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We interviewed Anu Shukla, chief executive of Offerpal about her views on the advertising offers that fuel the social gaming industry, which have been hit by controversy.

Here’s the context: Online social games are one of the hottest areas of our economy. Millions of users are logging in to play games like Mob Wars, but while these games are free in their basic form, they do charge users that want to buy things like swords or other virtual goods to improve their standing or status within the game.

The games increasingly do so by resorting to special “offers.” These offers are a type of ad that try to get a user to do something like sign up for a service, i.e., a credit card or a subscription to Netflix, in exchange for points that the user can use to buy their virtual goods or accelerate their standing.

The offers are a big source of revenue for social game companies on social networks such as Facebook. One game company called Zynga has done so well — reportedly earning more than $100M in revenue — that it may file to go public next year. But the offers have come under fire because some can be deceiving. Offerpal’s Shukla got into a videotaped verbal scrap with Techcrunch editor Michael Arrington last Friday at the Virtual Goods Summit over the ethics of offers. Arrington said that offers are dragging the social networking and social games industries into “hell.” Shukla replied that his accusations were “shit, double shit and bullshit.” Arrington, himself known for relishing showdowns, said to Shukla that she either was unethical or didn’t know her business very well. Arrington followed up with a post slamming the offer business as a scam. The debate has set off fireworks in the social gaming ecosystem. We interviewed Shukla on Monday about her views on the offer industry.

VB: We wanted to step back from the discussion that has happened so far, which highlights examples of bad offers and concludes that all offers are bad. Can you step back and provide some analysis that will help us understand the offers business?

AS: I love the approach of stepping back and looking at this. I want to put everything in context. there are 300 million people on Facebook alone. The major game companies have seen those users at one time or another. There are probably 180 million on Facebook alone playing games, not to mention MySpace and all of the other social networks and game web sites. All of those people are participating. Consider the Chris Anderson book, “Free,” about the business models based on free goods and services. It has been embraced by everyone, like Google with its free search results. You sometimes get sponsored links above organic search results and they are clearly highlighted that way.

The social games and virtual goods industries in the U.S. are following the ‘freemium’ models. If you go above this fray, you see that I am encouraged to use my credit card to get reward points or fly a certain airline to get frequent flyer miles. At Amazon.com, I am offered $30 off a purchase if I sign up for their credit card. That was one of the reasons I started this company. I thought it was such a great idea. It is at the intersection of free and product bundling. We observed that people were playing games all day long but weren’t willing to pay for them. Banner ads weren’t working. They continue to not work. So I don’t see a sustainable economy unless a free business model produces something for the publishers who are creating these games. As you know, virtual worlds and social networks are free. About 90 percent of those who play them today play for free. You can play and level up and send free gifts to people. Then there are people who are absorbed in the experience and want to increase the intensity of it. In that case, the first thing they encounter at some game sites is a request to pay for the [virtual goods] via a credit card. We are not involved in that stage.

About 10 percent pay. Of those people, maybe 7 percent or 8 percent [of those who pay for something] get to our offer page [as an alternative to credit card payment]. You get a page that says “earn stuff.” A promotion. You click on that. You again have a choice of payment methods from us, like PayPal. You get offers for a mobile service. Free product. Or a Discount. Some of the very best advertisers have done really well on this system. There are tons of Proactiv (anti-acne skin treatments) sold to the players. There are a lot of book clubs that people join. There are movie subscriptions. People will make outright purchases. Of the offers we have, 90 percent require you to take out your credit card. The other 10 percent now — are you following me on how this funnel is getting really small — let you choose one of 5,000 other offers [instead of paying with a credit card].

If you put that in perspective, then you know it’s not true that the offer industry is responsible for all of the revenues of one company or something like that. [Some reports have erroneously suggested that most of a social game company's revenues come via offers]. It’s a small piece of what is happening and it is driven by consumer choice. About 90 percent of the players, I don’t see, [because they are playing for free and aren't buying anything]. The 10 percent are avid players [and most of those pay with credit cards]. They may be the kind of players who don’t mind paying subscription fees of $300 a year to play World of Warcraft. We are addressing these same players through offers. These are the same kinds of promotional bundles you see everywhere, from display ads to credit card payments. You pay $9.99 for a month of a service and $19.99 a month after that. They don’t change their ads for us. We get the same ads that they make for Google or Yahoo. Some of the less well-known brand names I see advertised on Techcrunch. They use an image of Rachel Bilson advertising a mobile subscription on Techcrunch. [pictured above: Michael Arrington of Techcrunch. Photo by Alexa Lee]

These ads are Federal Trade Commission compliant. If anything wasn’t, they would be shut down quickly by the FTC. And on top of that, we also have an additional guideline we have to follow. That is the platform policy guideline. That is where the platform owners like Facebook don’t want adult-oriented or gambling related ads. Here is another thing. Offerpal has published a set of offer inclusion and exclusion tools which we provide publishers for free. What this allows them to do is select the offers they want or don’t want. They don’t even have to call us.

