Digital Media

Updated at 2:50 p.m. PST to include quotes from senators and names of retailers that do business with Vertrue, Webloyalty, and Affinion.

Words like "scam," "fraud," and "arrest" filled the air during a Senate hearing on Tuesday that focused on the controversial marketing companies that allegedly dupe consumers into paying monthly fees to join online loyalty programs.

Vertrue, Webloyalty, and Affinion generated more than $1.4 billion by "misleading" Web shoppers, said members of the U.S. Senate Committee on Commerce, Science and Transportation, which called the hearing. Lawmakers saved their harshest rebuke for Web retailers that accepted big money--a combined sum of $792 million--to share their customers' credit-card information with the marketers.

Senate investigators launched their six-month inquiry by examining complaints from people who discovered mysterious charges on their credit card bill. For years, Web shoppers have complained that they were signed up to some Web loyalty program without their knowledge and were charged fees until they discovered the problem and complained. Some paid fees for years.

The government says the investigation shows that Webloyalty, Affinion, and Vertrue "trick" consumers into entering their e-mail address just before they complete purchases at sites such as Orbitz, Priceline.com, Buy.com, 1-800 Flowers, Continental Airlines, Fandango, and Classmates.com. A Web ad, which many consumers say appears to be from the retailer, offers them cash back or coupon if they key in their e-mail address.

Many of those who complained say they don't fear the ad because they aren't being asked to turn over credit-card information, according to the Senate report. But buried in the ad's fine print is notification that by entering their e-mail address, the shopper is agreeing to join a loyalty program and allowing the store to authorize marketers to charge their card each month, between $9 and $12.

"What's happening is many online merchants have decided to betray their customers' trust."

--Sen. John Rockefeller

"When people shop online, they have the right to expect that the stores they entrust with their credit card and other personal information will not share it," said Sen. John Rockefeller, (D-W.V.), the committee's chairman. "What's happening is many online merchants have decided to betray their customers' trust...fine print is the (biggest) scam of all time."

The way the government lays out its findings, it appears the loyalty programs are profiting off of the reluctance of many consumers to read fine print and check their credit card statements, and the blind trust many have in the stores where they shop.

Vertrue and Webloyalty issued statements saying they have changed their practices and have opted to require consumers to key in some credit card or other information to enroll into one of the company's membership programs. Expert witnesses and government officials said during the hearing that these alterations don't go far enough.

"This really has an easy solution. Retailers shouldn't sell (credit card) numbers to third parties, period. There is no legitimate reason to justify it."

--Prentiss Cox, professor

Perhaps most importantly, witnesses also said the best and only way to defeat the problem is to make it unlawful for retailers to ever sell their customers' personal information.

Affinion representatives were not immediately available for interview.

Rockefeller noted during the hearing that Vertrue and Webloyalty dropped some of their business practices only after Senate investigators were well into their probe. He also remarked that some of the retail companies, including U.S. Airways, had informed him that they they had ceased doing business with the marketers. He told the audience at the hearing and those who watched via a Webcast that he anticipated Continental Airlines would do the same.

The government's report provides a jaw-dropping amount of information that shows:

• Managers at Webloyalty, Affinion, and Vertrue are fully aware that most of the people signing up for memberships are unaware that they are doing it.

• Their programs are designed to mislead consumers into signing up.

"Classmates.com, which has been partnered with each company at different times and has earned more than any other partner, generated approximately $70 million in revenue."

--From the Senate report

• Retailers doing business with the companies are also aware that customers are likely to be angered once they notice the charges but do it because they are paid big bucks. Classmates.com has pocketed $70 million from partnering with the all three companies, according to the report. The government says that 88 retailers have made more than $1 million through the partnerships with e-loyalty programs, while 19 have made more than $10 million.

"The more aggressively an e-commerce company is willing to market Affinion, Vertrue, or Webloyalty's membership clubs to its customers, the more money it will earn," the Senate Commerce committee wrote in the report.

Another reason e-tailers risk alienating customers is that some of the e-loyalty companies insulate the Web stores from customer complaints. They call these complaints "customer noise." To illustrate this, the Senate committee included excerpts from a letter from a Priceline shopper who said she was charged for a loyalty membership for over a year without her knowledge.

