Zynga's Virtual Currency System Comes Under Heavy Fire

Thanks to some extensive reporting by a few gaming-industry websites, prominent social media game companies like Zynga have a battle on their hands.

The big issue is whether Zynga - which recently announced a huge profit - is basing most of its impressive financial growth on scams.

Investigative blog Techdirt and Mike Arrington of TechCrunch took Zynga to task for drawing a huge revenue stream from what they argued are questionable contracts, intensive marketing to children, and developer-created scarcity.

Pixels and Policy takes a look at the allegations and finds out there's quite a bit to be said for the quality of games-industry journalism.

A Financial House with a Questionable Foundation?

Dan Lyons of the website Fake Steve Jobs recently fired a salvo that pointed out the strange divide between coverage of Zynga's marketing in the mainstream New York Times (which recently botched a Second Life fashion article, to its increasing discredit) and on prominent games-industry news websites.

As it turns out, no one from the New York Times took any note of the fact that a slew of industry blogs and games industry veterans were slamming Zynga for its allegedly deceptive contracts and real-money transactions for virtual currency. Reading the New York Times article, it's almost as if no one ever said a word against Zynga's methods.

From Lyons' response:

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.

But what are Zynga's supposedly questionable business practices? According to a critique of Zynga's policies on Techdirt, the company is far from transparent in its offers of in-game currency to often underage consumers. In order to receive "Farm Cash," users can take surveys and receive "free trials" of products - most offers only require a cell phone number.

The problem comes along with the cell phone bill. Free horoscopes end up signing the user on to a cell phone "downloadables" contract, which offers ringtones and games for a set monthly fee. Failure to return the "free trial" products within a week can saddle unsuspecting users with heavy bills. This, Techdirt argues, is the heart of Zynga's financial success, and it's no way to run a company.

Virtual Currency, Real Profit

Techdirt may have a point, and similar offers have taken root in graphical virtual worlds like Second Life, where kiosks offer Linden Dollars to users who sign up for free trials of products or provide personal information to survey companies. The highest Linden Dollar rewards, of course, go to those who complete offers that have the potential to cost them huge sums of money.

Since Zynga is a private company, there is no way of knowing precisely how much revenue is generated from questionable surveys and trial offers like those in FarmVille, but if user participation in Zynga's Haitian charity drive is any indication, a substantial population of Farmville users carry large amounts of "Farm Cash." 

This is hardly just a virtual world issue. As Zynga prepares to offer public stock, its financial methods become a major issue of concern for institutional investors interested in riding the booming financial market for online game developers. If any of Zynga's revenue earning methods come under legal scrutiny, it could badly damage public interest in the company and shutter its hopes for expansion through public investment.

Another question that might interest potential investors: If fine-print and legal trickery are Zynga's main revenue creating pushes, what of the much-touted virtual currency market? How many players of Zynga games purchase Farm Cash outright as opposed to the purportedly "free" option of filling out surveys?

If Zynga's currency market is limpid save for those holding potential free trial time bombs, might the luster of Zynga's social media gaming operations fade in the eyes of large investors? Faced with serious questions from other bloggers and industry veterans, Zynga would do well to respond before taking any further steps towards a possible disaster.

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If Zynga's currency market is limpid save for those holding potential free trial time bombs, might the luster of Zynga's social media gaming operations fade in the eyes of large investors? Faced with serious questions from other bloggers and industry veterans, Zynga would do well to respond before taking any further steps towards a possible disaster.