Is Native Advertising Legal? Does It Matter?

I start this article with three controversial statements:

1. Native advertising likely violates Federal Trade Commission (FTC) rules on deceptive advertising

2. Native advertisers and publishers will profit tremendously from these violations and receive little to no punishment or regulation from the FTC

3. This concept, which I call “regulatory arbitrage,” has been proven to be highly profitable, having been proven by many other internet businesses

First Things First: What Is Native Advertising?

Go to virtually any article, social network or content distribution source online and you’ll undoubtedly run into “native advertising.” If you aren’t entirely sure what native advertising is, Wikipedia provides this definition:

“Native advertising is a web advertising method in which the advertiser attempts to gain attention by providing content in the context of the user’s experience. Native ad formats match both the form and the function of the user experience in which it is placed.”

As an example, I recently read a story about a small plane landing on a highway near San Jose, CA, and to the right of the ad, I saw the following “content”:

While you might question whether a reader engaged in a story about a harrowing plane crash would truly “also like” a piece on “’90s Babes Who Are Still Hot Today,” this is a great example of native advertising.

The “stories” are made to look like relevant news content, and there is no textual mention that these are all pay-for-placement ads. To find that out, you’d have to click on the little icon at the bottom right of the image. If you did that, you’d see this disclaimer appear:

The disclaimer lets you know that these links aren’t just sold to the highest bidder but rather only include “high-quality content.”

And hey, they’re only “sorta” advertisements since the “links will never take you to a blatant advertisement.” Phew, I was worried for a minute that that girl from Saved by The Bell was involved in some sort of cougar prostitution ring!

This example, by the way, is from Outbrain, one of the leading native advertising platforms online. Beyond Outbrain, there are dozens of other native advertising opportunities: you can buy a “suggested post” on Facebook, in-stream ads on Yahoo, promoted videos on YouTube and promoted Tweets on Twitter.

Given that the purpose of native advertising is to “match both the form and the function of the user experience,” it’s not surprising that many of these units are misperceived by consumers as organic – not paid – content.

Is This Deceptive Advertising?

But wait a minute – isn’t advertising that masquerades as content the very definition of “deceptive advertising”? I turned to the Federal Trade Commission (FTC) – the body that regulates online advertising – to get the official policy.

The FTC’s defines an action as deceptive:

“If it is likely to mislead consumers who are acting reasonably under the circumstances and if it would be material to their decision to buy or use the product.”

So is an ad that looks like editorial content “likely to mislead”? As far back as 1968, the FTC discussed a newspaper advertisement for a restaurant that “uses the format and general appearance of a news feature . . . [and] purports to give an independent, impartial, and unbiased view,” concluding:

“Since the column, in fact, consists of a series of commercial messages which are paid for by the advertisers, the Commission is of the opinion that it will be necessary to clearly and conspicuously disclose that it is an ad.”

This, from my perspective, would seem to require such disclosures for native ads (and definitely for those “top ten steakhouse” ads I see in airline magazines)!

The FTC has actually created a PDF – .com Disclosures: How to Make Effective Disclosures in Digital Advertising – on the subject. The key principle behind the FTC’s policy is whether an ad is “clear and conspicuous,” which they define as follows:

“Whether a disclosure meets this standard is measured by its performance — that is, how consumers actually perceive and understand the disclosure within the context of the entire ad. The key is the overall net impression of the ad — that is, whether the claims consumers take from the ad are truthful and substantiated. If a disclosure is not seen or comprehended, it will not change the net impression consumers take from the ad and therefore cannot qualify the claim to avoid a misleading impression.”

In evaluating several native advertising units, there’s certainly an argument to be made that the disclosures are “not comprehended” by consumers.

For example, in the case of the Outbrain ads I saw on SFGate.com, the disclosure is only viewable by clicking on a hyperlinked image at the bottom right corner of the ad unit. The FTC specifically comments on the effectiveness of images as proper disclosure, writing:

“Don’t be subtle. Symbols or icons by themselves are not likely to be effective as hyperlink labels leading to disclosures that are necessary to prevent deception. A symbol or icon might not provide sufficient clues about why a claim is qualified or the nature of the disclosure. It is possible that consumers may view a symbol as just another graphic on the page.”