The governments investigation will continue. According to a Senate staffer, Rockefeller will invite the CEOs of Webloyalty, Affinion, and Vertrue to testify at another hearing, which will likely be held sometime early next year.

To watch a replay of the Senate hearing go here.

Multiple sources are reporting that MySpace is in talks to acquire Imeem, the social-networking music service that has struggled with financial problems for some time.

Peter Kafka at All Things Digital is reporting that negotiations are in the late stages and that MySpace is making the deal to acquire some of Imeem's talent and technology. News of the talks was first reported by TechCrunch.

Here's my contribution to the news: two sources with knowledge of Imeem say CEO Dalton Caldwell was in New York recently looking for new investors. Imeem was again running short of cash after coming perilously close to a financial crisis last spring. After Imeem received new funding from some of the music labels, sources told CNET that the money would last only through the end of 2009.

An Imeem representative was unavailable for comment, and a MySpace representative declined to comment.

Nobody has reported the asking price but don't expect it to be very much. One of my sources said that Imeem had been looking for a buyer for a while. Nothing had come of it. But Imeem, which made a name for itself by being among the first to offer ad-supported streaming music and being free to users, is likely to be thrilled by this kind of exit.

A sale is another sign that the ad-supported sector is amid a shakeout.

The truth is the sector is in shambles. Ruckus and SpiralFrog shut down earlier this year. Qtrax, a proposed legal peer-to-peer service hasn't even formally launched yet and has struggled with financial problems.

MySpace purchased iLike in August for a price that was reported to be barely enough for investors to break even.

For a breakdown of the challenges that ad-supported music services face, read "How turf wars and miscues crippled SpiralFrog" and "Plenty of proof that ads don't support Web music."

Update at 9:05 a.m. PST: MySpace representative's statement added.

Tuesday could turn out to be an embarrassing day for a score of online retailers, such as Continental Airlines, FTD, and Classmates.com.

The so-called mystery charges that have appeared on some of their customers' credit card statements will come under scrutiny at a hearing held by the U.S. Senate Committee on Commerce, Science and Transportation.

At the center of the federal probe are Webloyalty, Affinion, and Vertrue, companies that make "cash-back" and coupon offers to consumers and charge them monthly fees to enroll in their loyalty programs. The reason the government is involved is that for years, scores of online shoppers have asserted they were signed up for the programs without their consent.

It might be in your interest to watch the Webcast of Tuesday's hearing if any of this sounds familiar to you:

An ad pops up just as you're completing a transaction at an online retail site. It's packed with fine print and it's not easy to see how to get past the page to complete the purchase. What is clear is that all it takes to move off the page is to enter an e-mail address. A shopper may think that entering an e-mail can't hurt them. It's not as if some marketer has their credit card information.

But what those who enter their address are often unaware of is that they are authorizing the retail store to allow Web Loyalty, Affinion, Vertrue, or other similar marketers to charge their credit cards. There are cases where shopper don't discover the monthly charges on their credit card statement for months.

"The economy is hurting so many families today and we need to provide them as much relief as possible," said Sen. John Rockefeller (D-W.Va.), the committee's chairman. "Thousands of American consumers have been complaining about these deceptive practices and asking for answers. There could be many more affected by these hidden mystery charges."

Affinion, Webloyalty, and Vertrue have all denied any wrongdoing and argue that their services offer users savings and are valued by many subscribers. They will not be represented at Tuesday's hearing, according to a Senate staffer but are expected to appear at a later hearing.

In August, as the government's investigation rolled on, Webloyalty announced that it would alter it's ads to require that consumers "enter the last four digits of their credit or debit card to confirm" they wish to pay the membership fees. Last week, Affinion made similar changes.

During the hearing, when the Senate committee is expected to make public the results of a six-month investigation, it will also likely say the alterations made by Webloyalty and Affinion don't go far enough. The committee is also expected to publicize how much money the marketing companies are paying their retail partners.

What would be interesting to learn is how long the average Affinion or Vertrue customer stays in the program. If it's relatively short and there's high turnover, then that might indicate the company is signing up unwitting people instead of those seeking to join them.

Note: To access the Webcast of the Senate hearing on the mystery charges, go to the Commerce committee's site here at 11:30 a.m. PST.

Woo wee, did Hulu's fortunes flip-flop fast.

