We've been chronicling just how badly both Hasbro and Mattel screwed up in responding to the massive success of Scrabulous on Facebook. The ridiculously popular application was attracting over 500,000 users every day and (amazingly) making Scrabble cool again, pumping up sales of the physical board game. But, of course, the intellectual property lawyers freaked out and said "this must stop." The resulting legal threats and lawsuits created quite a lot of backlash and anger (and a boycott of Hasbro games). Venturebeat is now looking at the aftermath, and shows that the fight effectively killed all momentum for Scrabble on Facebook. Part of the problem may be that the game is now fragmented, with a Hasbro version serving some countries, a Mattel version serving others and the Scrabulous makers' "modified" Wordscraper on the market as well. The end result is that each has significantly fewer users than Scrabulous had. In fact, the monthly number of users pales in comparison to the daily number of users that Scrabulous had. Great way to kill a wonderful (free) promotion that was attracting thousands of new fans to the game.

It's difficult to see how Hasbro could have handled the Scrabulous situation any worse. Scrabulous, of course, was a Scrabble-like game made for Facebook, which quickly became one of the most popular apps on that social networking site. Hasbro, which owns the rights to Scrabble in the US, didn't have its own version, and rather than recognize an opportunity, it chose to shoot itself in the foot, suing the brothers who created it. The Scrabulous guys eventually came back with a slightly modified game, which became quite popular as well, while many angry Facebook fans organized boycotts of Hasbro products. Prior to that, of course, the attention brought about by Scrabulous had resulted in a renaissance for the game, leading many people to go out and buy physical Scrabble sets. Yes, Hasbro took a situation that was driving more sales of the board game, and turned it into one where thousands of people were boycotting its products.

Either way, it appears that Hasbro has now dropped the lawsuit over Scrabulous, saying that the changes made to the game makes the lawsuit no longer necessary. Still, it seems like Hasbro played this game backwards. Back when Scrabulous was popular, almost everyone I knew on Facebook had a few games going -- but since Hasbro got involved, it seems people have moved on. So, even if Hasbro "won" the legal victory, they pretty much killed their real opportunity to capitalize on renewed interest in the board game. The company says that the new versions put together by the Agarwalla brothers "provides people in the U.S. and Canada with a choice of different games." Sure, it does, but wouldn't Hasbro have been better off by capitalizing on the fact that all of their interests were aligned initially -- rather than competing -- and Scrabulous was driving more sales?

We've talked about how both Hasbro and Mattel seriously screwed up in dealing with Scrabulous, the online version of Scrabble written by two brothers in India and placed in Facebook where it became a huge hit. While the companies did make overtures to working with the brothers, eventually they sued to shut down the game, pissing off plenty of legitimate fans, leading to widespread boycotts of Hasbro and Mattel games, and allowing the brothers to create their own new game that has also won fantastic reviews.

It appears that not every game company is so short-sighted. Reader Doug Schneider writes in to let us know about a guy who created a virtual copy of the popular casual game Bejewled inside the virtual world World of Warcraft. Yet, rather than shut the guy down or threaten to sue him, the makers of Bejewled, Popcap Games, hired the guy to create an official version for World of Warcraft, saying that the original version lacked polish, so they figured it made sense to just hire him to clean it up and make an official version. What a concept.

As you recall, Hasbro's decisions on how to deal with upstart Scrabulous backfired badly. The company first threatened Scrabulous, then tried to do a deal with them. When that failed it (finally!) built its own Facebook Scrabble and then sued Scrabulous. Rather than working to Hasbro's advantage, this backfired in a huge way -- pissing off plenty of people who swore never to use Hasbro's version of the game. And then it was just a matter of days until the Scrabulous guys came out with a new game that was close to Scrabble, but different enough to likely avoid all copyright and trademark claims.

Now, Hasbro only owns the rights to Scrabble in the US and Canada. Mattel owns the rights elsewhere. Now, seeing that Mattel had the distinct advantage of seeing how much backlash there was against Hasbro for its actions, and how poorly Hasbro's own Facebook Scrabble was received, you might think that Mattel would try a different path. Nope. Mattel has now forced Scrabulous offline outside of the US as well. To be fair, the guys from Scrabulous overplay their reaction as well. It's not that shocking. After all, this is how companies react these days. Rather than going with the faux outrage, why not just release WordScraper and get people to sign up for that, rather than any "licensed" version of Scrabble?