Outbrain is but one example. Take a look at this screenshot from Yahoo’s in-stream ads:

Note that the Credit Karma ad has an “Ad Choices” button in the upper-right corner and a “Sponsored” disclaimer next to the advertiser’s URL. Does this qualify as “clear and conspicuous”? First, consider the “Ad Choices” button. One of the FTC’s guidelines states:

“Don’t hide the ball. Some text links provide no indication about why a claim is qualified or the nature of the disclosure. In many cases, simply hyperlinking a single word or phrase in the text of an ad is not likely to be effective. Although some consumers may understand that additional information is available, they may have different ideas about the nature of the information and its significance. Hyperlinks that simply say disclaimer, more information, details, terms and conditions, or fine print do not convey the importance, nature, and relevance of the information to which they lead and are likely to be inadequate. Even labels such as important information or important limitations may be inadequate.”

Second, regarding the “sponsored” notation, the FTC guidelines explain:

“Display Disclosures Prominently. Disclosures must be noticeable to consumers. The size, color, and graphics of the disclosure affect its prominence. Size Matters. Disclosures that are at least as large as the claim to which they relate are more likely to be effective. Color Counts. A disclosure in a color that contrasts with the background emphasizes the text of the disclosure and makes it more noticeable. Information in a color that blends in with the background of the ad is likely to be missed.”

I’m not a lawyer, nor do I play one on TV, but it seems to me that the very success of Native Ads is premised on making these units look like they aren’t ads at all but rather, content. (You may remember a similar debate over ads — especially paid placements — on search engines.)

It’s therefore not surprising that the disclosures appear to be neither clear nor conspicuous – ads that didn’t look like the content of a site wouldn’t be native advertising; they’d just be ads, subject to the same banner blindness that other ads encounter.

Why FTC Action, If Any, Will Be Symbolic At Best

So, let’s assume that the very nature of native advertising goes against the FTC’s guidelines and that eventually the FTC will issue new guidelines that regulate native advertising.

Let’s also assume that at least some of the players in this space have a pretty good idea that what they are doing is probably violating FTC regulations, or at least is right on the edge.

I’m making this assumption based on my non-lawyer reading of the FTC guidelines – surely I’m not the only person who read this and thought “gee, these native ads probably don’t do enough to clearly and conspicuously disclose the fact that this is an ad.”

And to be clear, I’m not the first one to have written about the intentional confusion of native advertising – there are great commentaries readily available online via The Huffington Post, AdWeek and Pando Daily, among many others.

But here’s where I think this whole debate about whether native advertising is compliant with the FTC is particularly interesting – it just doesn’t matter. You heard me right: nothing the FTC can or will do will impact offenders for past violations of the FTC’s own regulations or substantially limit their future opportunity.

I say this for two reasons. First, because native advertising takes advantage of the notion of plausible deniability – that because no regulation existed specifically to prevent native advertising, it’s hard to prove or even assert that companies intentionally violated FTC rules.

And generally speaking, whenever you can only prove “actus reus” (the act of committing a crime) and not “mens rea” (the intent to commit a crime), you can’t convict someone. Indeed, the FTC has not issued any regulations on native advertising and has really only had one public forum on the topic held in December of 2013.

Combine this legal principle with strong lobbying groups putting pressure on the FTC on behalf of the advertising community, and the fact that the FTC – like many arms of the federal government – is severely understaffed, and you can assume any punishment for native advertising will be a hand-slap at best. The FTC has neither the time nor the resources to really fight 800-pound, internet gorillas like Google, Facebook and Yahoo.

The Future FTC Guidelines I Expect

As for the future, I do think we can expect formal FTC guidelines that cover native advertising. Notably, I think these guidelines will require more disclosure explaining to consumers that the link they are clicking on is an ad and the content after that link is there because of a promotion, not because of purely editorial decision.

These changes will impact native ad companies simply because they will reduce click-through rates. But I’d argue that if this is the worst that happens, a decline in revenue is, in fact, a victory for the native ad industry simply because the industry should technically have been shut down by the FTC from day one.

Perhaps one way to state this is to say that – now that native advertising is a multi-billion dollar industry – it is “too big to fail,” and the FTC’s best option is to regulate, not ban, these ads.

Introducing A New Concept: Regulatory Arbitrage

What I’m describing with respect to native advertising is not a new phenomenon online. There’s a strong history of online businesses that have grown at breakneck speed in large part by creating business models that skirt existing rules and regulations.

