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The Customer Experience Implications of the FTC’s New Rules on Native Advertising

By Augie Ray | December 23, 2015 | 4 Comments

Yesterday, the FTC issued new guidance on native advertising, sponsorship, and disclosure. In some respects, the new FTC guidance contains little new. It is just another reminder that the same tenets of ethical marketing are as true today as they were more than a century ago when the Postal Act required newspapers to differentiate advertising content from editorial content. But even if the rules remain unchanged, the rapidly evolving media and advertising landscape makes it vital that marketing leaders understand and act upon the new FTC guidance.

The rise of the empowered consumer, protected by ad-skipping DVRs and adblocking software, has raised the stakes for marketers and publishers. Likewise, the disintermediation of content delivery, with peer-to-peer sharing and Facebook’s news feed algorithms and Instant Articles, is upending the control that content creators once had over the distribution of information (and advertising) to consumers.

Media companies, adjusting to the loss of viewers, subscribers, and attention, have turned to native advertising to bolster revenues. And marketers, eager to overcome consumers’ avoidance of advertising, have eagerly adopted approaches such as native advertising and influencer marketer. There is, of course, nothing wrong with these strategies when carefully executed, but marketing leaders must recognize that creative and innovative practices carry additional customer experience risk that must be managed to minimize regulatory, trust or reputation risks.

Where the FTC stands is clear. While the FTC blog post has a mild headline, “FTC issues Enforcement Policy Statement and business guidance on native advertising,” the title of the guidance itself is less circumspect, “Enforcement Policy Statement on Deceptively Formatted Advertisements.” The agency makes its intent apparent from the first sentence of the blog post: “If what looks to be an article, video, or game is really an ad – but it’s not readily identifiable to consumers as such – the FTC has another word for it: deceptive.”

If you are a marketing professional, I urge you to take the time to read the Policy Statment along with the accompanying “Native Advertising: A Guide for Businesses.” Here are a few highlights:

  • The FTC reinforces the requirement that consumers must know when they see an advertisement. “Advertising and promotional messages that are not identifiable as advertising to consumers are deceptive if they mislead consumers into believing they are independent, impartial, or not from the sponsoring advertiser itself. Knowing the source of an advertisement or promotional message typically affects the weight or credibility consumers give it. Such knowledge also may influence whether and to what extent consumers choose to interact with content containing a promotional message.”
  • The FTC recognizes the challenges faced by media but is not altering its guidance. The agency acknowledges that “the business models of many publishers have undergone significant change, as, increasingly, consumers can skip or block digital ads while watching digitized programming or browsing publisher content.” Despite these challenges, the Commission notes that “Regardless of the medium in which an advertising or promotional message is disseminated, deception occurs when consumers acting reasonably under the circumstances are misled about its nature or source, and such misleading impression is likely to affect their decisions or conduct regarding the advertised product or the advertising.”
  • The FTC is not prescriptive in what constitutes a deceptive advertisement, saying that “the Commission considers the overall ‘net impression’ it conveys.”
  • Finally, the agency requires that “any qualifying information necessary to prevent deception must be disclosed prominently and unambiguously to overcome any misleading impression created.” This, of course, matches the FTC’s longstanding “clear and conspicuous” requirements of disclosures.

Marketers must determine how this new guidance should alter their business practices, but there are some obvious areas of concern within the FTC document, including:

  • Search: If your company offers a search function to help consumers find products and services, you must clearly disclose sponsored results because “consumers ordinarily would expect a search engine to return results based on relevance to a search query, as determined by impartial criteria, not based on payment from a third party.”
  • Influencer Marketing:  Marketers must ensure that paid endorsers disclose any financial connection with the brand if knowledge of that relationship would “materially affect the weight or credibility of the endorsement.” In other words, if consumers don’t know or would not assume that your brand is paying the attractive young Instagram star to wear your clothing, a conspicuous disclosure is required. (When Instagram model Essena O’Neill had a change of heart and rejected the commercialization of her account, she acknowledged the lack of disclosure, sarcastically asking, “Why would you tell your followers that you’re paid a lot to promote what you promote?” The FTC answer: Because it is legally required.)
  • Ratings and Reviews: Educate employees of the need to disclose their relationship when publishing information about or endorsing the brand (or ask them to avoid doing so altogether). When employees of a PR firm retained by an app developer posted reviews to the iTunes app store, the Commission took action because “the posted reviews were misrepresented as independent reviews reflecting the opinions of ordinary consumers, and the failure to disclose the reviewers’ material connection to the app company was deceptive.”
  • Native Advertising: Exercise caution with native advertising formats. Ensure appropriate disclosure if the paid nature of the content “is likely to affect consumers’ choices or conduct regarding the advertised product or the advertisement, such as by leading consumers to give greater credence to advertising claims or to interact with advertising with which they otherwise would not have interacted.” Even if a majority of individuals may recognize it as paid advertising, that may not be sufficient because, “A material practice that misleads a significant minority of reasonable consumers is deceptive.” Furthermore, since content is aggregated across channels, marketers must consider the many ways consumers will be exposed to the native ad; “if a natively formatted ad appearing as a news story is inserted into the content stream of a publisher site that customarily offers news and feature articles, reasonable consumers are unlikely to recognize it as an ad.”

