Gordon Crovitz on the FTC’s new guidelines on endorsements and testimonials and the blogosphere’s reaction.
The guidelines require people to disclose online if they have what the FTC vaguely defines as “material connections” with the sellers of a product or service. This could include getting free samples on which they base comments or reviews. Bloggers objected to the double standard that exempts traditional media from the rules—many newspapers, magazines and broadcasters accept free books and other products for their reviewers. . . .
The reaction to the regulations was so strong that last week the FTC tried to step back. The agency said it planned to bring actions against companies as advertisers, not against bloggers or individuals. But the draft rules cover anyone who comments on products and fails to disclose a relationship, even getting a free CD or music download and then commenting on the song. . . .
There should be more disclosure, but the Web is different from earlier media in ways that make government regulation less relevant and practical. The Web has its own self-regulatory mechanisms. Failing to disclose interests sullies one’s reputation online, and reputation harm travels faster and lasts longer than it did before the Web.
There’s also greater need for caveat emptor online, because there is no practical way that any government agency can monitor the world’s bloggers and posters. There will always be people who post comments about products and services that are self-serving in one way or another, at least by someone’s definition.
This is why independent brands that stand for objectivity continue to flourish. ConsumerReports.org has more than three million paying subscribers even with—especially with?—the many free product reviews posted by consumers online. Many of the most consistently popular bloggers have likewise earned reputations for operating with full transparency, which contributes to their popularity.
Instead of trying to extend analog-era regulations onto the Web, the FTC should encourage readers to be vigilant about assessing for themselves the independence of sources online.
erp says:
Does stuff like this count too?
October 19, 2009, 9:47 amFub says:
This issue is not a matter of the FTC “trying to extend analog-era regulations onto the Web” at all. In fact, applying the “analog-era” regulations governing broadcast sponsorship identification would eliminate this inanity entirely.
47 CFR §73.1212, which regulates broadcast advertising, specifically permits “getting a free CD or music download and then commenting on the song”:
October 19, 2009, 10:16 amcubanbob says:
Will the FTC also apply that to congressional mail and email to constituents? If ever a load of misleading and false information by a blogger has come within a mile of what Senators and Congressmen send out to their constituents I have yet to see it. And the gold standard for b.s is a toss up between the white house website and the democratic party emails.
October 19, 2009, 10:58 amOren says:
How in the world can a person reading an online review assess the independence of the source if they are not required to disclosure the relevant information.
You might as well tell the FDA to stop regulating milk and encourage consumers to be vigilant about testing for salmonella — in both cases, consumers fundamentally lack the tools to make the needed assessment.
October 19, 2009, 12:38 pmPersonFromPorlock says:
A hopeless task may be what the FTC wants: in government, failure is a reason for bigger budgets.
October 19, 2009, 2:40 pmKazinski says:
Oren,
I respectfully submit that bad reviews of music, camera, Windows7, etc. are a much less serious problem than tainted milk.
We’ve spent our whole lives being lied to about products, I think we’d learn some coping skills by now.
October 19, 2009, 3:16 pmLarryA says:
1. Presume any web reviewer gets free copies. That’s the way the industry works.
October 19, 2009, 3:20 pm2. A review is an opinion. Everyone has one. Read more than one review.
3. Realize you may disagree with a review just because you have different tastes, and not because a reviewer is trying to mislead you.
4. If a reviewer actually lies, respond online and help destroy his or her reputation.
5. It’s just a review. No one ever died from reading a bad one.
ChrisGreen says:
Consumer Reports and the Better Business Bureau are two ways of doing this for many products. Of course, those organizations don’t review every product out there. There are a plethora of beauty products that supposedly reduce weight and make wrinkles miraculously disappear that sponsor sites and comments that are supposedly objective but indeed are not. Many of these products are snake oil and I believe you cannot find many of them on at the Consumer reports of BBB websites. Sometimes even an intelligent person will buy such a product once (go to GNC and you will see a whole lot of them).
The question then, is this: Is it worth taking away the freedom of thousands (millions) of bloggers and commentors in order to protect a small number of consumers from purchasing ‘snake oil’ products that can’t be found on websites like Consumer Reports or BBB?
October 19, 2009, 3:30 pmChrisTS says:
Why is it too difficult to write, “I did/did not receive X/a sample of X free”?
October 19, 2009, 3:36 pmOren says:
Indeed.
(1) I’m not concerned with ‘bad’ reviews, I’m concerned that the reviewer might not have in mind the goal of producing an objective review due to being comped the item that he is reviewing.
(2) The similarity between the two is not in the magnitude of the harm but the absolute inability for the average consumer to detect it in the first place.
