Scrabble — the board game in which you compete with other players in making words — has become a familiar household name since December 1948, when the game was granted a copyright application and a trademark was registered in the U.S. Since then, it has sold more than 100 million sets in 121 countries in 29 different languages.

Scrabulous — an unofficial, online version of Scrabble — is perhaps lesser known, but since its launch in July 2007, it has become one of the most popular applications on social networking site Facebook. In early August, it had 1,331,840 monthly active users; at its peak it was attracting 600,000 players a day. (See “Scrabulous and the New Social Operating System.”)

Combined, the two games are not only creating words but also making waves among online users, application developers and copyright experts: On July 24, Hasbro, which owns the rights to the game in the U.S. and Canada, filed suit in federal court in New York City against Jayant and Rajat Agarwalla, the Calcutta-based brothers who created Scrabulous. Facebook has since pulled the application in North America. (Mattel, which owns the Scrabble rights in the rest of the world, had earlier issued cease-and-desist letters to the Agarwalla brothers, but they ignored them.)

The online community sees this as a replay of the traditional story of a small developer David taking on a Goliath corporation. Another application called Save Scrabulous has been started on Facebook and a petition has already attracted more than 10,000 signatures. Meanwhile, the Agarwallas have introduced a new word game, called “Wordscraper,” which is already gaining traction from Facebook users.

On the corporate side, the issue is less about money than copyright infringement and brand control. Wharton faculty note, however, that Hasbro may be doing more harm than good to its brand by going after Scrabulous. It not only risks alienating existing Scrabulous users, they say, but also misses the opportunity to capitalize on Scrabulous’s success in the difficult-to-harness social networking world.

Peter Fader, co-director of the Wharton Interactive Media Initiative, believes Hasbro’s action is an “incredibly bad business decision.” There is no evidence the Agarwalla brothers were doing “something absolutely disparaging” to the Scrabble brand, he says. In fact, Scrabulous “has been such a fabulously good thing for the Scrabble franchise [that] Hasbro should have been celebrating.”

It’s not clear if Hasbro did the right thing by going after Scrabulous, says Kevin Werbach, Wharton professor of legal studies and business ethics. “Many copyright owners today are over-inclusive as they try to assert their rights. The question for Hasbro is whether the benefit they get in terms of direct and indirect revenue from their own Scrabble game exceeds the cost of negative publicity from this action. But it certainly got them a black eye in the online community, although most people who play Scrabble have no idea this has happened.”

However, Werbach sees some merit in the arguments favoring copyright owners, too. “If someone had sold a board game called Scrabulous that is just like Scrabble, then people wouldn’t object to the company trying to shut it down as an infringer,” he says. “So fundamentally, I am not sure why this is a different situation.”

According to Fader, many companies sue “just because they think they have the right to, instead of pursuing what’s in their shareholders’ best interests.” It is “irrelevant if Hasbro was right or not” in its copyright claims against the backdrop of how Scrabble benefited from Scrabulous, he says. “One is the downside they have created for themselves and the other is a lack of an upside.”

Companies “need to move aside from knee-jerk tendencies to bring in legal action,” he adds, noting that Hasbro had other options besides suing. It could have formed a partnership with the Agarwalla brothers, he says, or bought them out. “It would have been smart to pay [the Agarwalla brothers] millions of dollars. That would have been minuscule compared to legal fees and their own application development expenses…. Hasbro may have won the battle but it has surely lost the war.”

‘Clunky’ Alternatives

At the moment, the two Agarwalla brothers — Rajat, 27, and Jayant, 22 — are not answering questions about the case. “As the Scrabulous matter is before the courts, our lawyers have recommended that we do not appear in the media or give comments to the press as it might compromise the case,” they said in an email.

The two run a relatively low-profile, 30-person company in Calcutta called RJ Softwares. The company describes itself as “an established IT solutions provider” and “offshore development partner.” Occupying a place of pride on the company’s website, as a sample of its work, is “Scrabulous is an amazing word game. It is entirely web-based. At Scrabulous, you get a top-notch rating system, a state-of-the-art game room and user profiles with images. The interface exudes perfection, minimalism and above all, functionality,” the site says.

Scrabulous has been around since July 2006, but it started making waves only when it was launched on Facebook last summer. Hasbro and Mattel have been after the brothers since early this year. Money is not really an issue here: makes about $25,000 a month in advertising — an amount that will hardly add to Hasbro’s bottomline.

So why did the two companies wait so long to take action? According to Hasbro’s official reply to Scrabulous fans, they did not want to make any move without providing an alternative to thousands of Scrabble aficionados, even if they were playing an illegal version. Hasbro commissioned Electronic Arts, the Redwood City, Calif.-based electronic gaming giant, to come out with its own version of online Scrabble. It’s available on Facebook in a beta version, only for the U.S. and Canada.

