleading cost-per-acquisition (CPA) ads Zynga was selling to partners.

Fishville, which launched on Friday, reportedly added 875,000 users in its first day of availability. Farmville, another Zynga game, has more than 63 million users, according to AppData, a service that measures the user base of the top Facebook applications from week to week.

Zynga CEO Mark Pincus has defended the ads on his blog, but has also decided to remove all cost-per-acquisition (CPA) ads from its games while Zynga reviews its advertising policies.

Pincus wrote on his blog yesterday:

we recognize it is our responsibility to ensure that offers which generate a bad user experience are not shown with any of our games.

therefore, we are removing all CPA offers across zynga games until we can control their inclusion and presentation ourselves. This will be effective by end of day today. this move is worth it for the long-term user experience and value to our partners like facebook and myspace.

Zynga, the developer of popular games on the Facebook platform like Mafia Wars, Farmville, and Zynga Poker, has been coming under fire in recent weeks for its advertising practices.

At issue are the lead-generation ads that Zynga and other application developers sell to monetize their games. These developers make money in three main ways: from users paying real-world cash to buy virtual-world products and upgrades for their in-game characters; from selling advertising sponsorships within the game experience; and by selling access to their user base to advertisers, who pay the game developer when users sign up for real-world offers in exchange for virtual-world products.

The problem lies in these lead-generation ads, some of which are deceptive, according to TechCrunch founder and co-editor Michael Arrington. Beginning two weeks ago, Arrington wrote a series of articles calling into question the ethics of such ads, as well as the policies of both game developers and Facebook itself, for allowing them.

Arrington did not take issue with the concept of paying real-world cash for in-game benefits, or for the idea of users completing real-world offers to gain in-game benefits. His issue was with those specific offers, which he says make up the majority of ads, that confuse users. Those ads usually end up costing more than the user would have paid had they simply paid cash for the in-game benefits, according to Arrington.

The controversy has already brought down one at least one victim: ad network Offerpal, one of the CPA-based advertising networks that works with game developers like Zynga, replaced its CEO last week.

New CEO George Garrick referenced the controversy on the Offerpal blog:

Regrettably, Offerpal has been guilty of distributing offers of questionable integrity from some of our many advertisers. The policies we’ve had up until now have not been thorough enough to prevent such offers from airing, nor has our organization had the proper focus and accountability to ensure quality assurance over the offers we distribute.

Offerpal has since taken down the majority of its ads, and will inspect each one before it goes back online, Garrick said.

While the matter of misleading ads is important to address, it’s equally important to put them in perspective, according to Justin Smith. Smith is the founder of Inside Network, which publishes the Inside Facebook and Inside Social Games blogs, as well as research in the social gaming space.

“It’s important to remember that a large majority of virtual goods transactions in social games take place via direct payments,” Smith told ClickZ. The virtual goods market in the U.S. will reach just over $1 billion this year, according to Smith.

Facebook makes money indirectly from CPA ads that game developers sell, since the developers will likely spend more of that money buying Facebook ads to promote their games and get more users. But Facebook is also intent on balancing any short-term revenue gains with long-term plans to keep users happy, Smith said.

In June, Facebook banned two ad networks it allegedly found to be using deceptive methods from advertising on its platform.

Even as Zynga has drawn fire for its advertising practices, one video game giant is validating the social gaming space with an acquisition.

Electronic Arts has acquired Playfish for up to $400 million in cash, equity and potential earn-outs. The move is a validation of the social gaming space, as well as the model of selling virtual goods for real money, said Smith. For its part, Playfish does sell some of the same kinds of ads that Zynga is being criticized for, but they have placed a larger emphasis on direct payments, Smith said.

Playfish could be on track to make as much as $75 million this year, according to Smith. Most of Playfish’s games are on Facebook, and the largest one is virtual pet-caring game Pet Society, which has 21.5 million monthly active users and 5.24 million daily active users, according to AppData. The second largest is virtual restaurant game Restaurant City, with 18.1 million monthly uniques.

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