Virtual Goods, Scams, Investigative Reporting And The Media

from the all-in-one-package dept

For many years, we’ve been quite skeptical of any business model in virtual worlds/social networks that rely on “buying virtual goods.” That’s because these are all based on artificial scarcities, and as we all know (hopefully, by now), relying on artificial scarcities for a business model is incredibly risky, especially once people realize the scarcities are artificial. And yet, over the past few years, a number of businesses have been built on this very premise. In fact, Silicon Valley is crawling these days with businesses built on selling virtual goods, and if you talk to many VCs about it, you’ll quickly note that they’re positively giddy over the fact that people are paying for this stuff. What they don’t seem to realize is that it’s unlikely to last.

In the last couple weeks, Mike Arrington, over at TechCrunch, did an amazing job calling attention to the widely known, but rarely discussed in polite company, dark underbelly to most of those business models: quite a large part of their revenue is based on scammy offers that effectively trick unsophisticated purchasers (often kids) into signing up for expensive subscriptions to things they don’t want. I was at an investor “roundtable” a couple months ago, which was mostly bankers in suits, and they were laughing about just how gullible people are on these things, and it’s great to see TechCrunch exposing them, and pushing the worst abusers to clean up their act. Of course, even when some, like Zynga, claim to be cleaning up their act, Arrington was able to dig up a video where Zynga’s CEO proudly talked about the scammy tactics he used — and then noted that these same scammy tactics showed right back up on Zynga, after the company promised they were gone. Those who use these kinds of tactics may find that while they “bring revenue now,” it may be short-lived. Companies that focus on such abusive tactics live to regret it (just ask RealNetworks).

But, the really amazing thing, as pointed out by Dan Lyons/Fake Steve Jobs, in an amazingly un-Fake-Steve-Jobs-like rant, is to compare the series of writeups by Arrington with the love letter to Zynga and other “virtual goods” companies in the NY Times, which came out after most of Arrington’s posts, and makes no mention of them at all. As Lyons/FSJ notes:

So: they walked into this shit-storm and somehow, by some miracle, managed not to notice the fecal matter flying all around them. It’s like covering a football game that took place in the middle of the blizzard and neglecting to mention the weather.

Now, maybe they did all the reporting before Arrington’s stuff broke. In which case they should have gone back and updated their info. Or maybe, just maybe, Zynga’s PR people teed up a Times story as a kind of rebuttal to what Arrington was reporting. Either way, that’s what ended up happening: Zynga used the Times to deflect the bad shit flying at them from Arrington. They need good press because they’re hoping to cash out by going public next year. That story in the Times will be worth millions. Many millions.

Meanwhile, Arrington, still digging, blasted again on Saturday night, reporting that sleazy ads had popped up again on Zynga, despite promises that they would be taken down.

Um, New York Times? If you guys are still wondering why people are dropping their subscriptions and getting their news from blogs instead of you — this is why.

After which, Lyons/FSJ notes:

And to all those people who go around wringing their hands and saying what are we going to do when the “real newspapers” all die and we have to get our news from Gawker and HuffPo and TechCrunch? Friends, I think we’re going to be just fine…. What really cracks me up is how often I still hear people say that bloggers are mere “aggregators” and the “real journalism” gets done at places like the Times. Because time after time, blogs are simply beating the shit out of the newspapers. They’re the ones who still dare to go for the throat, while their counterparts at big newspapers just keep reaching for the shrimp cocktail.

Of course, there’s just a bit of irony in noting that Dan Lyons wrote one of the quintessential blog bashing articles four years ago, when he was writing for Forbes, at one point suggesting that blogger “journalists” were no different than notorious (NY Times) maker-up-of-stories, Jayson Blair. Nice to see he’s coming around to recognizing things perhaps aren’t so bad in the blog world.

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Companies: offerpal, techcrunch, zynga

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Comments on “Virtual Goods, Scams, Investigative Reporting And The Media”

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27 Comments
Anonymous Coward says:

Assumed this was going to be about MMOs at first. Then I find out it’s about stupid facebook games. Idiots on social networks will do stupid things because they are idiots on social networks. Just like most people use the Internet and computers every day despite being completely clueless. So while I don’t care for these ‘games,’ it’s not much of a surprise considering you could probably get thousands of people to respond to ‘free viagra with credit card signup.’

Anonymous Coward says:

There is only so much truth to go around. Think back to the halcyon days of broadcast television.

3 channels. How many newspapers were there back then?

Now everyone can be a newspaper or a television or a radio or an internet.

The truth has become irreversibly fragmented. Oh well. Welcome to the 21st century. Thanks for making it. Now stop assuming the past means more than the future and start using your imagination.

Cheryl H (profile) says:

These “virtual scammers” are no different than the snake oil sellers of days gone by. There is a reason good old PT Barnum said “there’s a sucker born every minute”. A least today we have the means and the media to expose these things. Also as to the death of the daily paper, let it die. If I want up to the minute news I’m turning to the blogs. I do not have any desire to return to the “halcyon days of broadcast television”. I prefer my news open forum style with the option for instant debate.

JGM says:

Call me stupid, but although you make valid points in both categories, I’m not seeing the connection at all between “virtual goods” and “scammy marketing tricks” that you’ve conflated here.