It hasn’t been particularly well received: On Facebook, it has a user rating of 1.2 out of 5 and 191,764 monthly active players. It is clunky, according to users, and the “beta” tag implies that more improvements are necessary. “I’d be okay with you forcing out Scrabulous, if you had a decent application to replace it with,” says one user’s posting on the Scrabble website. “But this one is a joke!”

Mattel, meanwhile, has its own version of online Scrabble, called Scrabble Worldwide, on Facebook. It has been developed by Gamehouse, a game developer and gaming portal, and has a rating of 1.7 out of 5 and 63,905 monthly active users. This version also has its share of detractors, mostly because of users’ inability to play against friends in the U.S. and Canada, which are covered by Hasbro’s beta version. In an uncomplicated age before the arrival of the Internet, it was perfectly possible for companies to carve out regions and own the same brands in different countries. Now, brands have straddled the web, so users have the spectacle of one official online Scrabble (Hasbro) vying for honors with another official Scrabble (Mattel).

‘Platform Economics’

Werbach expects to see more conflicts surrounding applications in the social networking arena, noting that their number and severity depend upon how sites like Facebook manage their platforms. “I am sure there will be conflicts because the boundaries are not too well defined,” he says.

“The theory of platform economics suggests that a platform operator actually has an incentive to facilitate the optimum level of activity on its platform,” Werbach notes. “Facebook benefits by having lots of applications, even though the applications are making money and Facebook isn’t on the applications themselves — it gets more users, it gets more activity and so forth.” The owners of platforms may not always appreciate the benefits of having those applications on their sites, he adds.

Werbach adds that a potential risk for Facebook is if users increasingly identify the application as the source of value and not Facebook itself. “A thoughtful approach here [for Facebook] is not to see it necessarily as a conflict but to see the benefits the application brings,” he says.

The fallout of legal conflicts like the present one is significant especially because of the pedigrees of the participants. “What’s interesting on Facebook is you have large, venture-funded startups that are staking their business on building applications on Facebook and other social networking platforms,” he says. “It’s not just a bunch of small guys.”

The Scrabulous-Hasbro spat, however, won’t likely be a deterrent for other application developers, suggests Kendall Whitehouse, senior director of information technology at Wharton. “All the opportunities [for application developers] that were there prior to this are still there. If you have an application that fits, Scrabulous has proven how popular some things can become by being hosted on a popular social networking site like Facebook. The fact that you need to have an original game where you have free and clear intellectual property doesn’t mean that there is any less opportunity to take advantage of the reach, the distribution and the built-in platform features that social networking sites give you.”

Up Next: Wordscraper?

In fact, in the midst of this face-off comes Wordscraper on Facebook. Launched in February 2008 by the Agarwallas, it has a rating of 4.6 out of 5 and, now that Scrabulous has vanished, a tally of 133,046 monthly active users.

Wordscraper allows users to build and play their own word games, creating new designs and experimenting with the layout of the board. A unique option is Wordscraper Blitz. It is played in real time and allows hundreds of players to compete simultaneously with each other. The new game differs visually from traditional Scrabble and offers players new flexibility. Instead of the square letter tiles people are familiar with, they are now round. The special tiles (double word score, triple letter score, etc.) are not fixed; they can be placed wherever users want them. Most people place them the way they are on a traditional Scrabble board.

Wordscraper is one subject the Agarwallas are willing to talk about. “We are very happy with the response Wordscraper has received,” says Jayant Agarwalla. “It had the highest activity level among all applications on Facebook [on August 3]. Right now, we are working on a number of new features and user requests. Primarily, we shall improve the navigation and interface of the application.”

Hasbro and Mattel are believed to be looking at Wordscraper now. It may invite their wrath soon, and more court cases could follow. Indian cyberlaws have not yet been fine-tuned, and it would probably be up to the courts in the U.S. to pass judgment. At the moment, the legal issues surrounding the Scrabulous case are foggy. “We are not sure whether Scrabulous has been sued for copyright, trademark or patent violation,” says open source evangelist Venkatesh Hariharan.

A mutually acceptable model to monetize the efforts of various players in the business of social networking platforms may emerge, but Werbach isn’t betting on it any time soon. “Clearly, we are in fast-changing times in this environment of social network platforms, and there will be more equilibrium points that develop,” he says. “It’s not necessarily obvious that there is a model that is a win-win for everyone. The shares of the rents from this market are not necessarily equal, and the costs also are not exactly equal.”

Fader sees an increasing shift of power in the online world. “The old adage that content is king no longer holds — distribution is the ace in the hole,” he says. “There are so many examples — especially related to YouTube — where getting your offering out there to a wider audience is surely a good thing.”

Fader sees fewer and fewer copyright owners resorting to legal action like Hasbro. “We are at that turning point where this kind of Hasbro action is becoming more the exception than the rule,” he says. “We’ll soon get to the point — it may take years — where this kind of thing will not happen.”

In the meantime, the Agarwallas already have another application on Facebook. That’s Chess Pro, and there are no copyright complications as chess is several centuries old. But users are making various suggestions for the next Facebook application: Leading the list is “Wordwalla.”