Revenge of the Ringtones: A Cautionary Tale for Marketers

By Steve RaffertyJanuary 6, 2015

Recently the Federal Trade Commission announced a settlement with AT&T Mobility for $105 million for something called “mobile cramming.”  Mobile cramming refers the practice of billing 3rd party services on a consumer’s phone bill without the consumer’s consent.  The FTC has been aggressively pursuing mobile cramming cases recently. This is the 7th case since 2013.  Earlier this year they filed a complaint against T-Mobile for this practice.

As you look deeper at what transpired, there is an interesting story that should serve as a clear warning for companies that acquire customers via performance marketing partners.  In the beginning, it was performance marketing companies that acquired these mobile content “subscribers,” but it’s the deep pocket mobile phone carriers that are now paying a hefty price for their partners’ actions.

As someone who has been involved in the online performance marketing industry for about 15 years, I’ve noticed repeating boom and bust cycles in performance marketing.   It’s simple — whenever a particular type of offer is hot in performance marketing, there is often a big bust related to that offer a few years later. That bust can take the form of bankruptcies, lawsuits, and federal regulations — and often a combination of all of those things.

For example, in the 2003-2005 timeframe, mortgage lead generation was hot. There was strong demand from mortgage lenders, in particular sub-prime lenders, for mortgage leads.  The performance marketing industry responded accordingly by generating a lot of leads that turned into mortgage customers. Fast forward to 2008 and the entire financial system almost melts down. I’m not saying that performance marketers caused the 2008 financial crisis — they just provided fuel for the fire. Other offers that have been hot in performance marketing include debt consolidation, for-profit education, and payday loans.

Around 2010/2011, the hot offers in performance marketing were premium Short Message Service (SMS) content offers. The marketers would promote mobile content such as “Free Ringtones” and get paid for each new subscriber. Performance/affiliate marketers loved these offers because the payouts were high (up to $25 for each new subscriber) and they were given a lot of control over the process for signing up new subscribers.  As I will outline below, this is a dangerous combination.

 

The Mobile Cramming Ecosystem

The mobile cramming ecosystem can be broken into three tiers. At the top were the mobile carriers. They own the relationship with their mobile phone customers and bill them each month. The carriers allowed 3rd parties to bill content to their customers’ monthly mobile phone bills. In exchange, the carriers got 35-40% of the revenue for the mobile content revenue.

In the middle were the content providers. These companies bought SMS short codes from the carriers (via short code aggregators) that would be used for billing. The content providers would create the content, such as ringtones or horoscopes, and then promote the content via performance marketing companies. They would pay the performance marketers a bounty for each new subscriber. The offers were typically packaged as some initial free content with a paid subscription. The subscription fees were typically $9.99/month.  For example, the offer would be presented to the consumer as “Free Ringtones” and the smaller print would indicate that they had to sign up for a paid subscription for ringtones in order to get the initial free ringtones.

At the bottom were the marketing companies promoting the offers directly to the consumers.  These companies received up to $25 for each new subscriber they generated for the content providers. They used a variety of techniques to generate subscribers through online advertising. However co-registration paths seemed to be one of the more popular channels. The marketing companies hosted the sign-up forms themselves, providing them total control over how the offer was presented to the consumer.  Many of these marketers used tactics to mislead the consumers into unknowingly signing up for these offers. For example, some of the marketers found that the “Free Ringtone” offer performed much better when they minimized the text about the paid subscription. In other words, the consumers were misled into thinking they were signing up to get free ringtones, when in fact they were signing up for a paid mobile content subscription that was going to be charged to their phone bill. It’s safe to assume that a lot of consumers didn’t realize this content could even be billed to their cell phone, given that they weren’t purchasing it through their carrier. Since the consumer’s weren’t inputting their credit card information for the purchase, they probably didn’t even know they were buying something. To make matters worse, when they were billed via the cell phone bill, the bill often didn’t provide any detail about the nature of charges.

 

The Boom

At the peak, the various players involved were making a lot of money. In performance marketing circles at the time, all the talk seemed to be about premium SMS content offers.  Many marketing companies across the country rapidly built thriving businesses based on that category. It turns out that many of the companies that were thriving during the boom were later found to have used deceptive marketing practices to generate subscribers, and took reputable companies down with them. Many of these companies were fined by the FTC.  Companies like Acquinity Interactive, Tatto, Inc., Shaboom Media, LLC, Bune, LLC, Mobile Media Products, LLC, Chairman Ventures, LLC, Galactic Media, LLC,  Virtus Media, LLC, MDK Media Inc.,Tendenci Media LLC, Mindkontrol Industries LLC, Anacapa Media LLC, Bear Communications LLC, and Network One Commerce Inc. were targeted by the FTC.

