October 1, 1996

New Challenges for Advertising on the Information Superhighway

9 min

These days, it seems that you can hardly open a newspaper without finding an article explaining how the information superhighway, or, as the federal government calls it, the “national information infrastructure,” is going to change the way we work, the way we live, and the way we consume. Interactive advertising has generated enormous interest in the press and among major advertisers and agencies.

Unfortunately, some activities along the information superhighway have also drawn the attention of lawmakers and regulators. Pornography, obscenity, financial fraud and violations of consumer privacy in cyberspace are threatening the tremendous potential of this new medium.

The current outlook for interactive advertising reminds me of where infomercials were in the 1980s, when I represented infomercial marketers called to testify before Congress on abuses in what was then a new form of television advertising. Following Congressional hearings in 1989 and 1990, I worked with a group of the largest and most committed infomercial companies to create a self-regulatory body, NIMA International, and to establish industry-wide marketing guidelines for its members, which number nearly 600 today. As a result of NIMA’s efforts and its work with members of Congress and the staff of the Federal Trade Commission, the industry was able to avoid potentially devastating legislation and burdensome regulation aimed at infomercial formats and advertising claims.

Opportunities for Interactive Advertising

Major advertisers such as McDonald’s and AT&T have grasped the huge potential market of cyberspace. One market research company boldly predicted that on-line retailing alone will be a $50 billion business by the year 2000. While that may be a gross exaggeration, interacting advertising is here to stay and will surely grow if the medium is not tainted by cyberspace bandits or drastically curtailed by new legislation or overly restrictive regulation.

This new advertising medium can appear in the form of cd-rom catalogs, through which consumers can view merchandise and, in some instances, place their orders instantly from their computers via modem. Commercial on-line services such as America On-Line, Prodigy and CompuServe, and the Internet, also provide consumers with opportunities to view advertisements on bulletin boards and in their e-mail.

There are currently more than six million subscribers to commercial on-line services. By the end of this year, Microsoft will add its own commercial on-line service. Meanwhile, the Internet now has upwards of 20 million “net surfers” worldwide, a number that some expect to more than quadruple by the year 2000.

Despite all the commercial hype that surrounds this new medium, the on-line community is still small in comparison to traditional television, radio and print audiences. By one estimate, only about 3.8 million households access computer on-line services at least once a week, and fewer than 4 million computers are equipped with cd-roms. Recently, the entire interactive shopping market was estimated to be worth only $100 million annually.

Nevertheless, most experts agree that interactive advertising will, in one form or another, eventually reach most Americans. Certainly, its development as a new medium has caught the attention of federal and state lawmakers, who see cyberspace as “the wild west without a sheriff.” One electronic marketer happily described it as “the freest market ever created because there are no regulations on it.”

But as he and many other advertisers will eventually find out, there are rules of the road already in place.

Current Regulation of Interactive Advertising

The traditional rules of advertising enforced by the Federal Trade Commission apply to commercial practices in cyberspace. That is, if an advertisement is illegal on television, radio or in print, it’s illegal in cyberspace.

This means that objective claims made by an advertiser must be substantiated by competent and reliable evidence prior to dissemination. Comparative advertising and price claims must also be substantiated. Product demonstrations (to the extent possible in this medium) must accurately depict how the product will perform in the consumer’s home.

In addition, the commercial nature of advertisements in cyberspace must be clearly disclosed to consumers. Given the increased blurring of advertising with other content, questions will arise as to whether a message constitutes advertising, and if so, whether it is recognizable as such.

On-line computer services and shopping on the Internet will make the line between information and entertainment on the one hand, and advertising and direct marketing on the other, even less clear. These platforms frequently tie materials together thematically. An exploration of a “sports” forum or bulletin board can yield archival information and sales pitches simultaneously. Sales information appearing in e-mail, another forum for interactive advertising, may not be detectable at all, given that e-mail privacy is protected by federal law.

Endorsements and consumer testimonials must represent the current beliefs and actual experiences of the endorser. Yet, the truthfulness of on-line testimonials vouching for a product or service may not be verifiable. And in cyberspace, even the testimonials’ true identities may not be knowable because people can communicate anonymously. Real-time communications -- or “chats” -- between the advertiser and consumers pose another legal challenge for on-line advertisers, similar to that faced by the transactional television shopping programs.

Recent Law Enforcement Actions in Cyberspace

Law enforcement agencies across the country are stepping up their surveillance of the Internet and on-line services in response to rising complaints from the public and the media. Last year, a California couple was convicted of violating Tennessee’s obscenity laws through their operation of a sexually-oriented bulletin board in California. According to a recent article in the Wall Street Journal, there is “an increasingly abundant trove of sexually explicit material on the Internet,” with hard-core pornography predominating.

