Mike Arrington is a genius. Main-stream journalists sit up, knees together, back straight and start taking notes because this is a master at work. His recent blog entry titled Scamville calls out the most focused on and buzz-worthy companies in the valley for making money from advertising scams and accuses Facebook of encouraging a vile cycle of revenue and crappy marketing. The effect for Techcrunch is that it forces a number of high profile companies to respond and creates a giant political suck-hole that draws you in and spits you out on techcrunch.com. Cha-ching! [It’s cynical Sunday – didn’t you know?]

There’s a great show-down video at the Virtual Goods Summit where Mike confronts Offerpal CEO Anu Shukla about this and she delivers a rather colorful response. Video below.

Buried in the comments on TC are a few experienced words from HotOrNot founder James Hong. Love the hotel pay-per-view analogy:

We ran offers like this back in 2005 for a very short period of time at HOTorNOT, that is until we realized what was going on. In a nutshell, the offers that monetize the best are the ones that scam/trick users. Sure we had netflix ads show up, and clearly those do convert to some degree, but i’m pretty sure most of the money ended up getting our users hooked into auto-recurring SMS subscriptions for horoscopes and stuff. When I hear people defending their directory of deals by saying Netflix is in there, i am reminded of how hotel pay-per-view has non-pornographic movies. Sure it gives them good cover, but we all know where the money is made.

In the end, we decided to turn the offers off. Quite frankly, the offers made us feel dirty, and pretty much on the same level as spammers. For us, the money just wasn’t worth it. On top of that, we relied on our goodwill with users and focused on growing by having a product and company that our users liked. Our sense was that using scammy offers would make good money in the short run, but would destroy our userbase in the end. Perhaps apps on facebook don’t feel this pressure because facebook is so huge, and there are always new people to burn.

I’d like to point out that there are some game companies out there who are holding out on using offers to monetize their users. Personally, that makes me 10 times more likely to pull my credit card out for them.

PS. I don’t think the concept of letting people fulfill offers to get credits is structurally a bad one. I for one would like to see the offer networks work together to create some set of public agreement on what types of practices are banned from their network, and perhaps they can evan have some sort of certification logo. These practices will only stop when companies are not competitively crippled by NOT doing them. In effect, we need a nuclear non-proliferation treaty among the offer networks.

For soap opera fans here’s the war of words at the Virtual Goods Summit between Mike and Anu. [YouTube is currently down – so check back in a few if it doesn’t show up.]