As the virtual goods market continues to grow in the US – nearly doubling this year to just over $1 billion, according to our recently released Inside Virtual Goods research report – more attention is being paid to one of the more intriguing sectors of the virtual goods payment ecosystem: offers. Offers, a form of incentivized lead generation for performance marketers, are a popular alternative payment method for a variety of free-to-play online games, and currently play a role in the monetization of many social games through virtual currency microtransactions. How does it work? Basically, players are incentivized by developers to take advertiser offers with in-game virtual currency that they can then use to progress through the game.

One of the main issues that many people are still trying to wrap their head around is the sustainability of the offers space. Given concerns over quality of both the offers themselves and the leads they generate, are offers really going to be a meaningful method of social game monetization in the long term?

Quality has been and always will be an issue in any performance-based marketplace. Why? Because actors on both sides – advertisers and users – are trying to optimize for their own goals. And as you may expect, based on the history of the world, some people are always willing to be tricky to make an extra buck. That’s why the companies that operate performance marketing platforms have to keep both sides in check. If either side of the system – users or advertisers – act fraudulently, the system stops working. This is why Google has large efforts and teams devoted to managing both click fraud and landing page quality.

One example often cited by skeptics of the sustainability of offers in social games is the story of the “free iPod” incentivized marketing companies of a few years ago. Basically, these companies got people to sign up for a lot of offers by promising them a valuable reward, like a free iPod or plasma TV. But two significant problems arose. 1) Eventually, the advertisers paying for those leads realized that most people who took their offers weren’t really interested in their products at all, but were just trying to get the prize, and so they stopped investing in this area. 2) In addition, because the “free iPod” companies were paid for generating the leads, but had to actually pay out of their own pocket to deliver the prizes, they often made it difficult for users who took the offers to actually get the prize. User complaints led the FTC to get involved.

At the end of the day, the sustainability of offers in social games (or any other area for that matter) first depends on whether there is real value being delivered to both advertisers and users. I agree with Jay Weintraub that there are a couple of fundamental reasons why the space is creating sustainable value.

1. Payment choice in social games. When users decide to purchase virtual currency, they are most often choosing from a variety of payment methods inside the context of the game – and, within the offer wall itself, a variety of offers. These days, most payment aggregators offer five, ten, or more different payment options for users wanting to purchase virtual currency. These include PayPal, credit cards, mobile/SMS, offers, prepaid cards, and many more. In addition, once a user chooses to browse the offer wall, there are almost always many offers shown by default that are targeted to the user. While this is by no means perfect, it does mean that all users aren’t being forced to pick from a few offers they’re not interested in as the only way to get the virtual currency. Overall, offers make up a minority of virtual goods revenues in social games. The majority of revenues come from some form of direct payment, according to the many industry sources we’ve spoken with about the matter.

2. More accountability through identity. Within Facebook especially, users are operating in the context of their “real” identity. While no one claims Facebook identity is never faked, Facebook’s identity is designed to be very generic and socially verified – as people use Facebook, their whole history of application activity and personal content (photos, notes, links) are tied to their identity, as vetted by their friends. This means it’s generally a little easier to track down fraudulent users.

Andrew Chen also explains well how offers in social games can be examples of good product bundling that generate value.

All of that being said, quality is an important issue facing the industry. Last Tuesday, I had the opportunity to moderate the panel on managed offer platforms at the 80/20 Conference, which is focused on the latest in the performance marketing industry. On my panel were Mitch Liu (Co-founder, Offerpal Media), Adam Caplan (President, Super Rewards), Matt Handel (Co-founder, DoubleDing), Noah Kagan (Founder, Gambit), and Gurbaksh Chahal (Founder, gWallet). During our discussion, Adam Caplan answered a question about how much leads generated through incentivized offers on social networks were discounted by advertisers, and he said that right now he sees a 30-40% discount. Also during the discussion, Mitch Liu answered a question about fraud by saying that Offerpal has outright banned nearly 10% of users from taking any more offers, and that Offerpal has 40 support staff who spend a lot of time calling users to verify their identity.

When it comes to offer quality, much of the concern is focused on offers that don’t clearly disclose their terms to users – for example, mobile content subscriptions that end up billing users monthly without clearly explaining that up front. Every offer network says they eradicate low-quality offers, and new companies entering the space say they’re doing the same. But there are still some deceptive offers out there, and an important question is how widespread they really are. Many developers are self-selecting away from these offers in order to provide a good user experience and protect their brand, in turn driving demand for higher quality offers, but, as we’re seeing, other developers aren’t. (And some developers are choosing not to integrate offers at all.) Clearly disclosing offer terms is important both for users and for the long term health and growth of the social gaming ecosystem overall. Each developer, offer network, and social network (i.e. Facebook and MySpace) should set and enforce clear policies along these lines – if they don’t, regulators will eventually get involved.

Finally, it’s important to note that many of the most sophisticated performance advertisers – who have been around the block a few times – are investing in this space, and have been for some time. The Netflixes and Equifaxes of the world have well-developed methods of evaluating lead quality and adjusting bid prices accordingly, and if you look on your favorite offer wall today (in the US), they’re still there near the top of the list. It’s unlikely that Netflix doesn’t understand how its ads are showing up in social games.

At the end of the day, the most fundamental question facing the industry is whether incentivized marketing in social games is providing real value to honest advertisers and users. If you believe that is the case, then it only makes sense that as the space grows, it will attract more developers and advertisers interested in testing the performance of the market – as well as some people willing to act unacceptably until they’re discovered and forced to stop. The best thing all offer networks can do for themselves, users, and the industry overall is to keep adding more offers that provide more value to users and advertisers, while eliminating any deceptive ones.

Gallery: Offer Walls in Popular Social Games

1. FarmVille, by Zynga – Offers by Offerpal Media

2. Pet Society, by Playfish – Offers by TrialPay

3. YoVille, by Zynga – Offers by Super Rewards

4. Mobsters 2, by Playdom – Offers by Offerpal Media