MEMORANDUM FOR Jodie Bernstein
Director, Bureau of Consumer Protection
U.S. Federal Trade Commission

FROM: David C. Bowie
Director, Office of Finance, SIF/TD/ITA
U.S. Department of Commerce

SUBJECT: Comments on the FTC's Electronic Media Proposal

We want to thank you for the opportunity to review the Federal Trade Commission's (FTC) rules and guides to advertising commercial activities on the Internet and other new forms of electronic media (E-com, E-media). We share the FTC's views that significant advances in E-com are dramatically changing the global marketplace. In fact, with the rapid growth of information technologies and digital communication, electronic commerce (e-commerce) is rapidly becoming the heart and soul of the banking and financial services industries. Yet there is no clear cut understanding between the private sector and government negotiators on legislation, regulations, the industry and consumer needs, and the related policy issues.

According to Business Week reports of June 22, 1998, U.S. businesses will exchange an estimated $17 billion in goods and services this year over the Net, more than double the amount in 1997. By 2002, that estimate is expected to explode to $327 billion. Business Week states that by combining these estimates with further cost savings to businesses and online consumers, doing business on the Internet could add an additional $10 to $20 billion annually to the nation's gross domestic product (GDP) in four years. Further, according to market researcher International Data Corp. (IDC), by 2000, nearly 46 million people will be buying goods and services over the Net, up from four million today. By 2010, IDC envisions one billion costumers worldwide will be shopping on the Net.

Therefore, we share the Commission's statement that consumers must have confidence that the goods and services offered on the Internet are fairly represented -- that they will get what they are being promised to -- and that recourse is available if they do not. As a result, the enforcement of consumer protection laws is essential to ensure the vitality and viability of the Internet as a new marketplace. In this context, we appreciate and applaud the Commission's rules and guides to advertising and commercial activities on the Internet as timely attempts at addressing these issues.

In response to your requests for comments on specific E-media issues, we have the following comments:

1. Regarding the FTC's proposed interpretation of the term "direct mail," we think it adequately reflects the understanding of the term and appropriately encompasses the "electronic" equivalents of "direct mail." As noted by the FTC, most Internet advertisers track users' visits and/or interests through their click patterns or the use of search terms. Because of the interactive nature of Net-surfing, users reveal their preferences and many other personal information for an array of items. As a result, these advertisers gain valuable marketing information about the users' background and preferences. This information could be extremely useful in developing a representative profile of potential consumers that Net advertisers may use in targeting particular consumers. Therefore, targeted advertising on the Internet should be considered as the "electronic" equivalent of "direct mailing."

 

2. For the use of E-media to comply with affirmative disclosure requirements, the most fundamental issues are consumers' understanding, confidence, satisfaction, and protection. We recognize that it might be easier, more efficient, and less costly for industry members to comply with various requirements by simply using E-media. We also appreciate the FTC's intention that its rules and guides should not discourage the use of electronic media. However, it is ultimately the consumer who has to be fully content with the available options. Consumers must have choices on how would they like to take the delivery of information: electronically, written, or both. They must also be provided with clear and comprehensible disclosures to prevent deception. Therefore, the Commission should guide the industry to ensure that consumers are protected, and that they have the freedom to choose the mode of information delivery they prefer.

 

3. Regarding the disclosures placed within a separate frame and their effectiveness, we fully share the FTC's belief that for effective communication, disclosures should always remain accessible during the communication. Although advertisers may use frames to separate the screen, the disclosures containing frames must remain constant on the screen, fully and distinctly visible (e.g., blink, spin, pop-up, etc.) to users. With the development of advance 3-D and multicolor text, audio and moving video technologies, products are increasingly advertized with computer-added special effects. Such techniques are generally used to present products for marketing effectively, but not necessarily to display product disclosures. We strongly believe, as a rule, the display of disclosures should be as attractive and clear as the advertised products themselves.

 

4. For applying specific standards in rules and guides to electronic

media marketing, the specific manner in which they effectively communicate the disclosures is very significant. Especially for disclosing information using E-media, the effectiveness depends on the mode and the manner -- the placement of certain disclosures in a specific context -- in which disclosures are communicated. In this context, the consent orders issued in America Online, Inc. (Docket No. C-3787), Prodigy Service Corporation (Docket No. C-3788, and CompuServe, Inc. (Docket No. C-3789) are good examples. But the nature and duration of services these firms provide might be different from Web vendors whose identity, credibility and reputation may not be that well-established. Consequently, there is a good likelihood that such disclosure provisions may not translate precisely to all E-media ventures. Additional guidance, specific rules or standards may be necessary. They should be thoroughly discussed and evaluated for their suitability to E-media disclosure provisions.

We understand that the Commission's proposal does not contain a proposed policy statement. It is intended to provide a discussion of the issues to eliminate or reduce any uncertainty about the FTC's rules and guides applying to electronic media. However, the terms, rules, guides, and standards used in the proposal are more commonly associated with print media. Therefore, identifying the pitfalls of using the existing rules and guides might be necessary for developing E-media specific standards to close the gaps left by the existing practices.

Further, we have a couple of confidence building suggestions that should enhance E-media commerce. They are as follows:

A. First, for appropriate placement and effective communication of disclosures, the FTC should work with browser-system providers. Since there are just a few browser systems, it should be relatively easier to reach a consensus on common standards for both the placement and the display of disclosures. Browser system providers can integrate frames easily in their systems for effective communication of disclosures. Further, such arrangements should effectively avoid Web vendors' attempts, if any, to add to or detract attention from the prominence of disclosures.

 

B. Second, the Internet is a medium developed to provide wide access to information. However, it does not necessarily give consumers requisite confidence and protection. So, they are vulnerable to deceptions. A referral service entity would greatly enhance the causes of e-commerce. For example, the Better Business Bureau (BBB) does have databases for listed firms' business practices and reputation. Inquiring consumers can access that information on a particular business for its business practices, reputation and complaints, if any. A similar service -- say Better Electronic Business Bureau (BeBB) -- should greatly enhance the effective communication of disclosures. Since such a service would be institutionalized and viewed neutrally, consumers could access such information for confidence building by simply using E-media. This service should also be more efficient and less costly for industry members engaged in e-commerce.

Finally, although we will be unable to attend all your workshops, we would like to attend the workshops relevant to our work here at the ITA. Therefore, please keep us informed. Thank you again for allowing us the opportunity to review the FTC's proposal.

Drafted by Raghav Dwivedy, June 19, 1998
Cleared by David Bowie, June 30, 1998