Absolutely. The status quo (any review could have been paid-for at any time) is not unacceptable. The alternative, however, a requirement that reviewers disclose* when they have been comped, seems better.
If we were back before regulation of milk, and I had said “We’ve spent millenia being fed milk of questionable bacterial content and we know how to cope”, I don’t think anyone would have found that persuasive. It’s simply a better state of affairs to have available taint-free milk. Moreover, the disclosure requirement wouldn’t even ban ‘tainted’ reviews, it would simply require proper labeling.
Even the most fervent free market libertarians generally agree that the market cannot function optimally in the absence of compelled disclosure of material facts in a transaction.
October 19, 2009, 3:50 pmOren says:
(1) I could, but I’d prefer that the government create a new category of “un-reimbursed review” that I can chose from.
(2) I don’t care about the correctness of the opinion, I just think that opinions from those that have bought the product themselves are likely to be more reliable.
(3) I don’t think reviewers are intentionally talking up products they are comped in an attempt to deceive, I think it’s subconscious. Humans are naturally averse to angering people that give them gifts. The root of the problem is not ill-will, it’s human fallibility — our ability to be biased ( and not even realize it).
(4) See (3).
(5) Of course, but the lack of anyone dying does not mean that I cannot imagine a better state of affairs. Consumers should be able to chose what sort of reviews they want to trust based on the obviously material factor of whether the reviewer received anything of value in exchange for the review. Such choice maximizes utility over the status quo.
October 19, 2009, 3:54 pmiawai says:
This is the way things should be, and the only reason print media and traditional communications were under a tyrannical thumb was because the establishment maintained control of the media of communications. Before the internet all modes of communications were based on a few distributors reaching the masses (not the masses influencing themselves), and these few distributors were easy to regulate and control.
At all times since Gutenberg gave the power to publish to anyone who could afford it, the govt has been restricting access and regulating use – but they are out of their league in trying to regulate the internet, in technical acumen, policing manpower, and civil legitimacy.
October 19, 2009, 4:16 pmKazinski says:
Oren:
I don’t think that word means what you think it means. I think most libertarians generally agree that fraud should be illegal in business transactions. But “compelled disclosure of material facts” is a bedrock of libertarian thought? That is the sort of uber-regulation that libertarians rail about.
October 19, 2009, 4:23 pmFub says:
The disclosures you’re advocating are currently ONLY required by law of those commenters whose medium is licensed and regulated by the federal government (ie: radio and TV broadcasters). Newspapers, magazines or other print publications are not required by law to make such disclosures.
In fact, even broadcasters are not required to disclose receipt of free or nominal cost goods or services if the goods or services were provided for an “identification reasonably related to the use of such service or property on the broadcast”, as I noted above. That bit of regulegalese means, more or less, “for the purpose of broadcasting review or commentary on the goods or services.”
If the proposed FTC rules are enacted, ordinary citizens expressing opinions about goods or services will be subject to mandates and restrictions far beyond those to which broadcast media giants are currently subject.
I don’t think that would be “a better state of affairs.”
Full Disclosure: I receive as many copies of VC as I want, for free. I may owe Orin a beer, or maybe not.
October 19, 2009, 5:34 pmEli Rabett says:
Eli eagerly looks forward to little tags on textbooks in the college bookstore announcing that Prof. Adler has received free copies of the book he specified as well as access to hundreds of dollars of preparatory material. Such a nice hobby horse.
October 19, 2009, 10:30 pmDavid Schwartz says:
The most fervent free market Libetarians in fact agree that a free market in disclosure level, rather than a level imposed by government command, is the way to determine the optimal level of fact disclosure for transactions. The government has no magic way to determine the optimum set of disclosures any more than it has some magic way to determine optimum prices.
October 19, 2009, 10:38 pmrpt says:
“Kazinski:
But “compelled disclosure of material facts” is a bedrock of libertarian thought? That is the sort of uber-regulation that libertarians rail about.”
What does this mean? If I do business with a self-proclaimed libertarian will he withhold material facts? Is that how the ideal market works?
October 19, 2009, 10:55 pmChrisTS says:
1) AFAIK, faculty typically do not get free desk copies unless they order the book for a course. So, the idea that the book was ordered because of a free copy makes considerably less sense than the idea that someone will praise a product sent to her gratis before she made any decision about it.
2) It is possible, I suppose that some students do not know that professors receive desk copies and other materials from publishers whose books they select (‘specify’?) for courses. If this is not recognized as the norm by students and others, well then, faculty should make note of this on the syllabus or the website.
Given (1), I’m not sure why (2) would be necessary. But, whatever floats your fallacy of irrelevance.
October 19, 2009, 11:21 pmKazinski says:
RPT:
It means that the government doesn’t examine every industry and decide what the material facts are and pass a law specifying what must be disclosed and how.