Marketing leaders may wish to take action as a result of this week’s FTC guidance. While every marketer and brand may interpret their risks and opportunities differently, all marketing leaders share one common need: To ensure all employees and partners know the company policies and to have in place the proper oversight that ensures no mistakes are made that could cost the organization time, money or reputation.

Perhaps the best advice on this topic comes not from the FTC but from Warren Buffet, who said “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Go do things differently!

Leave a Comment

4 Comments

  • The FTC policy appears to be selectively focused on policing online digital media. Yet when you consider how blatant ‘product placement’ has increased in movies and TV programs, why is this practice not viewed by the FTC as deceptive? Seems like there’s an inconsistent public policy on this topic — one that treats different media with varying degrees of oversight. My point: rather than call it ‘native advertising’ perhaps bloggers and other publishers that are prepared to include paid advertising in their editorial should start to call it ‘product placement’ opportunities for marketers, and thereby avoid this government scrutiny.

    • Augie Ray says:

      Thanks for the comment, David. I’ll start by saying that I agree with your point of view on product placement, but I’ll arrive in a very different place than you do.

      I concur that there is inconsistency and that product placement seems to violate the spirit of both the longstanding ethical guidelines and the rules from the FTC. That said, I think the solution is to demand more disclosure around product placement, not to allow the advertising industry to cross the line simply because oversight of one medium is lax. (That’s a bit like saying, “Hey, that guy over there speeds, so I guess we should all just speed and ignore the dangers and laws.”) I am frankly surprised the FTC has not acted to enforce some rules around product placement, such as, perhaps, a clear and conspicuous disclosure at the beginning of the show which brands paid for placement.

      While I agree with your assessment that product placement in movies and TVs seems to violate the spirit and the letter of the regulation, I do think it’s possible someone could make an argument there are key differences between a product placement in entertainment and an ad that isn’t clearly an ad on CNN or the New York Times. The former generally (but not always) shows a fictional character using a product, not attempting to convey something fictitious as factual and not necessarily associating use with endorsement. Meanwhile, a blogger being paid to write positively about a product or an article that is really an ad on a news site is very different–it conveys a real entity (a person or a media source) conveying something that seems to be authentic, factual and non-commercial when, in fact, it is quite the opposite. In other words, a fictional TV detective drinking a Bud is hardly the same thing as a respected beer blogger receiving compensation to write how Bud is an unfairly slighted beer.

      I’ll just add that the reason I am being a stickler isn’t just because I adore the FTC and regulation. Ultimately, clear disclosure is what is best for everyone. We’ve seen an alarming decrease in trust in brands, business and media, and this ultimately hurts rather than helps everyone in the value chain, from consumers to brands to publishers. I fear some marketers will adopt practices that will eventually hurt their brands, because the short-term gains from today’s clicks and attention can sometimes result in long-term reduction in reputation and brand perception.

      I appreciate the dialog. Let me know how you agree or disagree, David.

  • Christopher Graves says:

    Augie, a very large body of research and many scientists would disagree with your assessment that implies product placement within fiction is somehow less compelling or less insidious. If you look at the research done by scientists such as Prof. Raymond Mar (the Mar Lab at York University), he notes that even explicitly labeling a story as “fiction” has no lessening of its impact on readers/viewers in terms of persuasion. If you look at the thousands of pieces of research on social proof, social norms and homophily, you will see that placing a product within the right social set (in a piece of fiction) is just as powerful as an implied endorsement by a reviewer. Good fiction creates what narrative science theorists call “narrative transportation.” It immerses us and triggers empathy. Indeed, scientists such as Melanie Green and Raymond Mar find this the most powerful of persuasive techniques. Here is an excerpt from a paper I have written on this: “Professor of social psychology and breakthrough researcher on narrative transport, Melanie C. Green, wrote that “Despite the normative presumption that individuals should form their beliefs based only on factual sources, common experience suggests–and my data confirms–that individuals often base real-world judgments on information from fiction. Humans are practiced at creating possible worlds, and when confronted with a fictional situation, individuals appear to be basing their judgments on plausibility rather than accuracy.”[5] Green, like Mar, said her research reveals that while an expository or evidentiary approach to persuasion may fall prey to the backfire effect, the power of transporting people through narrative can succeed.”

    • Augie Ray says:

      Your point is well taken. As noted, I’d like to see more disclosure of product placement to bring that into alignment with ethical transparency practices and with FTC guidelines.