Microsoft, Machinima 'Native' Ad YouTube Blunder Risks FTC Ire

YouTube Creators Failed to Disclose Campaign Videos Were Sponsored

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Native advertising can be a murky -- and if not done right, illegal -- business. Just ask Microsoft.

Microsoft recently signed a sponsored content deal with YouTube network Machinima to promote the Xbox One gaming console. As part of the deal, Machinima recruited some YouTube creators to post videos positively promoting Microsoft's product in exchange for ad dollars.

YouTube creator parodying Microsoft-Machinima campaign
YouTube creator parodying Microsoft-Machinima campaign

One problem: a number of the sponsored videos didn't disclose that they were sponsored, as first reported by tech news site Ars Technica. That could draw scrutiny from an already hawkish Federal Trade Commission, which issued rules on the matter in 2009.

The incident is more a fumble than foul play, though that may not matter to regulators. Unlike similar campaigns in the past, Machinima's contract with creators for Microsoft's campaign didn't require participating creators to disclose to viewers that their videos were sponsored, according to a person familiar with the campaign. And Microsoft didn't make sure such disclosures were required.

"Microsoft was not aware of the terms and requirements that Machinima has in place with its content providers as part of this promotion, and Microsoft didn't provide feedback on any of the videos. Machinima is no longer posting additional Xbox One content as part of this media buy, and is requiring the customary language to be added to the videos that were part of this program indicating they were part of a paid advertising campaign," the two companies said in a joint statement provided to Ad Age.

Running sponsored content without a disclosure would run afoul of the FTC's endorsement disclosure guidelines. FTC spokesperson Peter Kaplan declined to comment on any particular company or campaign, including whether such an incident was under investigation.

The FTC's disclosure guidelines read: "When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed."

The FTC has been insistent that companies "need to clearly and conspicuously disclose" any instances in which content is sponsored, said Gonzalo Mon, partner at law firm Kelley Drye's Washington, D.C. office.

A person close to Machinima said an advertiser like Microsoft would not be expected to know details of the campaign like disclosure arrangements. Typically for this kind of deal, Machinima's sales team hammers out high-level terms with an advertiser like how many views they want of the sponsored content and at what price per view (in this case, creators were paid $3 for every thousand views). Then another team inside Machinima that handles its relationships with creators puts together the contracts, including details like disclosure terms. If an advertiser wants to know those details, they can ask; otherwise they are oblivious.

A Microsoft spokesperson declined to comment on whether the company asked Machinima for details on the campaign agreements with creators. That could become an important detail if the FTC were to pursue an investigation into the campaign.

Mr. Mon cited a 2011 FTC investigation into Hyundai that could serve as precedent for how the regulatory body might address Microsoft's campaign. In that investigation of bloggers paid to promote a Hyundai Super Bowl ad, the FTC found that Hyundai was unaware of the incentives and had a policy in place that would have barred the violations.

"If [the FTC] were to start an investigation and find that Microsoft had the right policy in place and once [Microsoft] found out that it hadn't been followed, they took steps to quickly rectify that, the FTC shouldn't pursue anything further because Microsoft will likely have done exactly what the FTC wanted," Mr. Mon said.

On Wednesday Machinima began notifying participating creators that it would be adding disclosure statements to the sponsored videos and expects all videos to carry the disclosure in the next two to three days, according to a person close to the campaign. If a creator contested the addition, their video will be removed.

However the disclosure's location may not appease regulators. Instead of flagging the disclaimer within the video player where it would be more likely seen, those notices will appear in the videos' descriptions that appear underneath the player and can be easily overlooked (check out this example from the campaign). For example, if a video is embedded on a site outside of YouTube, the notice would only be viewed by clicking a button in the top-right corner of the video player.

The level of disclosure may become a sticking point for the FTC as it gets more aggressive about delineating content and advertising. Last year the commission introduced new guidelines stipulating that search engines need to more clearly label the ads adjoined to search results. And the FTC has been examining the rise of so-called "native" ads, i.e. ads designed to appear like non-advertising content such as news articles.

"The more of these [native advertising] examples that are out there, the more the FTC is going to think this is a priority and possibly want to regulate it," Mr. Mon said.

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