The Web's deepest stockpile of full-length TV shows and feature films is seeing some very public infighting over its future. The disagreements are over how Hulu should generate revenue and even how to sell ads, according to a report in Mediaweek.

Things were going so well. Since Hulu's October 2007 launch, the Web video site founded by NBC Universal and News Corp., has grown its audience, generated big ad revenue, and been bathed in positive press.

Hulu has mounted the only serious challenge to YouTube. The site also enables its TV network backers to offer viewers an alternative to pirate sites. But the indications are Hollywood is dismayed over Hulu's earnings. On the issue of Web revenue, the studios seem to be saying: "Is that all there is?"

The first signs that Hulu may not be the cash cow that everyone involved had hoped for came earlier this year. Instead of ballyhooing the selling out of ad inventory like it had done a year earlier, Hulu's managers hushed up.

Then, NBC Universal CEO Jeff Zucker and News Corp. Chairman Rupert Murdoch said publicly that Hulu may charge for some content. In an interview with Dow Jones last week, News Corp. COO Chase Carey said it's important that Hulu have "a real subscription aspect," but added some content will always be free.

Want to bet that the content you'll have to buy will be the latest and most popular TV shows and films?

Hulu's management is wrestling with these issues at a time when the public increasingly develops an appetite for high-quality Web video.

The number of U.S. households with broadband access that watched full-length movies and TV shows online doubled in the past year, according to research firm, Parks Associates. According to the firm, 45 million households regularly watch either TV shows or films via the Internet.

Jayant Dasari, a research analyst at Parks, said people like the control that sites like Hulu give them. If they miss a favorite TV show, they can get caught up on Hulu.

"If they're on the road or don't have access to a (Digital Video Recorder) they are more than willing to consider the option of broadband video," Dasari said. "This is a trend that can no longer be ignored."

Dasari said Web video's growth is being stifled by the lack of content available at Hulu and other sites. For example, there are only a handful of feature films available at Hulu. Crackle.com, Sony Pictures' Web service, only posts a fraction of its vast library of films on the Internet, but there's not another studio even offering that.

So what? What does it mean if the studios hobble Hulu? Consumers have watched TV for over half a century. They can still go back there. Right?

Big Champagne CEO Eric Garland, whose company tracks traffic on peer-to-peer sites--where most illegal file sharing occurs--told me recently that consumers are heading online for video entertainment and he doesn't expect them to return to their traditional viewing habits ever again. Garland's data shows that Hulu is the first legal Web service to snatch market share away from the pirate sites.

He also said that the lords of video, with their rejection of Internet businesses, are behaving much the same way the music industry did when confronted by the digital age. If network and film studio executives are dissatisfied with the returns they see from Hulu and similar sites, they should consider the possibility that this is all the new media landscape will yield, Garland said.

Customers of Verizon Communications who pirate music files may soon receive an unwelcome letter from the company.

Verizon, the second-largest phone company in the United States, is expected to begin issuing "copyright notices" on behalf of the Recording Industry Association of America to those accused of illegally downloading songs from the Web, according to sources with knowledge of the agreement.

The sources, who asked for anonymity, said Verizon's letter campaign is part of a test, which is expected to begin on Thursday. Jonathan Lamy, an RIAA spokesman, confirmed the existence of the test but declined further comment.

The move is significant for the music industry because among Internet service providers, Verizon has typically been among the most reluctant to intervene in copyright cases on behalf of entertainment companies.

"We recognize the importance of copyright and the need to enforce those copyrights," a Verizon spokesman said in a statement to CNET. "Without that enforcement, intellectual property won't be generated at all. At the same time, it's important for our customers to be assured that they won't have their privacy rights trampled."

The letter the RIAA will send to Verizon, and will likely be forwarded to customers, is similar to those issued in the past by other ISPs, such as AT&T, Comcast, and Cox Communications. The RIAA's letter has typically notified customers that they have been accused of illegally sharing songs and informed them that such activity is illegal.

In the letter, the user is advised to delete the content they distribute. It's important to note that not included in the letter are threats of service termination or interruptions, or any talk of a "graduated response." That's the term the RIAA uses to describe a deterrent program whereby an ISP gradually ratchets up penalties or warnings to suspected file sharers.

