Legacy Learning Systems – The Beginning of the End for Review Affiliate Marketing

We’ve all seen the testimonial advertisements on TV at 2 am and undoubtedly asked ourselves the burning question, “Does Alex Trebek really think Colonial Penn Life Insurance is that great?” All joking aside, it’s common sense and courtesy that an individual should only endorse products or services that they have actually used. As simple as that sounds, the Internet makes the issue much more complex by way of the well-known practice of “affiliate marketing.”
Affiliate programs, which are both legal and a major component of the e-commerce world, allow for individuals or entities to register as an “affiliate” of a company and earn commission based on generated web-traffic to the company’s site or “signing up” new customers for the company. Some programs utilize “reviewer affiliates” who promote the company’s products or services via online endorsements in exchange for some form of payment.
Although the FTC has previously reprimanded a handful of companies for affiliate program advertising issues, this week was the first action issued by the FTC that resulted in a fine. Tennessee-based Legacy Learning Systems, Inc. was recently slammed with a $250,000 fine (among other sanctions) for engaging in an affiliate relationship with reviewers who were not disclosing the relationship between the two entities, resulting in the FTC claiming the relevant reviews were deceptive ads and Legacy was on the hook for them.
Legacy sells guitar-lesson DVDs and employed an affiliate program to recruit and subsequently compensate “review ad” affiliates to promote the DVDs via various online forums. Based on this business model, the FTC accused Legacy of false advertising by misleading potential customers into believing the reviews written by its affiliates reflected the unbiased views of ordinary consumers, therefore violating the FTC Act. Pursuant to the FTC’s 2009 revised guidelines on endorsements and testimonials a positive review by a person connected to the seller (or someone who receives cash or in-kind payment to review a product or service) should disclose the material connection between the reviewer and the seller of the product or service. And the disclosure shouldn’t be buried deep in a set of legal terms, or invisible type in the footer of the page.
Probably recognizing that a battle against the FTC is no way to kick off 2011, Legacy agreed to an administrative settlement and must pay $250,000 while also implementing a comprehensive reporting procedure whereby Legacy must, on a monthly basis, review each of its top fifty (50) revenue-generating affiliate reviewer websites plus a random sample of fifty (50) additional affiliate reviewer websites to make sure that the required disclosures are being made. If the disclosures are not present, then Legacy must immediately terminate the affiliate. Furthermore, Legacy must provide all future and current affiliates with a copy of the Consent Order entered into with the FTC and a signed statement by the affiliate that it received the order and agrees to comply with the FTC requirements or risk being terminated by the affiliate program. Probably not the best way to introduce your company to a new affiliate.
David Vladeck, Director of the FTC’s Bureau of Consumer Protection was quoted as saying, “Whether they advertise directly or through affiliates, companies have an obligation to ensure that the advertising for their products is not deceptive […] Advertisers using affiliate marketers to promote their products would be wise to put in place a reasonable monitoring program to verify that those affiliates follow the principles of truth in advertising.”
When the FTC published its revised advertising guidelines it was pretty obvious (as with most attempts to regulate the Internet when you’ve been in a brick and mortar mentality since inception) that there was eventually going to be friction in the online world – but no one knew to what extent. We’re finally getting a taste of the enforceability of those guidelines and something tells me that affiliate program hosts were not expecting the enforcement to pack such a punch. That being said, sites that engage in any type of compensated review system as a form of advertising are going to feel the aftermath of this one. Affiliate programs, like most marketing tactics, are about the bottom line – when the only alternative to ridiculously impractical mandatory monitoring is the FTC breathing down your throat, it makes you wonder how long until review affiliate program operators cut their losses and just shut down these programs completely.

The Marketplace Has Spoken… And At Least One Company Has Listened

It’s no secret that business revenue models employed by industries across the board have had to drastically evolve in recent years to keep up with advances in technology, and adult entertainment is no different. Oddly, however, the adult industry has lagged behind, in its recognition of consumer demand for ala carte-type pricing models employed by other facets of the entertainment industry. But “better late than never” must be the new mantra for Pink Visual, as the adult entertainment megacorp unveiled its latest venture earlier this month.
PVLocker.com is a cloud-based distribution site promising to provide your porn on your terms. PVLocker utilizes an open source browser providing the customer with an app store-esque environment to purchase the desired content on a per file basis. Upon purchase, the user may then access the files, which are stored on Pink Visual’s server cloud, anywhere and anytime via PC or mobile device.
Use of PVLocker.com will initially be limited to storing Pink Visual content only, however, the company plans to eventually offer storage of any user-owned content. Now before your Infringement Radar starts buzzing off the charts, have no fear, Pink Visual has no plans to allow content sharing on the site. Hence, allowing PVLocker to fill a very noticeable gap in the adult website marketplace, while still keeping happy the almighty copyright holder.
Even though Pink Visual obviously understands the necessity of business model evolution, it intends to continue distributing content through the traditional subscription basis as well, as long as it makes fiscal sense to do so. How long will that be? No one can be certain what kind of effect this model will have on the traditional monthly membership business model. But one thing is for sure, when you have the immediate gratification of one-click payment at your finger tips versus the hassle of recurring billing, obsolescence is a much more real possibility than ever before.
Much like the experiences of the recording industry a few years back, adult content distributors are finally taking notice of the fact that they have been fighting a losing battle and that the marketplace will always win. The recording industry fought these battles for years – litigating against Napster, Grokster, and others, in the attempt to beat back rampant audio file piracy. The recording labels then dipped their collective toe in the waters of end user infringement litigation, only to suffer a tremendous public backlash, causing a quick 180 reversal on that strategy. One would think that this trial and error would have provided an early roadmap for the adult industry, when it began struggling with its own piracy headaches. Instead, many companies appear wedded to the concept of replacing lost revenues with legal judgments against infringers. While every copyright holder is entitled to enforce its rights and bring infringers to justice, that effort should be tempered with a recognition that less infringement might be occurring, if a realistic alternative to the $29.99/month recurring membership model were routinely offered to adult content consumers.
Flexibility is key and nostalgia breeds irrelevance – Pink Visual is embracing the future of adult content distribution by providing its customers with their entertainment “when they want it, where they want it, and how they want it.” [Cue Queen’s “I Want It All.”] Continued inventiveness like this will always be preferable to reliance on litigation as a revenue line item.

Tube Site Business Model is Legal – Protected by Free Speech Principles

Kevin Cammarata’s lawsuit against redtube.com, a popular ‘tube’ site, and its advertisers, was dismissed, and that dismissal was recently upheld by the California Court of Appeals. In addition, the court determined the suit to be an illegal SLAPP Suit, and awarded attorneys fees.

The the operation of a tube site was described as “conduct of placing speech on the Internet where it can be viewed for free by the public.” The court rejected any claims of predatory business practices, and noted:

We reject Cammarata’s argument that his causes of action arise from [Redtube.com’s] predatory pricing, not its speech, because here the product being priced is speech.” See, Xbiz.com, Appeals Court Rules Against Cammarata in RedTube Case,

The ruling is important in the continuing development of the law surrounding user generated content website operation. The utility of sites such as forum for expression of protected speech cannot be underestimated. Hopefully the courts will continue to afford legal protection for this business model, and dismiss ill-conceived lawsuits, brought against online service providers operating venues for expressive activities.