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FTC Cracks Down on Sponsored Content

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The Federal Trade Commission has recently been investigating sponsorships between video game developers and popular internet personalities known as “influencers.” The parties under investigation include sponsors like Warner Bros. as well as influencers like Felix Kjellberg—better known by his online moniker PewDiePie—creator of what is to date the most subscribed-to channel on YouTube.

The FTC alleges that developers paid influencers to post positive gameplay videos on sites like YouTube, and furthermore, that they discouraged content creators from revealing these sponsorships to the public. According to the FTC, viewers (as consumers) were deceived by what were essentially advertising campaigns masquerading as independent and objective opinions.

This isn’t the first time the FTC has investigated sponsorships in the gaming industry. Earlier this year it settled a complaint with Machinima over similar allegations of failure to disclose sponsorships. Machinima is now subject to 20 years of oversight by the FTC for violating its standards.

There are a couple of points worth making about these recent cases. First, it’s not clear even by the FTC’s own account whether many of these sponsorships required more than a certain amount of time be devoted to a game, and/or that a game be mentioned by name. Only some agreements appear to have actually require influencers to give positive opinions, or to overlook flaws in the games under discussion. It’s possible then that some influencers offered essentially the same opinions they normally would have.

Second, the FTC isn’t claiming that developers always tried to prevent creators from disclosing sponsorships altogether. In the most recent case, for example, Warner Bros. allegedly encouraged creators simply to include full disclosure information in description boxes below their videos, rather than in the videos themselves. Only the latter satisfies the FTC’s less-than-scientific requirements for “clear and conspicuous” disclosure. The trouble then was not that viewers were being deceived, but that they were unlikely to search for potentially relevant disclosure information.

FTC Regulations are Arbitrary and Harmful

The above points already hint that the recent boom in paid endorsements is not as significant as the FTC is making it out to be.

Nevertheless, the FTC also claims that in some cases influencers did disclose early access privileges to games they reviewed, but failed to disclose their financial compensation or the possibility that compensation was awarded in exchange for positive opinions. Although this type of case appears to occur less frequently than the ones mentioned above, it’s being taken as the rule rather than the exception by commentators, and is the focus of the current debate about disclosure.

Unfortunately, many commentators are treating these cases as open-and-shut examples of fraud. Yet there’s more to them than that, both ethically and economically. Here I’ll tackle some economic considerations, and save the ethical discussions for another time.

Perhaps the biggest assumption in these discussions is that the FTC’s disclosure rules are necessary and reliable regulations on advertising. This claim does not hold up under scrutiny.

As far as consumers are concerned, it shouldn’t come as a surprise that the FTC’s investigations do not contain an explanation of how gaming sponsorships actually influenced sales. Instead, its public statements only make reference to the popularity of sponsored videos. Ultimately, regulators have failed to produce evidence that anyone was actually deceived into buying disappointing games. In fact, some commentators are upset at the lack of outrage among viewers.

Like most consumer protection regulation, the FTC’s standards are extremely patronizing. They assume most people are too disinterested or ignorant to bother investigating the goods and services they buy. The implication is that without the FTC and other regulatory authorities, consumers would persistently buy dangerous or fraudulent goods; hence the need for government to ensure product quality. However, this is simply not the case. Consumers are usually eager to know if they’re being duped, and no one likes paying for poor-quality merchandise. In fact, competitive markets persistently develop new institutions consumers can use to express their opinions and thus hold entrepreneurs to high standards.

Similar to antitrust or anti-dumping legislation, consumer protection legislation is almost never invoked by consumers themselves. Instead, rival producers use it as a tool to stifle competition. Consumers don’t clamor to be “protected” from low prices; rather, inefficient producers demand protection from their more popular competition. It’s not clear who inspired the FTC’s current investigations, but I’ll point out in passing that the rivals of companies like Warner Bros. are hardly disinterested in its legal fortunes.

Competitive Markets Ensure Quality, Not Regulations

Importantly, the market already contains a powerful mechanism for limiting unethical behavior: the profit and loss test. Whenever one influencer accepts money in exchange for a positive review, this creates an opportunity for rivals to gain market share by exposing the deceit and then promoting their own, unbiased opinions. Of course, it might be argued that influencers could simply band together to form a cartel in which everyone is sponsored and everyone deceives. But this overlooks the persistent instability of cartels, which inevitably collapse when the members realize the benefits of cheating.

The only cartels that are stable over time are those supported by the force of law. And it’s exactly this type of monopoly that the FTC’s regulations help to create.

The problem is that disclosure is costly: complying with the law requires time and resources, in addition to imposing further costs by potentially damaging reputations. However, economic and reputation costs are borne more easily by established influencers than by newcomers. Regulating disclosure means that aspiring influencers compete at a disadvantage, because beginners typically start with fewer resources and no reputation, and the cost of complying with the FTC’s standards is therefore relatively high. This in turn discourages new entrants to the influence market, which ends up favoring already-established names over new talent.

As a result, even if consumer protection regulation is motivated by good intentions, it inevitably creates legal privileges that undermine the very competition and consumer welfare they’re thought to safeguard. However, allowing influencers to freely compete with each other increases the diversity of opinion in the market, and allows consumers to decide which opinions are most relevant to them.

If businesses choose to disclose sponsorships and possible conflicts of interest, it should be because they’re striving to give consumers a better deal, not because they’re abiding by arbitrary government regulations. The former case provides a powerful incentive for entrepreneurs to improve quality and develop trust with their customers, while the latter encourages them to satisfy the letter of the law in the narrowest sense, without regard to consumer welfare.


Matthew McCaffrey

Matt McCaffrey, former Mises Research Fellow, is assistant professor of enterprise at the University of Manchester.

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