Well, you kind of had to see this one coming. Days after taking Scrabulous down in response to the lawsuit from Hasbro, the brothers behind the game have put up a new game called "WordScraper" that is similar, but has a few different rules as well. The idea, obviously is to be different enough to get around the lawsuit from Hasbro.

When you look this over, you begin to realize just how badly Hasbro screwed up in handling this situation. In focusing on a legal solution, it may have created the worst case scenario for the business side of the company.

When we talk about various trademark and copyright disputes, one response we often get is that a company has to react that way to "protect" its "property." This is not quite accurate. While there are some issues concerning trademark and preventing a trademark from going generic, there are almost always better business responses than suing -- and on copyright issues, there's no requirement to protect. However, in an age where lawyers all too often make business decisions based on what can be done legally, rather than what makes the most business sense, those options are all too rarely considered. In the past, there was often little that could be done for those impacted by such decisions. These days, however, things are quite different. Pissing off a large group of people, even if you have the legal right to do so, can often be a disastrous business move.

This is clearly demonstrated by Hasbro. The saga began earlier this year when Hasbro realized that Scrabulous was ridiculously popular on Facebook. Scrabulous was developed by two brothers who liked the game Scrabble and noticed that it couldn't be played online. Hasbro had done little to help put the game online, and the brothers were merely doing a much better job responding to the market need than the company that supposedly "owned" the rights.

Hasbro finally put together its own version (which got terrible reviews) and then sued Scrabulous, getting the brothers to take the game down. And, historically, that's where all this would end. Hasbro was legally in the right and had every right to push to block Scrabulous. But, as a business decision (as counterintuitive as it may seem), this reaction may be quite bad for business.

First, witness the rather loud and nearly immediate response from many Scrabulous fans, slamming Hasbro for its actions and pushing a boycott on all Hasbro products. Some will surely claim that many of these folks would probably never buy a Hasbro product in the first place and so this is a lot of noise about nothing. However, don't underestimate the reputational hit that Hasbro will take for this -- especially among younger folks who may be Hasbro's most important target audience. As Metallica is still in the process of learning, your reputation is extremely important, and damaging it by treating your fans incorrectly can do an awful lot more damage to your brand than you might expect.

Now, add in the fact that the Scrabulous guys have come back with Wordscraper, and chances are people are going to flock to it, just as vehemently as they now want to avoid Hasbro's Scrabble. That's about the worst case scenario for Hasbro, and it was entirely avoidable if they had simply realized how people would react to their decisions (which wasn't hard to guess from earlier responses prior to the lawsuit).

Update: Some folks in the comments (and via email) are pointing out the rumor that Hasbro offered to buy out Scrabulous from its creators. That's a valid point, but it doesn't really change the rest of the calculus here at all. Even given the fact that Hasbro made an effort at buying them out, that still doesn't mean that (having failed that) suing them was the proper second response -- as evidence by exactly what's happened since then.

Well, it was bound to happen sooner or later. Following Hasbro's decision to finally actually sue over Scrabulous (though, of course, it waited until it had its own competing game first), the guys behind Scrabulous have shut off access to the game on Facebook for users in the US and Canada. Outside of those countries you can still play it -- or you can go directly to the Scrabulous website itself. Or, of course, you can go use Hasbro's version of Scrabble, though, as the report notes, it doesn't seem to be working very well. And, without any competition, Hasbro doesn't have that much incentive to make sure it gets much better.

For months, Hasbro and Mattel had been threatening the makers of Scrabulous with a lawsuit for daring to do what the gaming companies had been unwilling to do: make a fun version of Scrabble available on Facebook in a way that got many people playing the game on a regular basis. It took nearly 9 months, but Hasbro finally put a version of Scrabble on Facebook itself, and now that it's up has finally officially filed the lawsuit.