We provide the customer service. If a user, despite multiple ways to unsubscribe, they are not happy, then they come to us. We are the merchant of record. They may ask us for their money back. If an offer receives too many complaints, we are on the hook for it. We go back to the advertiser if they charge twice for a transaction or there is some other problem. If we have too many complaints from an advertiser, we will cancel them. We police ourselves. We follow our guidelines, starting from the FTC. We are on the hook. That’s what you get for being an aggregator.

We have not had a huge number of complaints about any offer that has run on our network for more than 24 hours. What does happen is that there are all kinds of offers that are acceptable on Facebook which certain publishers don’t want to run. The customer service headache is not worth it. We remove them. Some advertisers, who are not by any means the norm, will redirect to a landing page that even we don’t know about. Then all of a sudden we are non-compliant. We won’t do business with them. I feel the controversy is a little bit misplaced. It’s ironic because we hated the incentive business. We saw what was broken and did what we could to clean it up.

VB: I want to clarify some things you pointed out. Do you get a sense for how the publishers use the tool they have to select or deselect the offers they want to participate in? Do you get the feedback about which ones they like or don’t like? [picture by Alexa Lee]

AS: They don’t need our permission and we don’t ask them why they took something out. All of the numbers associated with an offer, such as how much revenue is coming in, are there for them to see. They can see if they are making $500,000 per offer per month and they can get rid of it if they want. We don’t question them.

VB: Isn’t that one way for you to find out if there are bad offers in the mix? What is your way to find out if there are bad offers in the mix?

AS: Consumer complaints. They complain. The publishers can tell us about it. We police the offers based on the consumer complaints. But remember the offers won’t get in our system unless they are FTC compliant and they meet the platform guidelines, like Facebook or MySpace.

VB: And a small percentage of the consumers complain?

AS: A very small percentage of the consumers complain. About 90 or 95 percent of the complaints are from consumers who say I filled out the offer and didn’t get my points. The publishers fix that problem. We handle about four million transactions per month. That’s the average for the last six months. We probably get 100,000 inquiries or complaints in a busy month. About 90,000 say they didn’t get their points. About 10,000 of them say they want to cancel the offer that they signed up for, or they didn’t like the offer, or why am I being banned.

VB: What percentage does 10,000 complaints add up to?

AS: That is less than 1 percent complaints. I have less than 1 percent of the people complaining about offers.

VB: Is there a way to break down those complaints? Do you resolve every one of them?

AS: Every one of them.

VB: If there are scam offers, what exactly are people complaining about? Are they complaining about the things that Arrington brought up, like whether there is small print that doesn’t tell you what you’re paying when you accept an offer?

AS: I have never had a complaint about that. The complaint that I get, which again is less than 1 percent of the users, is that I signed up for this and they said they would charge me $20 and they charged me $40. They charged me twice. I don’t know if it is because a user clicked on it twice because they didn’t think they did it properly. Needless to say, those are the ones that I get. There are maybe 15 of them a month where we give the money back to them. [Editor's note: In the above ad from Techcrunch's story, Offerpal notes that the cost of the offer is spelled out in the red boxes. Zynga has asked that the above ad be taken down, though it is still running elsewhere].

VB: If you look at this record compared to other kinds of advertising media, I suppose this record looks good?

AS: I don’t know about other kinds of advertising media. I can only tell you what we see. I can tell you there are some very avid offer takers that take them again and again. They have a good experience with it. If the account comes under review because they have done too many transactions, they complain very loudly to let them continue. We have lots of repeat users. You can go to [analytics companies] Quantcast or Compete.com and look at how many people come back again and again. About 57 percent of our visitors in a month are repeat visitors.

VB: Do you have a list of categories that you don’t take ads on?

