June 29th, 2002

Sites told to 'fess up; Search results often advertisers

By Verne Kopytoff
San Francisco Chronicle

The Federal Trade Commission has warned seven Internet search engines to fully disclose that paid advertisements are included in their search engine results.

The warning, issued Friday, will be sent in letters to AltaVista, AOL Time Warner, IWon, LookSmart, Microsoft and Terra Lycos. A letter is also intended for Direct Hit Technologies, though that company has been acquired and its Web site no longer exists.

The FTC’s warning culminates a nearly yearlong investigation into so-called pay-for-placement search engines, which provide links based not just on relevancy, but on who pays for top billing. Many of the Internet’s biggest Web sites feature this form of advertising, though with varying degrees of transparency.

“We wanted to raise a concern that we hope they will take seriously,” said Howard Beales, director of the FTC’s bureau of consumer protection. “What we saw across the search engine was some pretty clear disclosures and some that weren’t.”

The FTC did not recommend any fines for the search engines. Nor did it say that any of them violated the law.

Pay-for-placement search engine results generally appear at the top of a search page, above traditional relevancy-based links generated by mathematical formulas.  They are text-only and are usually limited to a handful of businesses that bid for one of the top spots.

LookSmart, based in San Francisco, and IWon, based in New York, simply label the paid results “featured listings” without providing further explanation.  On the other end of the spectrum, Netscape uses the term “sponsored links” and provides additional details about the advertising.

The FTC gave a long list of labels that it believes are inadequate or ambiguous.  They include “featured listings,” “recommended sites,” “search partners” “products and services” and “partner search results.”

Commercial Alert, a consumer group in Portland, Ore., co-founded by Ralph Nader, filed the original complaint with the FTC over pay-for-placement search in July 2001. It accused the search engines of providing results that look objective, but are really “paid ads in disguise.’’

“We won,” said Gary Ruskin, executive director for Commercial Alert, referring to the FTC’s letter. “This is the first step in the process of search engines disclosing that their ads are ads.”

Some of the search engines Commercial Alert complained about are part of larger companies. Its complaint about AOL Time Warner centered on Netscape, while that against Terra Lycos focused on its Lycos and HotBot Web sites.

A study released in April by Consumers Union found that 60 percent of the public is unaware that some commonly used search engines are paid to list some sites more prominently than others. Eighty percent of users wanted search engines to reveal such financial deals.

Many search engines changed how they label paid search results soon after Commercial Alert’s complaint became public. For example, Microsoft’s MSN went from “featured listings” to “sponsored sites.”

Many Web sites investigated by the FTC refused to comment on the matter or did not return telephone calls.

However, Fred Bullock, chief marketing officer for AltaVista, based in Palo Alto, said in a statement: “We believe that the paid listings that we display on our site are delineated from our search results and that the disclosure is not misleading.”

Andrew Weinstein, a spokesman for AOL Time Warner, said Netscape’s labeling is now in line with Commercial Alert recommendations. However, he said the switch had nothing to do with Commercial Alert’s complaint. It was simply to make the title uniform with America Online, he said.

Beales, the FTC director, said his agency will monitor the Web sites it sent letters to for future compliance. In addition, he said that he hoped that other Web sites will follow the FTC’s recommendations.

Among the recommendations is that companies disclose to consumers if they are paid simply to consider placing Web sites in their directories. Many search engines refuse to consider businesses in their Web directories, regardless of placement, unless they pay a fee.

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