Thursday, October 22, 2009

Reconstructing Zynga: the industry's opinion on fraud in social games

My previous post about fraud in Social Games raised a few objections and spun a few sub-discussions. That's great, because it shows people are interested, and there's a LOT to be discussed in this field. I wanted to circle back to some of the main points that were raised in this discussion.

There's nothing new about fraud. Really. Ever since people walked this planet, I would assume, there has been fraud - more and more as time advances and human kind introduces additional currencies that replace tangible goods. It's beyond the limited availability of tangible goods; being able to control supply and demand through a symbol (call it cash, checks, virtual currency or repackaged subprime mortgages) is the basis for modern economy. But is the fact that fraud isn't new merely a reason for underestimating it? Definitely not; if it were, then why is the Spanish Prisoner scam, better known in its current days' reincarnation as the Nigerian Scam, still rampant on the web?

I'll tell you why: because where's money there's fraud. And when only a handful are being chased and prosecuted - hell, why not try it myself? Being an old story doesn't mean fraud isn't a problem, it only means it's here to stay, and engaging with it is a major obstacle on your way to scaling your ecosystem.

So what have I heard in terms of concrete objections? Two main themes:
  1. There's not much fraud in social games nowadays, and not many fraud losses. If we start scanning and challenging our customers we'll scare the legitimate ones off, and it's just not worth the risk; so we basically prefer limiting risky actions in our games.
  2. If we open up to secondary markets we will hurt the primary market - reduce the game's retention and incentivize users to leave the platform.
First, to the fraud point. Lately there has been an MRC Platinum session in San Jose, CA. One of the sessions there was called "the true cost of fraud", trying to give an overview of what it actually means to incur fraud, including fines, processing costs and others. But there's another cost for fraud, the hidden cost - the one where you don't open up to business because you're too restrictive. If you don't experience fraud, you're probably too limiting in what you let your users do, because fraudsters exploit the most profitable avenues. If you keep two types of currencies (one internal, one purchase for money or by completing offerings), do not allow interchanging them and ban transfers between users, you block a good chunk of potential revenue. In another discussion one of the participants rightfully noted that the fraud budget you set aside should be part of your marketing budget - when you let users do more, you acquire more of them. When you let users pass currency between two of your games, for example, you immediately create an incentive for an existing user to bootstrap their game in a completely different revenue channel. Not opening up because of fraud, then claiming there's low fraud on entry, is a blind spot in your strategy.

Now, going gang-ho on user verification and interaction without proper planning will indeed drive everyone off your experience. But who said user interaction needs to be a 5-page nightmare? Users expect to be engaged nowadays. Yes, you need to be an expert to allow a "one-click" experience and a highly intelligent layered friction mechanism to verify the dangerous part of your population - but hey, I'm not selling you the secret sauce, just telling you what kind of dishes it improves. All I can say is that I've seen it happen and I know it's possible.

Second, as for secondary markets: SMs create additional revenue streams. Having SMs external to the developer's platform is indeed a cesspool but compliance, accepted user behavior policy and money laundering are true considerations of a maturing industry. For social gaming and virtual currency to really become "the thing", these need to be tackled sooner or later. Will it kill the in-game purchasing experience? I claim that it won't, because going to a secondary market will be like going to the flee market to find a good deal (or maybe some very special items only very talented players can find). It's not streamlined into the game, and this context shift alone will reduce the risk of players pausing their game to go off to a secondary market to get additional chips. Yes, it will require smarter pricing and better management of supply and demand, but I don't know any single game developer that just throws a game at their users and expects revenue to start streaming - this things are highly planned, why not plan for even higher revenue by supporting a secondary market?

Opening up to more markets and users is very much possible. It requires careful planning and head on tackling of the industry's issues, but as always, it's highly beneficial for those who get it right.

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