Solar Power

Posted November 6, 2009

Louis-brandeis_sub There is a natural and healthy tension between politics and markets. The tension is the difference between socially oriented citizens who are often unfamiliar with business and in any case favor the strong, visible hand of government protection and their commercially-oriented brethren who prefer the invisible hand of market competition and generally view government as a cost to be minimized.

The trade offs between these views are the leitmotif of this blog. Jam Side Down refers to the tendency of partisans of both schools to inhale too deeply their own exhaust, underestimate perverse consequences, and end up with a sticky mess on the floor. 

LET THE SUN SHINE IN

Interestingly, one type of regulation is generally favored by both camps. These are Sunshine Laws, named after the famous observation by Supreme Court Justice Louis Brandeis that "Sunshine is the best disinfectant". Sunshine laws mandate transparency in government and have been passed by the federal government and all fifty states. They generally require that public business be, well, public. The case for transparency increasing government accountability and reducing corruption poses problems in practice (Guantanamo comes to mind) but is by now so widely accepted as to be unworthy of debate.

If Sunshine laws work so well in the public sector, why are they are so little used in the private sector? There are two general excuses. First, government is a monopoly, so accountability is frequently a function of transparency whereas the private companies are held accountable by market competition, which requires secrets. This is not entirely silly. Second and less convincing to me, private business is private. There is, after all, money involved. Norway publishes the annual income and net worth of every citizen and, although there is an interesting case to be made for it, we don't do that here and are not likely to start.

Companies prefer the shade. They avoid sunshine, especially if it can lead to public embarrassment. As a duly sworn federal regulator, I noticed that even in the very early days of the internet a company whose dangerous working conditions had killed an employee thought nothing of paying a fine and conducting business as usual. But propose to publish the details of their transgressions on a public web site and suddenly you had their full and undivided attention.

In short, Brandeis was right and we should apply his insight more often to the private sector (and in fairness, publicly trade companies are for good reason subject to high standards of disclosure).

SILLY CON VALLEY

We have seen an amazing example of the power of sunshine in Silicon Valley this week. Our arguments here tend to involve slightly obscure technologies, but bear with me — it's a great story.

Playfish-Logo- Background: Social networks like Facebook and MySpace are huge. Facebook alone accounted for a quarter of all page views in the United states in the past 90 days.

What, exactly, is everybody doing on Facebook? They are playing games. Games sell virtual goods (seeds for your garden or a shotgun to dust an opponent) and they are fertile grounds for advertisers.

Some of these ads are sleazy, or in the current vernacular, they are "scammy". Some of the scammiest ads sell cell phone subscriptions (example: ad copy says" Where is Your Girlfriend? Find out her exact location now." See the add here but watch where you click). This particular site sells a useless $10/month subscription onto your cell phone. The worst scams always seem to cost $9.95/month (take an IQ test, then "enter your phone number to see the results". Congratulations, you just subscribed). The carrier gets half, Facebook gets a couple bucks and the publisher and the ad service get the rest. It is extremely lucrative for everyone except the consumer, who has a very difficult time getting these subscriptions taken off of a phone bill. Consumers learn the hard way that if their 11 year old enters a cell phone number to get some free seeds in Farmville, an innocent farming game on Facebook, they need to change their cell phone number in order to stop the bills.

This is not small time stuff. Farmville, for example, has 61 million active users, a population slightly larger than Great Britain. Companies like Slide, RockYou, Zynga, Playdom, and Playfish author games for social sites. The last three of these companies serve ads and make hundreds of millions of dollars in revenue — a huge amount of it fraudulently (meaning that people subscribe without realizing they are subscribing, or subscribe to a service that has little or no value).

Other companies like TrialPay, Offerpal and SuperRewards are in the business of generating sales leads. Sign up for a Netflix account or a cell phone or a credit card and they get paid. So they offer game credits to get you to enroll. And plenty of people get massively hooked into online games, usually starting with a free version.

To some extent, lead gen scams self-regulate, since the as quality of the leads degenerate, Netflix and others quickly reduce prices or rescind their offers. In other cases however, scams generate both revenue and leads and consumers have very little recourse.

These scams are perverse because in the ecosystem of social networks, social gaming sites, lead generators, and phone carriers, each player is powerfully disadvantaged if they hold themselves to higher standards (Slide and RockYou refused to run scam ads and are dramatically smaller, less valuable businesses as a direct result).

Zynga-logoWe have, in short, a classic case of a new technology industry that needs adult supervision. Ideally, a regulator like the FCC would assert jurisdiction and intervene quickly. Often their authority in these areas is not clear however, especially if the companies are based outside the U.S. Alternatively, Congress may notice the problem, hold hearings, draft legislation, get lobbied, and eventually pass a bill that gets signed into law.