Last December, the RIAA announced that it would no longer seek to file new lawsuits against individuals accused of illegal file sharing. Instead, the trade group representing the four largest music labels would try to convince ISPs to adopt a graduated-response program. While some companies, such as Cox, have said they will terminate service for chronic copyright violators, most ISPs have shied away from suggesting service termination.

More importantly, in the 11 months since the RIAA dropped the filing of lawsuits on a widespread basis, not a single ISP has acknowledged a formal agreement with the RIAA.

As for Verizon, it appears that the company is expanding the antipiracy relationships it has with the entertainment sector. In past years, as many of its competitors began to lock arms with entertainment companies, Verizon appeared to hold back. Verizon fought the RIAA when the group went to court to force the ISP to turn over the name of an alleged copyright violator.

Verizon also opposed antipiracy legislation important to the film and music sectors.

Verizon's attitude toward antipiracy seemed to change in 2005, when the company quietly agreed to forward notices to suspected illegal file sharers on behalf of Disney. In exchange, Verizon received the rights to transmit 12 of Disney's TV channels over its broadband network.

Several other ISPs have recently begun forwarding copyright notices on behalf of the film studios, according to the sources who spoke to CNET. It's not yet clear which other ISPs are involved.

NEW YORK--Manhattan is the center of book publishing, all four music labels have headquarters here, and it's home to the country's largest general newspaper.

But even in the Big Apple, many people appear unwilling to pay for media.

New York magazine conducted an apparently unscientific poll of 100 pedestrians in Manhattan's SoHo district and it revealed some startling and humorous results.

Few of those polled are willing to pay for The New York Times. Asked whether they subscribe to the paper, 79 said no. Asked how much they would be willing to pay to read the paper online, 63 said "nothing." To the question of how charging a fee to read the paper online would affect The Times, 65 answered that it would make it less successful.

The good news for the music industry was that 34 of the respondents say they pay for all their music. The bad news is that 61 acknowledged obtaining at least some of their music illegally.

As for downloading TV shows illegally via BitTorrent files, seven of those polled said "all the time." Five said never." 38 said only if they miss a show on TV. 12 asked "What the hell is a torrent?"

When it came to books, the respondents were much more willing to pay and don't appear to be Kindle fans. Check it out.

Qtrax missed another deadline.

The would-be ad-supported music service once again failed to meet a self-imposed launch date. The company said barely two weeks ago that it would roll out in Australia and New Zealand on November 5.

For most start-up services, launch delays are embarrassing, but not unexpected. For Qtrax, this is only the latest installment in a year-long run of embarrassing misfires, lawsuits, unpaid bills and broken promises.

Within the halls of the top recording companies, Qtrax's setbacks have begun to take a heavy toll on the company's already battered reputation. To make matters worse, the ad-supported model has lost a lot of credibility in the music industry after the collapse of Ruckus and SpiralFrog. Several of the other top competitors in the sector, including Spotify, Imeem, and iLike have begun gravitating towards other revenue sources.

"Qtrax is an absolute disaster," said one music industry executive who asked to remain anonymous. "It's an embarrassment."

What's noteworthy about the most recent Qtrax setback is that typically Allan Klepfisz, the company's founder, will do damage control with the media. This time, however, a music-sector heavyweight is out in front.

"It's a difficult environment to get capital in this industry," Jay Berman, a Qtrax adviser and former chairman of the Recording Industry Association of America told The Financial Times this week. Referring to Qtrax's claim that the company hopes to raise $50 million and Qtrax said last week that it has a deal with Baidu, one of China's top search engines, Berman said: "Is it ambitious? Yes, it is. Is it doable? Yes."

Klepfisz declined to comment. Berman could not be reached for comment.

Berman was once the recording industry's top lobbyist and according to my music source he used his clout to help Qtrax secure licensing deals with the top labels. A year ago, New York-based Qtrax announced that Berman, who has offered consulting services to several digital music companies including Project Playlist, was added to the Qtrax advisory board.

"Every time something happens with Qtrax, Jay has to get on the phone and calm everybody (at the labels) down," said the music exec.

But the source said Qtrax, at this point anyway, is in no danger of losing its access to the labels' music. He said it has paid and the labels will most certainly accept Qtrax's money. "Why wouldn't they?" he asked. "But they haven't exactly created a lot of good will in the business or enthusiasm for their product.

