The Troubling Rise of Facebook’s Top Game Company

Correction Appended

Cheryl Blitman got a horrible shock when she opened her cell-phone bill. It was $170 higher than usual. Her phone company told her that her daughter had subscribed to 17 premium texting services. But Michelle, 15, was adamant; she had not. Eventually they figured out the source of the charges: FarmVille.

FarmVille is the most popular game on Facebook — 65 million unique monthly players and growing. It is also the furthest place imaginable from the seedy underbelly of the Internet. It’s a hamlet where the sun always shines, crops always grow and your friends drop by to do chores accompanied by plinky guitar music. Its astonishing popularity is a testament to the potential of gaming on social networks. Social games promise the golden pork-chop combo of the addictiveness of computer games with the communality of Facebook and MySpace. And they generate some of their revenue from product come-ons, which is where Michelle — and FarmVille‘s owners — has run into trouble.

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FarmVille is part of Zynga, the fastest-growing, most buzzed-about social-game company of the moment. In October, Zynga operated six of the 10 most popular Facebook games: FarmVille, Cafe World, Mafia Wars, YoVille, zyngapoker and Roller Coaster Kingdom. Founded in July 2007 by Mark Pincus, 43, Zynga had 45 staffers by June 2008 and now employs 600, counting contractors. Its most recently launched game, FishVille, hooked 9 million users in a week. Zynga is privately held, but a rival less than half its size was recently bought by Electronic Arts, the GM of games, for $400 million. How could an outfit that offers scammy mobile-phone horoscope subscriptions get so popular?

To figure that out, we have a useful analogy close at hand: FarmVille. There are two ways to move ahead in the game. One is to grind, as it’s known — plow, plant and harvest. Once you’ve grown, say, eggplant, you accumulate enough points to move up to a wider choice of crops. You invite friends to be your neighbors. You exchange gifts and help out, all of which let you accrue the capital you need to expand your farm, thus making it ever more remunerative.

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But if you want to skip all that backbreaking plowing, er, clicking, or if you’ve run out of friends who faux-farm, you can buy farm cash and get what you want. These virtual goods are the products that social games are actually trying to hawk. People hand over real money for make-believe merchandise. It’s like using greenbacks to buy Monopoly dollars — but if you want to win, you’ll pay up.

Starting a social-gaming company is also a grind. You have to do a million little things to get ahead. Industry watchers credit Zynga with figuring out hooks for its games that make people want to revisit — a combination of shrewdly timed rewards, incentives and opportunities to play with friends.

Pincus calls these the “golden mechanics.” He learned them by trial and error, mainly while working on his two failed start-ups, Tribe.net and Supportsoft. He also has a behavioral psychologist on staff. Unlike traditional electronic games, which can’t be changed much after they’re shipped, Zynga’s games constantly evolve in response to users’ preferences, so they’re more habit-forming. “They’re making movies,” he says of console-based-game creators. “What we’re doing is more like weekly TV programming.”

Zynga’s tactic of gaming Facebook’s architecture was critical to its takeoff. It flooded Facebook with ads. It exploited the social network’s distribution engine to pepper players’ friends with updates and invitations. To release games quickly, it used a roll-up strategy, buying YoVille, licensing Texas HoldEm (which it renamed zyngapoker) and imitating rivals. Playfish’s Restaurant City was around before Cafe World, and FishVille is reminiscent of Crowdstar’s Happy Aquarium. Even FarmVille rips off Happy Farm, a hugely popular online game in China (richly ironic, given China’s disregard for intellectual property). Once it had collected a vast user base, Zynga could lure customers to new games.

To do all this, the company needed money and had to prove to investors that offering free games on Facebook was a sound proposition. Zynga attracted $39 million in start-up money and got a second wave of $15 million this month. Ads and virtual goods bring in most of the revenue. But because people who play free games on the Internet like the free part, Zynga needed a third income stream — product come-ons.

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These offers are like ads, except that when you click on them, you’re agreeing to try and then buy a company’s service in exchange for game points. Sign up for a Netflix subscription, get two months free plus 100,000 points. Some players cancel as soon as they have the points. Other deals, like those that snagged Michelle, are shady. Michelle took a quiz that required her to enter her cell-phone number and a code. At some point during the exchange, there was supposed to be a notification that she was signing up for an SMS subscription at $9.99 a month. Michelle says she never saw it.

Zynga did not create the sketchy offers, which are outsourced, but neither did it have a handle on them. “We have always policed offers for content,” says Pincus. “But there’s thousands of offers and hundreds of new ones every week.” Facebook and MySpace tightened their guidelines after getting complaints. Then a tech blogger confronted the CEO of a company that creates offers. She answered his accusations unwisely (“S___, double s___ and bulls___”), and it blew up online. Also on the Internet: footage of Pincus speaking at a University of California, Berkeley, event about how he funded his start-up. “I did every horrible thing in the book to just get revenues right away,” he said. It’s bravado that now makes Pincus wince: “I was selling myself short.”

For the moment, Zynga has removed all offers and says it’s going to vet each one before it appears. Whether this is just a speed bump for a company that’s growing dizzyingly fast or a huge infrastructural problem is unclear. Reports peg Zynga’s revenue at $100 million a year, which the company says is low. If you assume similar economies for Zynga as for Playfish, says Atul Bagga, an analyst with Think Equity, “Zynga could be four times bigger on a run-rate basis.”

Social games have drawn people who would never touch a console game or World of Warcraft — stay-at-home mothers, office workers looking for a five-minute break, families. This is partly because they feel safer playing with their friends and partly because there aren’t quite enough other things to do on social networks. But if they start to feel unsafe, the whole house of cards will come crashing down. Michelle is already lost. “I told her never to go to FarmVille again,” says her mom. “It’s a scam.” Or the next killer app.

The original version of this article misspelled the name of Atul Bagga.

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