Is Facebook a Paradise for Scammers?

Every day tens of millions of people log on to Facebook, the popular social-network site, and spend time playing goofy online games. But watch out. Some people playing these games are getting fleeced by scammers, tricked into signing up for products and services they didn't want.

Worse yet, this isn't happening by accident. The companies that develop games for Facebook make big money by selling ad space—some of it to scammers.

This week, Silicon Valley blogger Michael Arrington caused a ruckus by suggesting that Facebook itself has been turning a blind eye to the scams because it is sharing in the spoils. Arrington, who runs the influential TechCrunch blog, is on a crusade to pressure Facebook to clean up its act.

"Ultimately this is Facebook's fault," Arrington says. He says the social-networking site isn't enforcing its own rules against scam ads. "It's like with Major League Baseball and steroids. If the rules aren't enforced, which is what's happening on Facebook, then people are going to break the rules. Facebook needs to stop this."

Facebook denies Arrington's charge. In an exchange via e-mail, David Swain, a company spokesman, tells NEWSWEEK that Facebook works hard to stamp out scammer ads and has already disabled two ad networks that were breaking the rules.

"We have, and will continue to, move aggressively to stop any activities that threaten or damage our users' experience," Swain says. "Any assertion to the contrary is false."

Arrington responds that Facebook isn't doing a good-enough job, because when he checked out FarmVille, a popular Facebook game, "it took me about 10 seconds to find really scammy ads."

Facebook is the hottest site on the Internet, and it's growing like mad. The site has more than 300 million users, adding 50 million in the third quarter alone. Earlier this year Facebook board member Marc Andreessen said Facebook would rake in more than $500 million in revenue this year.

Facebook CEO Mark Zuckerberg announced in September that it had become "cash-flow positive" well ahead of schedule. It had expected to hit that milestone in 2010.

Facebook is booming because it's a wonderful and useful Web site. But it also represents a ripe target for scammers. Here's how they operate.

Let's say you've signed up to play FarmVille, a game produced by Zynga, a company in San Francisco. Each month some 63 million people play the game, in which you plant seeds and harvest crops.

If you want to buy things in FarmVille, like seeds or land, you can either earn points or you can buy points. To buy points, you send Zynga some money from your credit card. Yes, people really do spend money buying seeds for an online game. I have no idea why.

There's also another way to earn Zynga money: you can click on ads that promise to give you FarmVille currency if you perform some task, like filling out a survey.

You might take an "IQ quiz," for which you answer a few questions, and then, to get your score, you must enter your cell-phone number. The scammers send a PIN number to your cell phone, and tell you to enter that PIN on a Web site.

In the fine print, there's a message saying that by entering your PIN you are signing up to get a daily horoscope for $9.99 per month. Next time you get your phone bill, you've been stung.

When first contacted by NEWSWEEK, an exec from one company that distributes these ads claimed they're totally legitimate. "There is no way a user can inadvertently sign up for anything," said Matt McAllister, marketing director at Offerpal Media, an ad network in Fremont, Calif. "They have to opt in for it." McAllister points out that this is nothing new. "These ads have been around for years."

Two days after that conversation, however, Offerpal announced that its CEO and founder, Anu Shukla, would be stepping down. McAllister said her resignation had nothing to do with the charges about scammy ads. But then her replacement, George Garrick, posted a public statement admitting that "regrettably, Offerpal has been guilty of distributing offers of questionable integrity." Garrick vowed that the practice would stop.

It's true that scam ads have been around for years. But one thing that is different about Facebook is that users share a lot of personal data with the site. This means scammers can create especially insidious ads, using software programs that dynamically insert your personal information—your name, the name of one of your friends—into the ads that you see. So a naive user might think the ads are just messages from Facebook, especially since scammers sometimes use the same typefaces and colors as Facebook does.

Better yet, scammers don't need victims to hand over a credit-card number. All they need is a mobile-phone number. Guess who's on Facebook? Millions of naive teenagers who may not have credit cards, but do have mobile phones. Cha-ching.

What gets Arrington's goat is the fact that legitimate companies are profiting from this stuff.

See, Zynga gets paid to run ads with its games. And Zynga is making a fortune. The company is privately held and won't say what its revenues are. But at least one analyst says it earns about $200 million, while published reports have placed Zynga's revenues as high as $250 million this year.

That's pretty amazing, considering the company was founded only two years ago, in July 2007.

To be sure, most of Zynga's revenue comes from legitimate business, not from scammers. Zynga executives declined to give interviews. Instead they had an outside PR agency send five written statements via e-mail with instructions that these statements could be attributed to Zynga, the company, but not to any individual.

In the statements Zynga said it has a team dedicated to stamping out scammers and has already shut down some advertisers for breaking rules. Zynga's statement list also points out that most of its revenue comes from people "directly paying for virtual goods" rather than clicking on ads and special offers.

After Arrington launched his crusade, Zynga CEO Mark Pincus posted a blog item on which he said, "We have worked hard to police and remove bad offers," but also acknowledged that "we need to be more aggressive."

Arrington fired back by digging up and posting a video clip in which Pincus earlier this year told an audience of developers that "I did every horrible thing in the book to just get revenues." Arrington's take: "Zynga has been scamming users from the beginning quite intentionally as part of their revenue model."

But Arrington says the ultimate responsibility lies with Facebook because (a) this all takes place on their platform; and (b) if you follow the money, a lot of it ends up at Facebook.

While Zynga makes money by selling ads that run with its games, it also spends a lot of money buying advertising space from Facebook to promote its games.

In fact, Arrington reckons Zynga is Facebook's largest single source of revenue. He says Zynga will spend $100 million with Facebook this year. The research firm eMarketer doesn't have an estimate for how much Zynga spends with Facebook, but says Zynga ranks as the eighth-largest advertiser on all social networks and is one of Facebook's largest advertisers.

"Facebook is getting indirect cash payoffs from the advertising, and the amount is clearly massive," Arrington says. "This is what helped them get to profitability this year."

For this reason, Arrington surmises, Facebook has an incentive to ignore scammy ads, even when some of those ads violate its rules.

Facebook says that's simply not so. Swain, the Facebook spokesman, insists the company aggressively enforces its rules, with Zynga as well as everyone else.

But consider this. Right after Arrington broke the story, Zynga announced it was taking down all of the ads that let people pay for stuff via a mobile phone.

This wasn't exactly an admission of wrongdoing. But if those "mobile ads" were legitimate, why did Zynga take them down?

Swain says Facebook "will hold ad networks and developers accountable." But scammers find ways to avoid detection. One trick is to "geo-block" scammy ads so that they don't get displayed to Internet users in Northern California, where Facebook is located, so Facebook can't spot them.

The good news is that scammers tend to hit a site for a while and then move along once people start to catch on. So eventually they'll drift away from Facebook.

For now, though, Facebook remains a fantastic honeypot for scammers—a place with 300 million people who have been lured in with the promise of free fun and games, and who have willingly handed over all sorts of personal information about themselves. These naive, trusting souls represent such a ripe target that you almost can't blame scammers for exploiting them.

Facebook has good reason to crack down on scammers. If it doesn't, members may start to drift away. Also, Arrington says if the baby Einsteins who run these social-networking sites can't police them, government regulators may step in and do it for them.

Is Facebook a Paradise for Scammers? | News