This holiday, who's looking out for online shoppers?
A long-running marketing ploy now under federal investigation has raised questions about why it was allowed to go on for nearly a decade.
Web shoppers are in need of a digital-age Ralph Nader, the kind of firebrand consumer advocate who can focus public scorn on unscrupulous merchants.
Last week, the U.S. Senate Commerce committee revealed that some of the Web's best-known retailers, including Barnes & Noble, Hotwire, Yahoo, Pizza Hut, Travelocity, Fandango, and Victoria's Secret, were part of a dubious marketing operation designed to mislead their own customers.
Serious questions about who's policing e-commerce were raised after the Commerce committee issued a report detailing how three marketing firms, Affinion, Webloyalty, and Vertrue, generated $1.4 billion with the help of the e-tailers--largely by deceiving consumers into paying up to $20 a month for loyalty-program memberships. (Note to reader: take a look at the Commerce committee's report (PDF), as it's well written and seems to catch the e-tailers cold).
The lure for millions of consumers typically starts this way: Marketers present ads to them late in the transaction process at a retail site. An often-unwitting consumer is offered cash-back rewards if he or she provides an e-mail address. Tucked into the fine print are the full terms of the deal. By providing an e-mail address, a consumer agrees typically to pay between $10 and $20 a month.
For this number of marquee merchants to be mixed up in such a questionable gimmick seems unprecedented in the brief history of online commerce. Going into a holiday season that is already supposed to see soft spending, the scandal could undermine confidence in Web shopping, which generated $60 billion in sales during the first half of this year, according to the Senate report.
One of the most glaring side issues of this fiasco is that for nearly a decade, consumers complained about these practices but few people in authority seemed to care. What is apparent is that many people in positions to help shoppers didn't, or from the perspective of some consumers, may not have done enough. They include:
Connecticut AG Richard Blumenthal
On paper at least, Connecticut appears to be a haven for controversial marketing companies. All three of the marketing firms under investigation by the Senate--Affinion, Vertrue, and Webloyalty--are based in the state.
In 2006, Blumenthal settled a lawsuit with Trilegiant (PDF), the name Affinion was called then, for $14.5 million. But Affinion continues to operate, and Blumenthal hasn't won anything from the other two firms.
In April, Blumenthal launched an investigation into Webloyalty. That came one month before the Senate Commerce committee launched its probe. The feds have since held a public hearing and shared revealing information about all three marketing firms with the public. Blumenthal, who has been Connecticut's attorney general since 1990, promises more action.
"I will continue to vigorously and aggressively fight membership club scams," Blumenthal announced on the day the Senate Commerce committee held its hearing.
Blumenthal did not respond to multiple interview requests.
The retailers' directors and CEOs
For readers who question whether the CEOs and directors of such companies as Orbitz, Continental Airlines, US Airways, and 1-800-Flowers knew about what the marketing companies were up to on their behalf, this is what the government had to say:
"Committee staff has spoken to more than a dozen e-commerce partners of Affinion, Vertrue, and Webloyalty and has reviewed thousands of pages of e-mail communications," according to the Senate report. "The interviews and the e-mail communications provide abundant evidence that the e-commerce partners are aware that their customers are being misled by the enrollment offers from Affinion, Vertrue, and Webloyalty."
What would make a director or CEO take such risk with their company's reputation? In July, blogger Andrew Left, who specializes in shorting stocks, wrote that VistaPrint, an online printing company and a retail partner of Vertrue's, has generated as much as 44 percent of its quarterly net income by charging Vertrue access to its customers' credit cards.
But for even the most profit-at-all-cost investor, the questionable ploy could risk breaking customer trust and appears to have already battered stock prices.
Last week, the stock price of VistaPrint traded at nearly $56 the day before the Senate hearing on November 17, but it closed Tuesday at $50, a 10.7 percent drop. Shares of United Online, parent company of Classmates.com--which reportedly generated $70 million from the questionable marketing practices--fell from $8.40 before the November 17 hearing to $7.05 on Tuesday, a loss of about 16 percent.
When contacted, VistaPrint referred me to statements the company made earlier in the year in documents filed with the Securities and Exchange Commission. In a 10-K SEC filing, the company said it expected revenue from membership discount programs "will decrease in the future" to possibly zero.
The big question is whether VistaPrint made that disclosure thinking that its payday would end as a result of the Senate investigation or one of the several lawsuits filed against it and Vertrue.
Visa, Mastercard, and American Express
The biggest credit card companies might also want to explain how they continued to process transactions from Webloyalty, Affinion, and Vertrue, when apparently they had received scores of complaints about these companies.
When consumers ask their credit card company to force a retailer to issue a refund, it is called a chargeback. A merchant that sees too many chargebacks is supposed to suffer some penalties. For instance, at Visa, chargeback-prone merchants are supposed to be fined and eventually booted off Visa's network. What happened here?
A Visa spokeswoman said she was unable to comment at this time. Representatives from Mastercard and American Express were not immediately available.