Neither the regulatory nor the legislative process are perfect and neither are quick. Enforcement is often slow and technically inept, so that the smartest of the bad guys move to new scams anyway. Lather, rinse, repeat. 

SOLAR DISINFECTANT

Which is why it is amazing that in less than ten days, the scam game problem has been addressed, significantly improved, and potentially solved thanks mainly to the application of strategic sunshine by the blogosphere.

The story began on October 26, when TechCrunch founder and Valley provocateur Michael Arrington ran a story entitled "Social Games: How the Big Three Make Millions"that mentioned in passing the scams prevalent in social gaming. In writing about Zynga, Playfish, and Playdom, Arrington noted:

The goal of all of these games is to get to a higher level, and
generally have more fun growing things or killing things faster than
your friends. Get addicted to the free version, then start spending to
move things along more quickly. Once people are committed, it’s easy to
get them to pay...

All three companies are willing to give game currency in exchange
for offers. Sign up for Netflix. Buy a ringtone subscription. Or energy
drinks. Sign up for a credit card. Get car insurance. Take an IQ survey
that requires a $9.99/month mobile subscription to see the results. We
even found one for arthritis medication… One executive we spoke with says that 70% of total revenue from these
applications may come in from lead generation, not direct payments.
Netflix alone will pay $30-$40 for a free trial (requires credit card).

Michael_arrington The result of this mild rebuke was several emails to Arrington from insiders who detailed exactly how these scams operate. Five days later he published a Halloween treat for the industry with "Scamville: the Social Gaming Ecosystem from Hell" where he summarized the competitive dilemma facing social gamers as "The games that scam the most, win".

Here’s the really insidious part: game developers who monetize the
best (and that’s Zynga) make the most money and can spend the most on
advertising. Those that won’t touch this stuff (Slide and others) fall
further and further behind. Other game developers have to either get in
on the monetization or fall behind as well. Companies like Playdom and
Playfish seem to be struggling with their conscience and are constantly
shifting their policies on lead gen.

Arrington also revealed a public conversation he had held with the CEO of one of the greatest offenders.

Yesterday I attended the Virtual Goods Summit in San Francisco. In the Q&A session of one panel I asked Offerpal CEO Anu Shukla
to explain the ethics of her business, and outlined my ecosystem of
hell argument above. Shukla went on a tirade, calling my points “shit,
doubleshit, and bullshit”

(Arrington knows how to seize a good PR moment, so he had the conversation videotaped. See it here). Shukla is now Exhibit A in the course "How a CEO should not respond to a journalist".

Events then unfolded quickly. Arrington published a series of daily updates, many worth reading.

Logo_offerpal_media"(Arrington) raises good points about
‘scammy’ advertisers and the bad user experience they create. I agree
with him and others that some of these offers misrepresent and hurt our
industry…..In
fact, the worst offender, tatto media, referenced in the techcrunch
article, had already been taken down and permanently banned prior to
the post. Nevertheless, we need to be more aggressive and have revised
our service level agreements with these providers requiring them to
filter and police offers prior to posting on their networks. We have
also removed all mobile ads until we see any that offer clear user
value."

During our research we spoke to dozens of scam artists, game
developers, advertisers and legitimate and illegitimate middlemen. One company was consistently mentioned as being the most above board with their approach to the market – TrialPay. So we’ve asked TrialPay CEO Alex Rampell to write a guest post on how he sees the market, and how it can move forward in a healthy way. Rampell published Tragedy Of The Social Gaming Commons: A Blueprint For Change which offered specific guidelines for companies and specific examples of how TrialPay had applied them. 

In my talks with Facebook earlier this week they took the position
that they’ve been aggresively protecting users, and they’re taking the
same tone in this blog post. They say that with so many ads and so many
apps its impossible to monitor the entire platform effectively. My
answer was that it took me about 10 seconds to find really scammy ads on FarmVille,
the most popular social game on Facebook with 63+ million monthly
users. If they just start with the big guys, a lot of the problem will
go away.

In our original post we showed a financial connection between these
ads and Facebook. Apps take the money from the ads and then
aggressively buy ads on Facebook, effectively giving them a cut. So
slow enforcement against even the top apps when they are so blatantly
violating the rules is both unacceptable and suspicious.

Ten days — whew. Arrington, who is drawn more to heat than to light, gets a lot of credit.  A lawyer by temperament and training, he marshaled his facts and arguments, presented them cogently, and goaded the industry into responding. That they responded responsibly and quickly is not only gratifying, it is astonishing.

I am quite familiar with the liberal response to these sorts of developments: these companies are simply trying to avoid being properly regulated and we can't trust them to behave.

Congress will have no objection from me if they wish to jump in and make some sausage. But Congress  is designed to work slowly. They are unlikely to have nearly as much impact as the strong dose of public humiliation caused by some warm California sun has had this week.

Competition, Economics, Politics, Reform, Social, Technology

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