In practice it means that mom and pop restaurants do not have to pay for nutritional analysis of their entrees and print it on their menus; car repair shops do not have to track how many repairs are not completed satisfactorily the first time and are returned. Lawyers do not have disclose what % of their cases they lose and provide disclosure; Dr.’s don’t have to calculate what % of their patients live past 80.
All of those examples are examples of “material facts” in commercial transactions. Do they all have to be tracked and disclosed?
I’m a computer programmer, do I have to track and disclose the bugs per 100 lines per code? I can’t count that high. That would be absurd, but some may consider that a “material fact”. And it is a lot more of a “material fact” than whether a blogger got a free copy of a book.
Of course best of all would be if the government would create a tort for failure to disclose a “material fact” in any commercial transaction, and then let the trial lawyers loose to litigate that and shut down our economy.
October 19, 2009, 11:24 pmrpt says:
“Of course best of all would be if the government would create a tort for failure to disclose a “material fact” in any commercial transaction, and then let the trial lawyers loose to litigate that and shut down our economy.”
Well, there is the remedy of rescission for fraud in the inducement or mistake which is not new law. Your position sounds like an excuse to do whatever you can get away with. I don’t think the free books discussed here are an issue, but if this is the libertarian principle upon which Prof. Somin and others oppose regulation of financial institutions, it is simply an apologia for crooks. Freedom to loot. Amorality at its best. It is the anti-golden rule.
October 19, 2009, 11:38 pmDavid Schwartz says:
You can make the same argument about any free market policy. Why isn’t the absence of government regulation of prices freedom to loot? Why isn’t government regulation of warranty lengths freedom to loot?
The problem is that disclosing facts has a cost, and the government is not in a good position to determine which such disclosures are worth the cost and which are not. As a general rule, any time someone compels you to do something you could do anyway, they are not doing you any favors. Nothing prevents consumers or businesses from insisting on any facts they think are relevant, or any warranties or disclaimers, as a condition of entering into an agreement.
Suppose you want to sell something but have no ability to make the disclosures required by law. How is prohibiting you from selling the item at any price not an example of the government exercising its freedom to loot?
October 20, 2009, 12:12 amrpt says:
I am not talking about “the law” or “the government”. I am talking about the underlying attitude that resists disclosure and justifies deception. The anti-government regulation meme (i.e., “caveat emptor”) seems to be an excuse for dishonesty, the consequences of which are blamed on the victim. This is more important than ideology.
October 20, 2009, 12:35 amKazinski says:
rpt:
Who is resisting disclosure and justifying deception? Businesses have always relied on their reputation and integrity to attract and keep business. Deception in a commercial transaction is called fraud, that is a crime. Its just that not every problem is solved by creating a Federal agency with a sheath of regulations to manage it.
Truth in lending laws have been on the books for a long time, and I see nothing wrong with them for federally regulated and insured financial institutions. But they didn’t stop the sub-prime meltdown. In fact a lot of the problem was caused by too much Federal intervention in the markets, by providing an almost no questions asked market for mortgage originators to dump the paper they wrote.
October 20, 2009, 1:57 amArrowSmith says:
Let’s make all lying punishable by death, since lying is horrible and evil. The logical conclusion of this kind of thinking.
October 20, 2009, 2:00 amDavid Schwartz says:
Sorry, rpt, we thought that when you said “compelled” you mean *compelled*. As far as I know, nobody justifies deception, and the only disclosure anyone opposes (at least so far as I’ve seen in this thread or elsewhere) is one imposed by a third party.
And you completely invert what people who invoke caveat emptor mean by it. It is not a justification for entering a deal with your eyes closed. In fact, we precisely mean that you should *demand* disclosure, refuse to enter into an agreement without it, and hold someone to it.
In fact, we mean that even if you live in a society that compels all kinds of disclosures, you should not rely on these disclosures to be adequate.
October 20, 2009, 5:57 amOren says:
Non-disclosure of material facts is fraud. If I sell you my house and fail to mention that (I know) the basement leaks, I have sold you my house under false pretenses.
Consumers ought to have choice on what to buy, but you can’t seriously expect me to test my ground beef to see if it’s really cut with chicken or pork. Or test my gasoline for octane every time I fill my tank. For one thing, information is not free, so there is real disutility in either spending time and money octane-test-kit (if such a kit is even practical) or running some risk of buying inferior gasoline.
To me, the key element is that the regulations do not ban sponsored reviews. Consumers that want to read such reviews can do ahead and do so. Consumers that do not believe that a sponsored review creates an environment in which it is harder to criticize the product can weigh them however they want. In short, it’s hard to see the disutility of the reg at all (whose compliance cost is also approximately zero dollars).
