[Infowarrior] - FTC Moves to Unmask Word-of-Mouth Marketing

[Richard Forno]

FTC Moves to Unmask Word-of-Mouth Marketing
Endorser Must Disclose Link to Seller
http://www.washingtonpost.com/wp-dyn/content/article/2006/12/11/AR2006121101
389_pf.html

By Annys Shin
Washington Post Staff Writer
Tuesday, December 12, 2006; D01

The Federal Trade Commission yesterday said that companies engaging in
word-of-mouth marketing, in which people are compensated to promote products
to their peers, must disclose those relationships.

In a staff opinion issued yesterday, the consumer protection agency weighed
in for the first time on the practice. Though no accurate figures exist on
how much money advertisers spend on such marketing, it is quickly becoming a
preferred method for reaching consumers who are skeptical of other forms of
advertising.

Word-of-mouth marketing can take any form of peer-to-peer communication,
such as a post on a Web blog, a MySpace.com page for a movie character, or
the comments of a stranger on a bus.

As the practice has taken hold over the past several years, however, some
advocacy groups have questioned whether marketers are using such tactics to
dupe consumers into believing they are getting unbiased information.

In October 2005, Commercial Alert, an advertising and marketing watchdog
group in Portland, Ore., petitioned the FTC to consider taking action
against word-of-mouth marketers. The group called for the FTC to issue
guidelines requiring paid agents to disclose their relationship to the
company whose product they are promoting, including any compensation.

The group cited a 2002 Wall Street Journal article on a marketing campaign
by Sony Ericsson Mobile for its T68i mobile phone and digital camera. The
initiative, called "Fake Tourist," involved placing 60 actors posing as
tourists at attractions in New York and Seattle to demonstrate the camera
phone. The actors asked passersby to take their photo, which demonstrated
the camera phone's capabilities, but the actors did not identify themselves
as representatives for Sony Ericsson.

Commercial Alert also singled out Tremor, a marketing division of Procter &
Gamble, which has assembled a volunteer force of 250,000 teenagers to
promote the company's products to friends and relatives.

Procter & Gamble spokesman Terry Loftus said participants in its
word-of-mouth campaigns are free to talk negatively or positively about a
product or service and do not receive compensation. Volunteers are not
required to disclose their relationship with the company, he said. Some
participants receive sample products, he said, so they can offer an opinion
on a product.

Word-of-mouth advertising is already covered under existing FTC regulations
that govern commercial endorsements. What the FTC sought to do yesterday in
its staff opinion was to note that such marketing could be deceptive if
consumers were more likely to trust the product's endorser "based on their
assumed independence from the marketer."

"The petition to us did raise a question about compliance with the FTC act,"
said Mary K. Engle, FTC associate director for advertising practices. "We
wanted to make clear . . . if you're being paid, you should disclose that."

The FTC said it would investigate cases where there is a relationship
between the endorser of a product and the seller that is not disclosed and
could affect the endorsement. The FTC staff said it would go after violators
on a case-by-case basis. Consequences could include a cease-and-desist
order, fines and civil penalties ranging from thousands of dollars to
millions of dollars. Engle said the agency had not brought any cases against
word-of-mouth marketers.

Though the staff's opinion fell short of Commercial Alert's original
request, the group's executive director, Gary Ruskin, said he was pleased
the staff agreed that word-of-mouth marketing could be deceptive.

"This letter tells marketers like Procter & Gamble that their 'sponsored
consumers' must disclose that they are shilling, or they are probably in
violation of the prohibition against deceptive advertising. That's big," he
said. "It will change practices in the word-of-mouth marketing industry."

Andy Sernovitz, chief executive of the Word of Mouth Marketing Association,
said the FTC's decision was an endorsement of the industry's efforts to
police itself. The Chicago-based association, which has more than 300
members, last year issued a code of ethics stating that marketers should
disclose ties to sponsors.

The group has also tried to hold members accountable. Sernovitz said the
group is reviewing the membership status of the Edelman public relations
firm after Wal-Mart, one of the firm's clients, reportedly gave positive
comments to bloggers who then posted the comments without mentioning the
source. Edelman later admitted that some of its employees had written the
blogs.

Procter & Gamble, which is not a member of the association, recruits
volunteer marketers online, Loftus said. The company chooses volunteers
based on their answers to a survey on the Tremor Web site, which tells
participants if they join the Tremor Crew they could "name the next big
movie" or "help design a video game."

Peter Blackshaw, chief marketing officer for Nielsen BuzzMetrics, which
tracks the effectiveness of word-of-mouth marketing, said brands have more
than a moral incentive to be upfront with consumers. "There's a high
turn-off factor if consumers learn that the person making a recommendation
is actually on contract," with an incentive to push a product, he said.

A 2005 survey of 800 consumers by market research firm Intelliseek found
that 29 percent of participants age 20 to 34 and 41 percent of those age 35
to 49 said they would be unlikely to trust a recommendation again from a
friend whom they later learned was compensated for making the suggestion.