These violations give these businesses an unfair advantage against entrenched, law-abiding competitors, which have too much invested in the system to disregard the rules. I call this “regulatory arbitrage” – playing in gray areas of the law to grow market share in a competitive space.

Consider three businesses – each of which are valued at over $1 billion – that have profited from regulatory arbitrage in the last ten years – YouTube, AirBnB and Uber.

Let’s start with YouTube, the online video giant acquired by Google in 2006 for $1.65 billion. When Google acquired YouTube, it was clear to everyone involved with the deal that Google was acquiring a copyright-lawsuit-waiting-to-happen (recall that in the early days of YouTube, copyrighted material was rampant as YouTube didn’t have the technical resources, or maybe the will, to block this content).

In fact, Google allegedly put aside between $200 million and $500 million to combat the expected copyright litigation that would flow after the acquisition.

And how did YouTube grow so massively on the backs of copyright owners prior to Google’s acquisition? Easy – prior to the Google acquisition there was no incentive to sue them:

“Though content owners may not have been happy with their content being shared on YouTube, the site has been able to avoid expensive lawsuits by simply not having much money to go after. But it does now. It has $1.65 billion, and everyone knows it.” — Fox News

In other words, YouTube built a $1.6B company in part based on regulatory arbitrage, then got acquired and had the acquirer foot the bill for their violations.

Now consider AirBnB, valued at up to $12 billion. AirBnB allows individuals to rent out their property (or just a room) to other people. It’s part of the “sharing economy” (which, by the way, now has its own lobbying group).

So how did AirBnB grow so quickly? There are two bits of regulatory arbitrage that helped them substantially. First, AirBnB ignored laws that regulated hotels and zoning. Second, AirBnB violated the terms of service of Craigslist by spamming Craigslist’s rental listings (this technique is also known as “growth hacking,” which some sadly suggest is the future of all marketing).

And last, take a look at Uber, now worth $3.5 billion. Uber – a mobile app that allows users to hail a towncar online – has run afoul of taxi laws in many cities, since the Uber system appears to violate numerous municipal ordinances. But that’s ok, apparently, because no one really knows whether those laws cover Uber or not.

Its legality is simply not clear-cut. There are laws for taxis, which you hail on the street, and there are laws for limousines, which you call in advance. But until Uber came around and gave people the option to schedule cars with a moment’s notice from an app, there was no need for laws governing limousines that sometimes act similarly to taxis — or taxi-type cars that could be digitally hailed. The company operates in a gray area of its own invention.

Gray Is The New Black

Clearly, regulatory arbitrage is working for native advertising, as well. Outbrain is planning an IPO with a valuation of $1 billion, Facebook has gotten hundreds of thousands of Facebook page owners to buy “promoted posts,” and Twitter’s revenue – which is 100% native advertising – was $253.6 million for the first six months of 2013. To be sure, not all of this advertising wantonly disregards FTC regulations, but gray areas exist, as shown above.

From an advertiser’s perspective, I am a huge proponent of native advertising, simply because it works. That consumers are wary of advertisements means that they frequently ignore and often discount the messaging in the ads. So, ad units that don’t look like ad units drive more trust, more clicks and more sales. What’s not to love?

And frankly, you could argue that there are a lot of other advertising schemes online that the FTC should focus on prior to turning its attention to native advertising. It’s also worth remembering that effective ads (ads that drive revenue for publishers and sales for advertisers) are what fuel the zillions of pages of free content available online.

Of the top five global Web properties, 100% offer free content to consumers, and 100% have native advertising units. If companies like Outbrain didn’t exist, other advertising would take its place, and perhaps that advertising would take up more space and be much more annoying.

Reasonable Self-Regulation

I’d also argue that the current state of native advertising – perhaps not like peer-to-peer apartment rentals and on-demand taxis – is one of reasonable self-regulation. Outbrain, for example, does review all content prior to publication, ensuring that outright fraudulent advertisers or claims don’t make it into the system.

At the end of the day, I can’t help looking at native advertising and thinking about the classic film noir movie, Chinatown (note: if you haven’t seen the movie and someday plan to, you may not want to read the next paragraph).

Chinatown’s premise is simple: the world is unfair, the powerful win, and fighting the system is a waste of time. If you want to succeed, accept these truths and accept your place in the system.

It’s a dark and cynical worldview to be sure, but it seems relevant here. If you can’t beat ’em, join ’em: set up your native advertising campaigns today! Forget it, Jake, it’s the internet (video autoplay).

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