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Xbox and Machinima: Another Reminder to Disclose All Material Connections

4 Feb, 2014 By: Gregory J. Sater


The blogosphere was abuzz last week, chattering about a “native advertising blunder” allegedly committed by Microsoft in the course of promoting its new Xbox One gaming console on the popular Machinima YouTube channel that is frequented by gamers. Commentators speculated that the Federal Trade Commission (FTC) might even get involved.

Here’s the situation: Diehard gamers produce homemade videos all the time, talking about the latest video games or about gaming or anything else that their peers might want to hear about. They then post them on Machinima where other gamers see them and comment on them. Some of these gamers have a lot of followers. That makes them attractive to Microsoft and to other game console manufacturers because they are “influencers.” When they speak, other gamers listen.

So Microsoft entered into an advertising agreement with Machinima whereby the latter would compensate gamers to post videos about the new Xbox One console on its YouTube channel. This was on a $3 cost-per-thousand (CPM) basis – meaning $3 would be paid for every 1,000 views of a homemade video on that channel if: first, the video showed at least 30 seconds of footage of the games on the console; second, the video referred to the Xbox One by name; and third, the video said nothing negative about it or about Microsoft.

This was, of course, to generate buzz on the site about the new Xbox One console but, judging from the past week, it generated the wrong kind of buzz because the gamers who did this to earn the CPM commission were not required – by the Machinima terms and conditions – to disclose, either in their videos or alongside them in text, that they were part of a paid ad campaign for the Xbox One.

Microsoft, according to media reports, was not aware of the terms and conditions that Machinima applied to the gamers who were posting these videos about the Xbox One, but one of the terms and conditions that got a lot of attention in the blogosphere was: “You agree to keep confidential at all times all matters relating to this Agreement including, without limitation, the Promotional Requirements and the CPM Compensation, listed above.”

Some apparently interpreted or misinterpreted this sentence as being an admonition to the gamers not to disclose the existence of the financial relationship. The other term that got a lot of attention this week, of course, was the one barring negative comments about the product.

Whether this is “native advertising,” which is a term that has been in the news a lot lately (the contours of which remain uncertain) or falls under the preexisting, better-known category of an endorsement which, per the FTC’s Testimonial and Endorsement Guidelines from 2009, needs to “clearly and conspicuously” disclose the “material connection” that the endorser has to the product that he is endorsing, one thing is clear: it can cause a major PR problem for a company when it comes out that a product launch is being talked about by “influencers” (either through blogging using the written word or through producing and posting videos on YouTube) who are being compensated but are not disclosing that fact to their followers.

For instance, in 2011, there was an FTC investigation in the news involving Hyundai, which had promoted its Super Bowl commercial virally through third parties with a connection that the FTC felt could have been better disclosed by the third parties.

The takeaway is, if you’re a marketer and you’re working with affiliate networks, affiliates, publishers or other types of third parties who can get your product in front of thousands or even millions of potential customers online – whether it’s on YouTube or elsewhere – in return for you making a CPM or CPA or other payment to them, you should pay attention to the terms and conditions that are in effect between those third parties and the content providers who are interacting with the consumer and therefore being exposed to your paid promotion.

Do those terms and conditions admonish everyone involved to make a clear and conspicuous disclosure of the financial connection that exists? And, if so, is anyone actually policing the third-party content providers to make sure that they’re actually following that admonition? Either for PR reasons, or for FTC compliance reasons, this is becoming more and more important.

Gregory J. Sater is a partner in Venable LLP‘s Advertising, Marketing and New Media Group. He can be reached via E-mail at gjsater@venable.com.


About the Author: Gregory J. Sater

Gregory J. Sater

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