October 20, 2009, 10:52 amOren says:
There is a huge chasm between reviewing a product of your own volition, and being paid or otherwise induced to do so. There are plenty of places where the law makes a distinction between giving a thing away and selling it.
That was fairly clear already, yes.
VC is not a thing of value as contemplated by the rule. You most certainly owe Orin a beer though.
Transactional information is not the same as any other economic good. It is, in fact, a special case because disclosure increases the total utility in the system.
No economist on this planet would tell you that the market ought to set the level of information symmetry because the incentives are not aligned with maximizing total utility.
October 20, 2009, 11:07 amegd says:
Except regulators are not nearly as efficient as the market. If X’s gasoline is advertised as 85 Octane and consumers realize that Y’s 85 Octane gives them better gas mileage, then they will switch, and X will go out of business or try to compete with Y. Or, a consumer (or class of consumers) might decide to sue X for fraud and run them out of business.
In a regulatory environment, consumers realize that X and Y are both 85 Octane because that’s what the regulations say. Someone might report X for having less than 85 Octane, and eventually the regulators might get around to it. But consumers won’t actively look for Y, they won’t shun X, because in their minds X has the same energy content as Y.
Same thing applies to tainted milk. If A sells one gallon of tainted milk, the legal damages will convince A that it shouldn’t sell tainted milk. A will reform, and try to convince people to buy it’s product again, or A will go out of business.
In a regulatory environment, A gets a slap on the wrist, but keeps the FDA stamp and consumers think A still has a good product.
October 20, 2009, 12:24 pmFub says:
Just to make sure we are talking about the same thing, two hypos:
1. You are a DJ for MegaMedia, which holds broadcast licenses for stations in 57 states. MegaMusic Inc. sends you a CD. You broadcast the CD on all those stations, and comment “This is great music. I love it. I think you will too.”
The FCC does NOT require you to make a sponsorship identification stating that your broadcast was sponsored by MegaMusic Inc., or even that you received the CD for free. The CD you received was NOT a “thing of value” under FCC rules.
2. You are LoneBlogger.com, and your scribblings or podcasts are received by 2 people in East Gnawbone, Iowa once or twice a week if they remember to read your blog. JoeBlow Music, your neighbor who has a bar band, gives you a CD of his music. You comment on LoneBlogger, “This is great music. I love it. I think you will too.”
Under the proposed FTC rule, you must disclose on your blog that you received the CD free. Otherwise you can be fined or imprisoned.
Sounds fair and reasonable to me. NOT!
October 20, 2009, 1:22 pmDavid Schwartz says:
Just to correct a common myth, octane rating has nothing to do with energy content and will not affect mileage under normal circumstances. High octane fuel is simply more resistant to detonation and premature combustion than low octane fuel. If your car does not experience detonation or knocking on 83 octane fuel, it will run no different on 90 octane fuel.
The idea that high-octane fuel inherently provides higher performance, higher fuel economy, or is somehow better for your car is a complete myth. Some gasoline manufacturers do use different additives (primarily detergents they can claim keep your engine cleaner) in their higher-octane gasolines and this is at least theoretically capable of making a difference.
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October 20, 2009, 6:30 pmOren says:
That would require the massive disutility of millions of citizens monitoring their mileage. Moreover, if the difference in mileage is less than the natural variation (just due to weather/traffic/how hard you slam the gas), the inferior gas will never be discovered.
In the case of gasoline octane, it’s far more efficient to require disclosure by the merchant (who can test all their gasoline for effectively zero marginal cost) than to inject doubt into the marketplace.
No, A simply rebrands as a brand-new corporation C with a clean slate.
Actually, now it seems like plain old common courtesy.
October 21, 2009, 10:07 amFub says:
So the proposed FTC regs put ordinary people at risk of criminal conviction for failing to exercise “ordinary courtesy”, but giant corporations which control most broadcast and print media get a free pass for precisely the same discourteous acts.
I still don’t think that’s a fair or reasonable law. But I ‘m old fashioned that way.
October 21, 2009, 11:48 amDavid Schwartz says:
In fact, this example proves precisely the opposite of what you claim it proves. In fact, the government does require octane disclosure, and as a result lots of people buy higher-octane gas reasoning roughly as you did — that the government wouldn’t require its disclosure if it wasn’t important.
In fact, octane is irrelevant when buying gas. Higher octane gas is just more knock resistant, and if your car isn’t knocking, higher octane gas will do you no good.
So your poster child for regulation has in fact injected an absurd inefficiency in the market where because it’s the only thing required to be disclosed, it becomes the de-facto means of comparison, despite the fact that it has no relevancy.
Consumers in fact idiotically rely on the government-mandated disclosure.
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December 28, 2009, 5:28 pm