The 135-pages of documents include internal Facebook memos, secret strategies, and employee emails that showed how the social media company engaged in what was internally dubbed “friendly fraud” in order to maximize revenues. These findings are explosive, as they tell a different story about so-called “whales,” or the small percentage of players who spend a lot of money in games.
It suggests that, rather than being willing big spenders, many whales were accidental or unintentional, as children didn’t realize that purchases of virtual currency were connected to their parents’ credit cards. When those parents tried to get the money back from the so-called in-app purchases, they ran into hassles and had to enlist the help of credit card companies, the Better Business Bureau, or the courts.
The story detailed the case of one 12-year-old boy who had spent nearly $1,000 in the game Ninja Saga. That case led to a lawsuit in 2012. The time span for the abuses covered 2010 to 2014, but the documents related to these cases were not released until now. While the cases are old, they covered a critical time of unprecedented growth when Facebook established its dominance in the social networking market.
Reveal said that U.S. District Court Judge Beth Freeman ordered the documents unsealed on January 14 after Reveal from The Center for Investigative Reporting argued for the release last year, saying the public had a right to know how Facebook targeted children. It’s one more problem for Facebook as it faces scrutiny on user privacy and fake news.
In a statement, the company told Reveal, “we routinely examine our own practices, and in 2016 agreed to update our terms and provide dedicated resources for refund requests related to purchased made by minors on Facebook.”
And in a statement made by Facebook to the Guardian on Friday, Facebook said, “We were contacted by the Center for Investigative Reporting last year, and we voluntarily unsealed documents related to a 2012 case about our refund policies for in-app purchases that parents believe were made in error by their minor children. We have now released additional documents as instructed by the court. Facebook works with parents and experts to offer tools for families navigating Facebook and the web. As part of that work, we routinely examine our own practices, and in 2016 agreed to update our terms and provide dedicated resources for refund requests related to purchases made by minors on Facebook.”
Free-to-play games have a long history, as they started in Asia with Nexon, which realized that many players didn’t have the money to buy games but a small percentage of those players were willing to do so if it meant they could get better capabilities in a game or could show off to their friends. It was important in free-to-play games that game companies didn’t put a cap on spending, in contrast to the usual $40 or $60 price on retail games — a business model that prevailed in the West. That’s because the unlimited spending and unlimited revenue from a small but dedicated base of whales — as little as 2 percent of the total players — could pay for the costs of the game for everyone else who played for free.
When Facebook launched in 2004, it experimented with models. In 2007, Zynga released Texas Hold ‘Em Poker, and followed with YoVille in 2008. By 2009, it launched FarmVille, generating 20 million daily users by October 2009. With those early games, players could join for free and socialize with friends. The games were viral, but, as free-to-play titles, it was crucial to get whales to spend.
The Reveal story suggests that Facebook’s own reports showed underage users — who were not authorized to be on the platform in the first place — did not realize their parents’ credit cards were connected to their Facebook accounts, according to the documents. Employees warned of the problem, but Facebook took o action. A team suggested how to reduce the problem, but the company did not implement it and “instead told game developers that the social media giant was focused on maximizing revenues,” Reveal said.
One 15-year-old spent $6,500 in about two weeks playing on Facebook. The article said one employee, Tara Stewart, tried to alert colleagues about the problem and proposed a way to simply refund money to parents when it was clear kids used the credit card without permission (It’s not clear how Facebook could have easily known when kids were using a parent’s account). Stewart said the problem was especially bad in certain games, including “PetVille (Zynga), Happy Aquarium (Crowdstar), Wild Ones (Playdom), Barn Buddy and any Ninja game” (like Ninja Saga).
Reveal said, “An internal Facebook survey of users found that many parents did not even realize Facebook was storing their credit card information, according to an unsealed document. And parents also did not know their children could use their credit card without re-entering a password or some other form of verification.”
Stewart said that when children were required to re-enter the first six digits of a credit card number on a game before they could spend money, the number of chargeback and refund requests were lowered. That forced the minor to prove that he or she had possession of a card.
Facebook did not approve the fix. Data showed that from October 12, 2010, to January 12, 2011, children had spent $3.6 million, the documents said. (Facebook’s revenue for all of 2011 was $3.7 billion). And Facebook found 9 percent of the money it made from children was being clawed back by the credit card companies. The average chargeback rate is 0.5 percent, according to the nonprofit Merchant Risk Council, Reveal said.
A Rovio employee told Facebook that the developer was aware of high refund rates on its Angry Birds game. A Facebook analysis revealed that in 93 percent of the cases, refunds were the result of credit card holders not realizing the game was charging their account. The parent knew the child was playing Angry Birds, but didn’t think the child would be allowed to buy anything without prior authorization, as like what happened with iOS games, a Facebook employee wrote. The average age of those playing Angry Birds in those cases was five.
Part of the concern about stopping those situations from happening was that it would also hurt intentional revenue. Presumably, that meant that the “friction” of putting in a barrier, like a new authorization of a card, would stop people who really did intend to make another purchase. Facebook said in a memo that “friendly fraud” was OK. That is, it told game developers to let children proceed without their parents’ permission, to maximize revenue. If people complained, they should simply get some free virtual items, as those bore no cost for Facebook.
Until now, Facebook successfully fought to get most of the records in the related lawsuits sealed, saying it would hurt its business. In 2016, Facebook settled the lawsuit and agreed to dedicate resources to refund requests made by U.S. minors over in-app purchases.
Facebook now offers the option to dispute purchases and process refunds at the time of purchase and via its Facebook Payments Support Center. Under the games section, Facebook has an option to select that a purchase was made by someone under 18 years of age.
Facebook requested documents containing information that could be used to defraud the company remain sealed. And Facebook’s Parent’s Portal provides resources for parents on Facebook, and its dispute guidelines are available publicly.