If somebody wants to buy orc-proof armor or whatever for a game, more power to them. It’s really no different than limited-function shareware and exactly the scenario posited in a TechDirt favorite, Chris Anderson’s “Free”. Of course given that there is no scarcity of game programmers out there, any of whom can make a similar game with cheaper armor, it had better be a really good game and that armor had better deliver a good value in terms of a better gaming experience if you expect to make any money in the long run. I fail to see how this becomes a bad thing. Even where the thing being bought is “worthless” in traditional game terms it’s not much different from people who buy (nearly worthless) window stickers to customize their cars.

Scamming people into worthless subscriptions, however, is a different thing altogether and is never acceptable. (A personal theory is that the success of these schemes has less to do with kids who don’t know better than the alpha-wave state induced by a good game). But It’s not the same thing as selling virtual goods. Even Arrington in his original stories makes this distinction clearly — it’s the fact that the main reason the game companies (and by extension Facebook et al.) are profitable is not because they are selling virtual goods but because they are scamming.

JGM says:

Call me stupid, but although you make valid points in both categories, I’m not seeing the connection at all between “virtual goods” and “scammy marketing tricks” that you’ve conflated here.

If somebody wants to buy orc-proof armor or whatever for a game, more power to them. It’s really no different than limited-function shareware and exactly the scenario posited in a TechDirt favorite, Chris Anderson’s “Free”. Of course given that there is no scarcity of game programmers out there, any of whom can make a similar game with cheaper armor, it had better be a really good game and that armor had better deliver a good value in terms of a better gaming experience if you expect to make any money in the long run. I fail to see how this becomes a bad thing. Even where the thing being bought is “worthless” in traditional game terms it’s not much different from people who buy (nearly worthless) window stickers to customize their cars.

Scamming people into worthless subscriptions, however, is a different thing altogether and is never acceptable. (A personal theory is that the success of these schemes has less to do with kids who don’t know better than the alpha-wave state induced by a good game). But It’s not the same thing as selling virtual goods. Even Arrington in his original stories makes this distinction clearly — it’s the fact that the main reason the game companies (and by extension Facebook et al.) are profitable is not because they are selling virtual goods but because they are scamming.

Designerfx (profile) says:

not a long term business

it never intended to be a long term business. All it takes is a year of saying “We made 5 million dollars” to get some CEO somewhere to suck up and invest as well.

I mean really, how many times has phorm/etc renamed themselves?

Diebold -> premiere election services.

There isn’t an actual penalty for these companies, they just rename with what they earned and move and do it again.

Mike Masnick (profile) says:

Re: Re:

I’m confused as to how this post isn’t in conflict with this one:

http://techdirt.com/articles/20091013/1125436510.shtml

It looks like in that one, you’re praising selling virtual goods, but in this one you’re blasting it. Could it just be selling things people are willing to pay for is fine, but scamming people is bad?

There’s a bit of a difference there. In the D&D case, what’s cool and different is the selling of convenience (faster to get to other levels). I’m not a big fan of selling magic swords, but I do think that selling convenience or some other benefit is reasonable.

But, yes, in the end it’s a bit of a fine line. The question, really, is what is sustainable and what is not. I don’t think simply selling virtual goods by itself is really sustainable.

PixPol (user link) says:

Interesting Piece

Well written piece. It provided quite a bit to chew on in terms of what constitutes a legitimate revenue stream.

Pixels and Policy will be working from your research to take a look at what this means for Zynga as a company, especially if they try to make for a public stock offering in the near future.

Best,
The Team
http://www.pixelsandpolicy.com

ya know says:

if you want to do your own search engine and have bandwidth , you can goto sourceforge.net and get some opensource and give it a whirl i found some neat “spiders” as they call them that will crawl the web or even sites and archive there stuff.

ITS a way to get round filters and censorship…..and if i know whom is doing what i can TRUST it more as will me friends.

Anonymous Coward says:

Mike Arrington is a royal pooper for making MG Siegler work on Halloween.

I went Trick-Or-Treating as MG Siegler (TechCrunch Shirt and all) and felt sad when he wrote an article Halloween evening titled “Have No Halloween Party to Go to? Check out Heidi Klum’s party online” or something.

I mean, I really feel bad for the guy. Why does Arrigton make people work on Halloween? At the third party, I was even pressured to sing “I’m MG Siegler” song. Man, Arrington is super el suck-o slave driver. At least some MG Siegler had fun on Halloween somewhere… Even if it was in spirit.

BBT says:

Mike, how is selling virtual goods any different from selling software? What’s the difference between buying content via an expansion pack or even the initial game itself (“real” goods) and buying tiny pieces of content in the game (“virtual” goods)? It’s all just buying extra content for your game. Software is IP like anything else, an infinite good, so there’s no difference between buying software and buying extra content for that software. It’s all virtual goods, and people have been building business models on selling it since computers were invented.

BBT says:

no, I’m saying that paying Microsoft to upgrade from one version of Office to another is just as much of a purchase of a “virtual good” as paying to upgrade DDO from a version without the sword of doom to a version with the sword of doom. The only reason why the sword is called a virtual good is that it actually fits the metaphor of being an “item”. But it’s really no different from any other software purchase and there isn’t a functional difference between purchasing an item, purchasing access to a level, purchasing an expansion pack, or whatever. It’s all just purchasing software.

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