State and federal regulators are also finding increasing instances of securities fraud, illegal promotion of penny stocks, unregistered broker and investment adviser activity, and illegal pyramid chain letters sent by e mail. For example, in Texas, a retiree sent $10,000 to a man who misrepresented himself on a computer bulletin board as a money manager. Last year, state regulators in all fifty states issued a bulletin to investors, warning them of illegal financial schemes in cyberspace.

And a week ago, an infamous computer hacker was arrested in North Carolina for stealing information on 20,000 credit card accounts (including credit card numbers) over the Internet.

Last fall, the Federal Trade Commission brought its first enforcement action against on-line advertiser Brian Corzine. Doing business as Chase Consulting, Corzine used America On-Line to advertise a $99 credit-repair kit that he represented as “100% legal.” In fact, his product encouraged users to take illegal steps to repair their credit histories.

According to Corzine, he had no idea that his promotional scheme might be illegal. Undeterred by that argument, however, the FTC froze Corzine’s assets and obtained a settlement that required him to provide refunds to all purchasers of his credit repair kit. While credit repair scams advertised in traditional formats have been a frequent target of FTC enforcement, the Commission had yet to flex its muscles in cyberspace.

Underscoring the applicability of the traditional rules of advertising to advertisements in cyberspace, Federal Trade Commission Chairman Janet Steiger warned that “as these computer networks continue to grow, we will not tolerate the use of deceptive practices here any more than we have tolerated them on other recently-emerged technologies for marketing products and services to consumers.” Driving home that point, FTC Commissioner Christine Varney recently told a group of manufacturers that “there can be little doubt that [the Corzine lawsuit] is the first of many cases to be pursued by the FTC regarding fraud and deception on the information superhighway.”

Two recent lawsuits illustrate additional problems of civil liability in cyberspace. In Cubby v. CompuServe, 776 F. Supp. 135 (S.D.N.Y. 1991), the plaintiffs sued CompuServe for defamation. They alleged that false and defamatory statements about their newsletter appeared in a CompuServe forum called, “rumorville.” CompuServe argued that because the information that appeared in the forum was compiled and edited by a third party, CompuServe did not and could not exercise editorial control. The court agreed, comparing CompuServe to a bookstore or distributor that could not possibly examine every publication for defamatory statements.

In the future, system operators that do exercise more authority and control over computer bulletin boards (either through sophisticated screening software or simply policing their services) may not escape civil liability -- or the long arm of the Federal Trade Commission, which holds accountable those responsible for advertising content.

In Playboy v. Frena, 839 F.Supp 1552 (D.M.Fla.), a Florida operator of a bulletin board was found liable for the unauthorized distribution of copyrighted photographs and trademark violations. The operator argued that he did not upload the photographs himself and could not know about or control the subscribers who did. Because copyright infringement is a strict liability offense (i.e., knowledge of infringement is irrelevant), the bulletin board operator was found liable.

Proposed Regulation of Cyberspace

Lawmakers are certain to attempt to impose more order in cyberspace. Interestingly, there are many parallels with the 900-number industry, which from the outset was besieged with complaints to state and federal officials about 900-numbers carrying pornography and obscenity. Later, 900 numbers were used to commit securities fraud, consumer-product sales rip-offs, pyramid schemes and credit card scams, leading to stiff regulation at the federal and state level. Not by coincidence, the 900-number industry hit its peak in 1992, the same year the U.S. Congress enacted tough restrictions on the use of 900 numbers.

In response to “smut on the Internet” Senator James Exon of Nebraska revived legislation that would prohibit the electronic transmission of obscene materials. A number of states, including new York, are presently contemplating similar legislation.

Congress and the Federal Trade Commission continue to consider tightening up laws to protect consumers’ privacy from the practices of overly-aggressive list rental companies and credit reporting agencies. Last year, Congressman Markey threatened to introduce legislation that would allow consumers to prohibit commercial on-line services from selling information about them to list companies. These rules could have a significant impact on the way marketers gather and use information about on-line consumers.

Finally, last year, Congress questioned the promotion of prescription drug products on interactive cable TV medical networks. The Food and Drug Administration and the Department of Justice have asked Congress to pass new legislation to curb inappropriate promotion of drug products to the public.

Self-Regulation of Interactive Advertising

Interactive advertising is at a crossroads right now, much like infomercials were in the late 1980s. Cyberspace can develop into a profitable medium for major advertisers and entrepreneurs alike, or it can be ruined by legislation and/or regulation spawned by reckless marketers who are unaware of, or blatantly disregard, the rules of the road.

However, through effective self-regulation, interactive advertisers may dodge the bullet of public taint and government intervention that killed the 900-number industry. Advertisers who wish to preserve cyberspace as a free and open marketplace should look to the models of self-regulation developed by NIMA International and other trade associations, many of which work with the National Advertising Division of the Council of Better Business Bureaus.

As a final caveat, however, I believe that given the virtually uncontrollable nature of cyberspace, the sheer number of users involved and the low entry barriers to this advertising medium, government regulators and self-regulating bodies will have a very tough and demanding job policing the information superhighway.