It's rather telling that Hasbro waited until its own version was online to file the lawsuit. What the company is basically admitting is that Scrabulous was a great promotional vehicle for Scrabble (otherwise why leave it up?), but now that Hasbro is competing with Scrabulous online, it wants to cut out that competition. Hasbro's General Counsel is being quite misleading in saying: "Hasbro has an obligation to act appropriately against infringement of our intellectual properties." That's not quite true. There is no "obligation" to sue someone who made your game popular again just because you were late to the game.

Scrabulous showed Hasbro that there was a huge market for their game. There was no indication that Hasbro had any interest in Scrabble for Facebook prior to Scrabulous' success.

Then there's this bizarre quote from Hasbro's GM of digital initiatives: "Hasbro has always had the same two priorities. One is to offer a great playing authentic game for fans and the second is to protect our intellectual property. This was theft of I.P., plain and simple." Really? Your second biggest priority is to protect your IP? Then why did you wait all this time to sue? Clearly there was a benefit in leaving Scrabulous up while your own version was being developed. Clearly the comparison to "theft" is incorrect. No one would let "theft" go on for months on end before suing, just so they could create their own competitive offering.

The Scrabulous/Hasbro situation is a perfect example of Matt Mason's thesis that "piracy" is almost never about "theft." It's almost always a market indicator that the market is unhappy with what's being offered. It's the market showing companies what they want.

Back in January, we explored the news that both Hasbro and Mattel (who own the rights to the board game Scrabble in different regions) were upset and threatening to sue about the incredibly popular knockoff version Scrabulous on Facebook. As we pointed out at the time, shutting down the game would quickly piss off 2.3 million Scrabble fans -- many of whom were interested in the game for the first time, most likely leading to real sales of the board game. While the situation still has not been resolved (and Scrabulous remains online), the New York Times has the latest details that suggest that Real Networks is negotiating with Scrabulous' creators. Since Real has a deal to produce an online version of Scrabble (the article first says the deal is with Hasbro, and later says it's with Mattel, so it's not clear who the deal is with), perhaps this will all be worked out for the best. However, the article does mention that executives from Mattel are against the idea of settling with the creators of Scrabulous, fearing that it "would set a bad precedent."

That's lawyers speaking, not marketers. How could a fun online game that has rejuvenated interest in what was seen as a rather dull board game among many folks today, be considered a "bad precedent?" How could having millions of new fans of your game and treating them right, rather than depriving them of what they want be considered a "bad precedent?" Some may answer that the "bad precedent" would be that it would encourage others to create similar knockoffs of other Mattel games, but, again, if they drove as much interest in the originals as Scrabulous did, isn't that a good thing? Some may claim that it would deprive Mattel the opportunity to license the games for lots of money, but again looking at Scrabble as an example, the bigger fear for Mattel should have been the fact that many people didn't care about the game at all. By letting random people create the games for it, it can quickly determine which games work well online and then work with the creators of those games to put an official stamp on it. The Agarwalla brothers created this game at no cost to Mattel, who otherwise would have spent a ton of money to create it after which it might not have caught on in the same way Scrabulous did. This way the game has been created, tested and even built up an audience at no cost to Mattel. Shouldn't they consider that to be a good thing?

It was only a matter of time before super-popular office productivity killer, Scrabulous, was sued by Hasbro for infringing upon the Scrabble trademark. A shutdown notice was sent two weeks ago, although, as of right now, Scrabulous is still operational (hurry up and finish up your games). Founded in 2006 as a standalone website by two Indian brothers, Rajat and Jayant Agarwalla, Scrabulous' growth accelerated significantly when it launched as an application for Facebook. As the 9th most popular application on Facebook, Scrabulous boasts over 2.3 million active users with over 500,000 of them active daily. While Hasbro does indeed have a strong legal case against the Agarwalla brothers, they are missing out on a key opportunity by pursuing this litigious route. Although Hasbro recently licensed the digital rights of its games to EA, no online version of Scrabble exists right now. So, by shutting down Scrabulous, Hasbro would be angering 2.3 million of Scrabble's biggest fans. Instead, why not hammer out a compromise and turn this into a win-win-win situation? Unfortunately, most likely, history will repeat itself, as this is not the first time Hasbro has chosen this route -- in 2005, they shut down popular online Scrabble site, e-scrabble.