Mises Wire

Are Advertising “Bribes” Unethical?

Wherever there are entrepreneurs finding new ways to earn money, it’s a safe bet government regulators won’t be far away. So it is with the online entrepreneurs known as “influencers.” Internet personalities like PewDiePie build enormously successful businesses using little more than a microphone and some video equipment, and naturally, government isn’t going to stand for that.

Consequently, the Federal Trade Commission is cracking down on undisclosed sponsorship deals between video game developers and the online influencers who play and review their products. The FTC claims that some influencers failed to properly disclose their financial relationships, which in turn deceived viewers, who were unaware of possible conflicts of interest. I’ve discussed the economic implications of these cases elsewhere, so here I’ll focus on some of the ethical issues.

Online Marketing and “Payola”

While it’s true that internet marketing generates a lot of controversy, influencers are not new, and neither is the practice of paying them for endorsements. The problem goes back at least to the 1950s, when it was common in the music industry for radio DJs to accept payment from record companies in exchange for playing their records, a practice known as “payola.”

Payola was a source of confusion and controversy in the 50s, which is why Murray Rothbard wrote an essay on the subject titled, “The Problem of Payola.” It’s a nice survey of the topic that, as usual for Rothbard, gets right to the core problems involved. And much of what Rothbard wrote in that essay applies with equal force to current investigations of online influencers.

A first, general ethical question about payola and online marketing is whether they are fraudulent. However, a more specific and practical question is whether these activities should be punishable by law. The narrower question matters because not all cases of fraud are cases of theft: some are simply immoral deceptions. It is not for the law to enforce all types of morality, and of course, morality is not synonymous with legality. Prosecution should therefore be limited to cases where the use of force is appropriate.

In Rothbard’s view then, the main problem is figuring out whether payola involves theft. If influencers sell false products to their viewers, they are guilty of theft and must pay restitution. The trouble, however, lies in defining what their product is, and thus what would constitute a fraudulent sale. It’s usually unclear exactly what services influencers provide and what kind of value their viewers expect to receive, and this makes unpacking potential deception more difficult.

However, a simple question sheds light on the issue: who exactly is defrauded when influencers fail to disclose their sponsorships? The hidden sponsors are not defrauded, as they get precisely what they pay for. Non-sponsor companies are also not defrauded, as they made no agreements with influencers to begin with, and thus have no claim on them.

What about Consumers?

This leaves only the viewers. However, the legal rights of the general public are murky in this case. First, the decision to listen to (or to trust) an influencer is entirely voluntary, making it difficult for consumers to claim that influencers’ opinions are thrust upon them. Second, watching videos is “free” in the narrow sense that it doesn’t have a direct monetary price, which means viewers make no payments that could be used to show breach of contract.

Instead, the responsibilities between the influencer and the influenced are vague. As Rothbard argues:

In the case of the disk jockey, of course, the public is more directly involved. It trusts the disk jockey and relies on the jockey’s judgment to play what he thinks are the best records. It feels cheated when it finds that the jockey’s judgment was influenced by monetary considerations. And yet, while the disk jockey has practiced moral deception on the public, he is certainly not guilty of legal fraud. No express warrants have been given by the jockey to the public, which relies on an ineffable sense of trust in the jockey.

Nevertheless, payola can lead to theft: if kickbacks corrupt an influencer’s judgment, and this leads people to spend money on false goods, legal fraud has occurred. The FTC’s recent investigations of gamers make essentially this argument. The FTC alleges that consumers were deceived by influencers claiming to offer unbiased opinions, when in reality those influencers simply repeated marketing points suggested by their sponsors. In turn, some viewers may have bought poor-quality products. Now, it’s not clear this is actually what happened in the gaming industry, but if it did, the deception does amount to theft.

Regulation Isn’t the Answer

Yet even if legal fraud is occurring, it doesn’t follow that regulation by the FTC will improve things. For starters, it’s essentially impossible to define and enforce ideas like genuine judgment or unbiased opinion. As it turns out though, such enforcement isn’t necessary:

[T]he processes of the competitive free market, especially the profit and loss test, will tend to compel the [influencer] to use his best judgment if [he] is to remain in business. ... However, if this kind of payola system becomes generally widespread in an industry, then there will probably be no corruption of judgment in any case; for the “bribe” rate will be about the same for every [sponsor], and the [influencer] will be able to use his best judgment uninfluenced by special favors.

The bottom line is that there isn’t an economic or ethical case for regulating disclosure between influencers and their sponsors. In fact, economics and ethics each offer powerful arguments against regulation.

The practical implications alone should give us pause. Regulation necessarily means placing more power in the hands of the state and less in the hands of individuals. Government agencies are unlikely to turn down this offer, as they are only too happy to increase their “influence” whenever they can. To give just one example, the FTC recently claimed 20 years of oversight over Machinima after the company failed to disclose some of its sponsorships. Giving the FTC more of these powers does nothing substantial to protect consumers: it merely patronizes them.

If the FTC really cared about the harmful effects of hidden sponsorships and fraudulent goods, it’d spend all its time investigating government.

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