Michael Arrington

The saying “he who laughs last, laughs best” comes to mind in relation to a recent spat between TechCrunch founder Michael Arrington and Offerpal Media founder Anu Shukla over Arrington’s assertion that social gaming companies, like Zynga, are making hundreds of millions through “unethical” means.

Arrington’s original post on the issue, titled “Scamville: The social gaming ecosystem of hell”, details how social media sites like Facebook and MySpace are complicit in the scams, because “they’re getting such a huge cut of revenue back from these developers in advertising.”

Arrington followed this up by challenging Shukla at last week’s Virtual Goods Summit in San Francisco; claiming that direct-marketing companies like Offerpal act as middle men in facilitating these scams. Warning the following video has strong language:

It appears as though both sides have been busy doing damage control after the incendiary confrontation, with Offerpal posting a blog defending its position and following up by replacing Shukla as CEO with George Garrick, who formerly guided the successful IPO of advertising firm Flycast Communications, which was eventually sold for $2.3 billion. Garrick was quick to tackle the brewing controversy in his first Offerpal blog, titled “An open letter from Offerpal’s new CEO.”

In it Garrick states: “I’ve only got 48 hours under my belt, and have entered this industry in the midst of a recent firestorm of controversy… I am not going to comment on events leading up to this situation, nor on other players in the industry, but I have quickly concluded that regrettably, Offerpal has been guilty of distributing offers of questionable integrity from some of our many advertisers.”

For his part, Arrington has continued to press the attack, blogging about the showdown and Shukla’s subsequent demotion and soliciting reaction from MySpace and Facebook (“Facebook to increase enforcement of anti-scam rules”). He also posted on Zynga founder Mark Pincus who admitted he deliberately ran these direct-marketing scams in order to raise revenues quickly and show investors his small company was profitable right off the bat. Warning, the following video has strong language:

For Arrington the main point, which is somewhat lost in the melodrama, is that these “scammy” practices by Zynga and others make it virtually impossible for other social gaming startups to participate equally in the space, without running the same unethical business model. In the end they just can’t compete monetarily, says Arrington, as companies like Zynga can outspend them on advertising to get their games on Facebook and MySpace.

“It’s time for this to stop,” wrote Arrington, who definitely had the last laugh in this one. “Facebook and MySpace need to create and enforce rules against it so that game developers aren’t tempted to get a competitive edge by scamming users. And if Facebook/MySpace won’t protect users, then the government will have to step in.”

What do you think of this controversy? Who do you support in the debate: Arrington or Shukla? Should the government police this kind of Internet advertising? Post your comments below.