As part of the fines, the FTC often confiscated personal items including Patek Philippe watches, Rolexes, Ferraris, Bentleys, etc.  Based on the confiscated items, it is clear the operators of these businesses were living well.  A more extensive list of FTC fined companies is available here.

 

The Crash

When consumers started noticing these charges on their phone bills, they began to complain.   FTC’s complaint states that In 2011 alone,  AT&T received more than 1.3 million calls to its customer service department about the charges.  Mobile phone carriers reacted to these complaints and began to shut down the SMS short codes associated with them.  For a while the content providers just started using new short codes.  But, eventually, most of these mobile content offers just went away, bringing an industry down with it. It seems that most of the firms involved in this ecosystem, other than the carriers, simply went out of business.

 

The Fallout

The FTC’s charter is to protect consumers, so their attention is drawn to issues with a lot of consumer complaints.  Given the volume of complaints around mobile cramming, it was inevitable that the FTC would step in. While the FTC has taken action against some of the performance marketers involved with mobile cramming, many of them are no longer in business. The largest fines have been brought against the carriers.

While $105 million is a large financial penalty, it is just a part of the total cost to the AT&T Mobility. Think of the customer service costs dealing with millions of angry customers. It’s also easy to assume plenty of affected customers left AT&T for other carriers. Worse yet, think of the overall damage to the AT&T brand – both in bad customer experience and negative publicity.

 

Could This Have Been Prevented?

According to the FTC complaint against AT&T, among other things, the phone company did not act to determine whether third parties had in fact gotten authorization from consumers for the charges placed on their bills. It is unclear if AT&T was complicit in the activities of their partners or simply negligent.  From the FTC’s perspective, it doesn’t really matter. It was AT&T’s responsibility, and they failed.  Going forward, AT&T is required to obtain consumers’ express, informed consent before placing any third-party charges on a consumer’s mobile phone bill.

The decree from the FTC for AT&T to obtain consumer consent seems simple in theory, but in practice is much more challenging.  How does a company like AT&T verify that consent was properly obtained, when it is being collected by multi-layered network of 3rd party providers?  AT&T needed transparency regarding how the mobile content subscribers were obtained.  What if AT&T could have seen a copy of the exact web page that was presented to the consumer when they “signed up” for the mobile content and could verify whether clear and conspicuous billing disclosure language was present?  What if they could have stored independent proof of consent with their customer’s data?  With those safeguards in place, they would have been able to see that the offers being promoted to the consumers were misleading, and that the consumers often didn’t know they were signing up for a paid monthly subscription.  Had AT&T done that, they would have been able to detect and prevent this issue from the start.

Lessons learned

If you are a business that engages in performance marketing, such as buying Internet leads on a Cost Per Lead basis, or customers on a Cost Per Acquisition basis, you need transparency into how your customers are being obtained. It is much cheaper to do this proactively than waiting until you get lots of complaints, or worse, for a regulatory agency to penalize you and force you to do it.

If you are the ultimate beneficiary of the advertising or the end buyer of the leads, you will ultimately be held accountable for the wrongdoing by your network of providers.  I talk to a lot of companies that attempt to hold their partners responsible and rely on indemnification clauses to protect them from the actions of their partners. If these partners go out of business, those indemnification clauses are worthless. It is the responsibility of the end buyer to verify their customers are acquired in a compliant fashion.  Performance marketing can be a great channel for acquiring customers.  However, there must be controls in place to ensure things are done properly.

My company, ActiveProspect, provides a lead certification service called TrustedForm, which independently verifies the origin of Internet leads.  Responsible marketers use it to verify and document that proper consent was obtained from consumers. We were the first company to provide this type of solution and it has proven to be an effective way to protect our customers.

The real key to solving problems like this is not the technology alone. It is a change in business practices.  Advertisers must have more transparency from their partners and technology solutions like TrustedForm should be in place to verify and document it.

If you are a marketer that is buying subscribers or Internet leads from 3rd parties, are you verifying consumer consent?

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