The quest to uncover new business models and revenue streams has become something of a crusade for the games business in the past five years. After decades of selling full-price games and the occasional expansion pack, the industry has been forced into rethinking its models by a combination of factors - demographic expansion on the one hand, and technological advancement on the other.
Games are hardly alone in this, of course. The advent of high-speed connections and the rapid pace of change in digital media technology has forced every media business to look hard at its fundamentals. New opportunities have been opened up, of course - consumers now want to access media in contexts which were undreamed of even a few decades ago, which has expended old markets as well as creating brand new ones. Old doors are also shutting, leaving businesses which fail to adapt to new market realities to die slowly, their oxygen supply cut off not only by piracy but by fundamental changes in consumer behaviour and perception.
As such, finding new ways of making money and new classes of product is a healthy and necessary exercise for any industry which wants to survive. However, the recent behaviour of Zynga - possibly the world's most successful casual games company - is a salutary example of the kind of pitfalls which businesses face in creating such new opportunities.
Zynga is a San Francisco based company which creates games for Facebook, MySpace and other social network platforms. If the name of the company is not familiar, their games certainly will be. Anyone who uses Facebook is bound to have run across Mafia Wars, Dope Wars or FarmVille - the company's most successful game, with over 60 million active users.
These games are fairly straightforward in their concepts, but well-designed in their execution - by no means the pinnacle of casual game design, but good enough to be able to leverage the advantage of their social setting to create a compelling ongoing experience. Scratch the surface, however, and you find that they all share a common business model - one which has come under a great deal of unwelcome scrutiny in recent weeks.
Essentially, the games are based on a "freemium" model. Players can enjoy them for free, in which case Zynga makes a bit of money from straightforward advertising revenues. If they want to buy extra items (or simply to play for longer, by acquiring more "action points" instead of waiting for them to recharge over time), they can do so either with real money (a direct revenue stream from consumers), or by signing up to an offer from one of Zynga's partners.
It's the last part of the equation which has caused the scandal around Zynga's business model. Some of those partners were perfectly legitimate - Netflix, for example, encouraged people to subscribe to a 30 day trial of their service, and provided action points for Zynga games in return. Others, however, amounted to little more than scams, often promising people free items and then signing them up for subscription services which cost vast amounts of money and were nigh-on impossible to cancel.
Other partner offers would install applications on players' computers which were little more than malware, interfering with their programs and operating system and providing no clear way to uninstall the offending software. Some of them were merely extremely morally dubious - others may well have been illegal, at least in certain jurisdictions which don't take kindly to companies deliberately scamming their consumers.
What's certainly the case is that such scams were a breach both of Zynga's own restrictions on advertising - which the company appears to have completely ignored - and of Facebook's restrictions. As such, Facebook pulled the company's most high-profile game launch, FishVille, after only two days of operation, only restoring it to the site when Zynga had removed the offending partner offers.
Estimates of just how much money Zynga was making from these offers vary. The company's own executives dismissed it as a "mere" 20 per cent of their revenues, then revising the figure downward again to 10 per cent in a move which feels suspiciously like an attempt to downplay the importance of the whole scandal. Other sources peg the income from partner offers as being as high as a third of revenue, with some even suggesting that it could be as high as 70 per cent. For a company which has been (perhaps optimistically) valued at around a billion dollars, and which expects to post revenues of over $200 million this year, that's big money - even at the lower end of the estimates.
It doesn't take a great business mind, of course, to understand that scamming your consumers is not a fantastic long-term model. It essentially prevents you from building a loyal following, instead burning through consumers (which are not, contrary to what some business leaders seem to believe, a limitless resource) who, once mistreated, become disillusioned not only with your specific business but with the entire sector in which you operate. It's a quick way to make money, certainly, but also a certain way to limit your sector's growth.
The whole situation has been further compounded by Zynga's CEO, Mark Pincus, who appears to be a walking disaster in corporate communications terms. Not only did he address a meeting of entrepreneurs in which he proudly announced that he had done "every horrible thing in the book" in order to get revenues - and admitted that he "couldn't get rid" of a piece of malware which the company foisted on its consumers in return for some poker chips for one of its games - he allowed this to be videoed and posted on the Internet. PR people reading may wish to pause at this juncture to slap themselves melodramatically in the forehead.
Needless to say, the whole situation has now developed into a series of pledges from Zynga not to do anything naughty ever again - none of which ring particularly true, especially in the light of earlier protestations that the scammy nature of the partner offers was none of its business - and a class action lawsuit being filed against both the company itself and against Facebook.
The fallout is likely to be limited, assuming Zynga can actually clean its act up. Even if the class action succeeds (which it probably won't), it is unlikely that it will seriously damage Zynga's revenues. But some damage has been done; consumers have become more wary, and some have left the industry entirely, while advertisers, too, have been disillusioned by the whole affair. If you're a big, reputable company like Netflix, why would you want to hitch your cart to the social gaming space when they have a track record of associating your good name with scammers and con artists?
The whole affair is an object lesson in how not to do new business models. The key watchword here is ethics - because while many of Zynga's ideas are fine, and its games are perfectly decent (albeit not terribly original, which has led to accusations that it ripped off other developers), its owners decided to leave any sense of business ethics or of responsibility to their consumers at the door when they started up the company.
That kind of behaviour is not uncommon, of course - but in the long term, it has the potential to be extremely damaging. Zynga got lucky; its scandal has not broken into the view of the public, at least not yet. The next company to try to fund its operations through underhanded dealing and sharp practice, however, may not find itself quite so lucky - and if that happens, the impact could be immense, not just for one company but for the entire casual games sector.