"Qtrax hasn't instilled a sense of confidence that they can actually make something of what they have," the exec continued. "The only reason the (recording) companies have given content to them is because of Jay. If Jay didn't get on the phone, Qtrax wouldn't have its deals."

What the exec is referring to, specifically, are things like Qtrax's history of failing to pay vendors. Oracle filed suit against the company earlier this year and several companies have won judgments in New York courts against Qtrax. The latest came two weeks ago when Monarch Capital Fund won an award of $133,000 against the company.

According to court documents, Qtrax agreed in March to pay off a $200,000 debt in installments. Monarch told the court that after paying $70,000, Qtrax stopped making payments in May.

Clarification: Earlier reports by a number of other publications indicated that Qtrax's deal with Baidu wasn't completed. Qtrax does indeed have a signed agreement with the Chinese search engine, Qtrax said Wednesday afternoon.

Update: 11:15 a.m.: To include comments from Google.

Rupert Murdoch, the media tycoon who has long accused Google of ripping off content from his newspapers, said this weekend that his sites may soon disappear from the search engine's listings.

Murdoch is chairman of News Corp., the newspaper, TV, and Internet empire that includes The Wall Street Journal, The New York Post, 20th Century Fox, Fox News, and Hulu. He made the comments in an interview late last week with Sky News Australia.

After Murdoch accused Google, Microsoft, and others of "stealing" his company's content, he was asked why he just doesn't pull his Web sites from Google's search results.

"I think we will," Murdoch responded. "But that's when we start charging."

Murdoch and other News Corp. execs have said that they intend to charge readers and viewers. In the past, the company's sites have relied on advertising revenue.

Murdoch made it clear he's no fan of the ad-supported model. "There are no news sites or blog sites making any serious money," he said.

"What's the point of having someone come occasionally who likes a headline they see in Google," Murdoch continued. "The fact is there isn't enough advertising in the world to go around to make all the Web sites profitable. We'd rather have fewer people coming to our Web sites but paying."

When asked why he would buck the trend of offering free content, Murdoch said: "(The public) shouldn't have had it free. I think we've been asleep."

Google has said that it feels obligated to help media companies because it needs their content. That hasn't stopped Murdoch and his staff from continuing to make hostile comments about the search engine. What News Corp. hasn't done much of is follow up with action.

Is News Corp. trying to scare Google into making more concessions? Or is it just afraid to pull the trigger?

On Monday morning, Google responded to Murdoch's quotes in a report by the British publication The Telegraph.

"Publishers put their content on the Web because they want it to be found," Google said in a statement. "Very few choose not to include their material in Google News and Web search. But if they tell us not to include it, we don't."

Quincy Smith, the one-time banker and trusted adviser to new media poobahs, will leave his current post as chief executive of CBS Interactive in January to work once again as a consultant.

Smith plans to start his own advisory business and not surprisingly, the start-up's first customer is CBS, he said in an interview with CNET on Wednesday. Smith will focus on helping CBS with its Web video strategy.

Smith, whose most notable move while at CBS was helping to oversee the $1.8 billion acquisition of CNET, the parent company of this publication, said the reason he's choosing to leave now is to pursue opportunities he sees in banking and technology. Besides advising new media chieftains, Smith also suggested he's ready to stick a toe back into finance.

"I think CBS is at a point where I can help them from the playing field more than I can from the dugout, if you don't mind the baseball reference," Smith said. "I was a banker before and I think I can be a better banker...I see a lot of opportunities out there now for smaller banks as well as larger ones."

Before being hired to oversee CBS's digital division three years ago, Smith already had a reputation as a tech guru while working for Allen & Co, the respected boutique banking firm that was one of the underwriters for Google's initial public offering.

In the deal for CNET, critics blasted CBS for overpaying. But Smith noted that the acquisition helped turn CBS Interactive into the 12th largest Internet property, and a top 5 video property, according to comScore Media Metrix.

CBS Interactive President Neil Ashe will take over Smith's responsibilities.

Leslie Moonves, president and CEO of CBS said: "Quincy helped put CBS Interactive on the map."

The blog All Things Digital first reported the news of Smith's departure.