AS: We don’t take ads on any site that caters to children under 13. We follow the federal Child Online Protection Act law very closely. We don’t take anything illegal. Gambling is illegal in the U.S. We don’t take any pornographic or adult content. For the subscription type offers, the mobile subscriptions, Facebook has published a very stringent guideline on things like how it must be clearly stated at the point where they are about to enter a telephone number. A box for an action should not be pre-checked with an option. We have to make sure the landing pages are in compliance if we make those offers.

VB: Techcrunch wasn’t very specific, but they noted in a story that some of the questionable offers have been quietly pulled down over the weekend. What were they talking about?

AS: Absolutely. There is nothing quiet about it. We started reviewing the Facebook guidelines that came out in July. There were many offers taken down in July that didn’t follow the guidelines on boxes shouldn’t be pre-checked and all this stuff. Last Thursday, before the Virtual Goods Summit, we sent a note out to our publishers, saying that Facebook had come out with more explanations on their guidelines. We said we would be taking a revenue hit and would be removing some offers from advertisers that were not compliant. They would be put back in when they were compliant with the newly published guidelines. So there was nothing we did over the weekend that we weren’t doing all week long. We are not quiet about it. It’s Facebook’s world and we have to follow their guidelines otherwise they will shut you down.

VB: Do you know how many we were talking about there? How many advertisers were told they had to redo their offers?

AS: We told all the publishers this. On the advertiser side, it was just a handful. Some of these advertisers had already complied with earlier guidelines, especially in the area of mobile subscriptions. They were compliant but Facebook continued to refine the guidelines and did so about a week or ten days ago. They published additional guidelines. They said here are guidelines with more clarity. Many publishers said they would rather run a small subset of offers until they got clarity.

VB: I know the Obama administration has been more active in enforcing regulations under the Federal Trade Commission. Have they turned their attention to this area in any way yet?

AS: The FTC has existing guidelines for what ads can happen. We haven’t heard from the FTC. I believe that every ad we have ever run has been compliant. Facebook’s guidelines are much more strict.

VB: There are a lot of offer companies out there. You’re the leading company. Do you see the competitors not playing by the same rules?

AS: I believe if they didn’t play by the rules of the platform guidelines, they would suffer the consequences. I am not out policing them. But I am sure the publishers and the platforms are policing them. I don’t see anyone willingly trying to skirt guidelines because that wouldn’t be in their interests.

VB: Can you talk about Zynga? They are the leader in the social games industry. But they are painted a certain way. They do more offers. They may be more aggressive.

AS: I cannot say they are more aggressive than anyone else. They use us. They are busy making their games and promoting them. They use a handful of providers like us to monetize and they do a lot of direct payments business. They have an investment in customer support and are monitoring support to make sure the users don’t get disgruntled. They are acting in favor of the user. For example, in every case, I said that 90 or 95 percent of the complaints are about how the user didn’t get a point after doing an offer. We handle that by asking the advertiser. They confirm there was a valid transaction. Then we confirm back to Zynga that they earned their points. There is bound to be some leakage, or transactions that are lost. Zynga always errs on the side of the user. They don’t get paid. We don’t get paid. The user gets the point. They are among the most generous in awarding virtual points when a transaction can’t be tracked.

VB: We have heard that Slide does not participate in offers. Do you have a sense for all of the players on the social networks? Are the companies with the highest ranking apps participating in virtual offers?

AS: I would have to say that all of the people that have virtual currency are participating in some kind of micro-payment system and these are often supplemented by ad-supported payments like offers. I am not aware of any major player that is not doing that. There are certain types of apps that don’t lend themselves to any type of virtual goods monetization. They don’t have a virtual currency or digital goods. Certainly, prior to two years ago, many apps were built without this in mind. If you are talking about poking your friends or writing on walls, [popular Slide apps] those apps don’t fit with virtual goods and offers. I think the idea was they would monetize through advertising. It was after poker and role-playing game apps became popular that people realized that virtual goods monetization could be different and drive more average revenue per user than advertising.

VB: I talked to James Hong, founder of Hot or Not, about a comment he made on the Techcrunch story. He said that was getting a lot of attention for saying he didn’t want to use offers because they seemed unethical. But he noted he was talking about 2005, before all of the offer business got going strong, and that he isn’t with Hot or Not anymore and so he doesn’t know what their offer policies are.

AS: Offerpal was incorporated in June 2007. Hot or Not is using us for offers right now. Isn’t that nonsense? I am all for having open discussion and a debate on this. Let’s put scammers out of business. But if you don’t have facts and start hurling accusations at everybody and they aren’t supported, and then you publish things that are misleading….Isn’t there a government agency that watches ethics in journalism.

VB: Plenty of Fish’s founder Markus Frind came out in opposition to offers too.

AS: They don’t use offers and we don’t know them. But I do know they use pretty aggressive methods to recruit users. They are on the aggressive and spammy. I would like to make one note. Offerpal has never collected an email address of a single user and sent them emails selling something.

VB: It seems like you have been painted as being nothing more than a spammer.

AS: It is very clearly spelled out in an offer that if you take it, you are accepting that an advertiser is going to email you. A small percentage of offers do that, because they are selling something. It is like I sign up for Continental.com and click that I want emails sent about offers in my region. Then the advertiser can email me. If we hear from a user that they are getting spam, we have a routine that explains to them how to unsubscribe. You have to have that. Facebook was just awarded $711 million in a case against a spammer. So it’s spammer beware. Offerpal itself has never sent an email to anybody.

VB: Are complaints as a percentage of the users declining?

AS: We talked about the statistics earlier. So the complaints about offers are at the bottom of a large funnel. Those who take offers repeatedly cannot be dissatisfied because they can always stop. This is a completely erroneous discussion. There was a report from Think Equity that said that offer-taking is on the rise compared to direct payments. Why would that happen, with this completely voluntary activity? It’s like when I signed up to get my Amazon credit card because I wanted $30 off. It’s a great deal. If I am a teen, I do the offers because I want poker chips or a dress for my avatar. As a mature woman, I spend my time on Amazon.com, where I get my offers.

VB: Back to that question. Are complaints as a percentage going down?

AS: I believe they were insignificant before and they remain insignificant. Certainly, Facebook’s move is abating whatever noise there was.

VB: Is there more that has to be done by the likes of the industry to clean up?

AS: I think that Facebook is ahead of every other network property in enforcement of guidelines. They have gone way over. We get offers all the time from direct marketers. They are sophisticated. There are different types of advertisers coming into the fray. I would like to get advertisers who have never done direct response before. The current direct response advertisers want more.

VB: Would you rather see the likes of Procter & Gamble than late-night infomercials?

AS: I would like to see a different set of advertisers come in and underwrite the advertising. The late night
informercial people are in every mall and in Bed Bath and Beyond. If you are smart and build a billion dollar business, you will become a respected brand name. I am not at all against the late-night crowd that can become respected. I love the direct response advertisers we have. I also want people who haven’t tried this channel to learn how to use it. They provide variety for the users we have.

VB: Do you have a sense for how much the well known brands use offers?

AS: If it is a well recognized brand the offer performs a lot better. Most offers we get are from known brands that are sophisticated direct response marketers, from auto insurance to health and beauty.

VB: Has anyone done a survey that focuses on the offer business?

AS: I am not aware of any such research by any such party. Maybe we should do a study. I think our statistics are representative of the industry. We have 160 million user accounts. I have awarded 730 billion in virtual currency points.

[The following questions are supplemental email questions].

VB: What is the company’s Better Business Bureau rating?

Offerpal says it has a B+ rating and hasn’t received any new complaints since Techcrunch’s story ran.

VB: Some companies are changing their policies. Are these reactions to the press attention?

AS: Facebook has been actively enforcing their ad guidelines since July. They were actively enforcing last week – see the email Offerpal sent publishers on Thursday – prior to VGS summit- we have similar notifications sent to publishers in July . So, it is not a result of Press attention over the weekend. Since all publishers have the ability to also remove advertising offers from their own applications using our platform’s self service offer inclusion/exclusion tools – many of them (publishers) have , on an ongoing basis, been removing offers that they find inappropriate for their content . Our focus has been and is to make sure all offers are compliant with FB ad policies. This includes the Video Professor offer that is fully compliant.

I saw the [Techcrunch] post on RockYou offers – as mentioned in their email- this is a white labeled Offers product from Peanut labs. The reason that their email is being sent now , is that they did not launch their RockYou Offers product until August 09. Seems like they are just hearing about the July policy. I don’t believe their offers product is widely used , but they do use it for their own apps. Most of their apps – like Slide, were not designed for virtual currency and micro transaction based economies. It seems like they and Peanut Labs went through some considerable effort to actually create an offers product to use and resell to other publishers, so they must have seen a business opportunity. [Note: Peanut Labs did a survey that showed users prefer direct payments by a wide margin. They also prefer research surveys (Peanut Labs main business) over offers]. But it is new and does not have much traction outside their own apps – so it may not be a significant source of revenue for them.

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