Advisories

Last week, the Federal Communications Commission commenced a long-anticipated proceeding to re-examine its sponsorship identification rules. It initiated this proceeding, to a great degree, at the urging of Commissioner Jonathan Adelstein, who has been vocal in his concerns that the television and advertising industries, in adopting advertising techniques to respond to technological and marketplace changes, have been exposing the public to commercial messages without their knowledge.

One of the principal practices of concern to the Commission, though not the only one, is “embedded advertising” (by which the Commission refers to “product placement,” the commercial placement of products as props; and “product integration,” the integration of products into the dialogue and/or plot of a program).

While many trade press reports have focused largely on embedded advertising, as explained in this advisory, this proceeding is of even more wide-ranging importance to the broadcast, cable, programming production, and advertising industries, since it could significantly increase the sponsorship identification requirements applicable across the board to broadcasters, cable television operators and advertisers, and could apply sponsorship identification requirements directly to cable television networks for the first time. Comments on the proceeding will be due 60 days after its publication in the Federal Register, with replies due 30 days later.

The Commission's Notice is composed of two parts. First, there is a Notice of Inquiry (NOI), asking a series of questions about the current state of advertising on broadcast and cable outlets, and asking how the FCC should amend its rules to deal with new advertising techniques. Second, the announcement contains a Notice of Proposed Rulemaking (NPRM) with respect to certain specific items, including proposing to clarify the type of sponsorship identification necessary in television advertising, the extension of the sponsorship identification rules beyond local origination cablecasting to cable network programming, and clarification of the rules with respect to live-read radio commercials.

The specifics of the NOI and the NPRM are discussed below. Also set out below is a description of some of the Commission's initial comments assessing the current state of broadcast and cable advertising and of FCC sponsorship identification rules. We have given significant attention to the Commission's background review of this proceeding and existing law, since the Commission characterized several decades-old orders and policy statements as being the current state of the law, even though some current advertising techniques may be of questionable legality under these interpretations.

Introduction

In its Notice, the Commission thoroughly reviewed its current sponsorship identification rules and its perception of the state of the current broadcast and cable advertising market. Finding that the increased penetration of the TiVo and other digital video recorders have made traditional advertising through 30- or 60-second commercials less effective, since the spots can be easily skipped, the Commission looked at some of the techniques used by broadcasters, cable networks and advertisers to make sure that their messages reach their intended audiences.

It cited statistics that indicate a marked increase in embedded advertising and product placement (though its citation does not make clear to what extent the study covered the broadcast and cable world as opposed to product placement in other media formats, such as movies and Internet productions).

The FCC went on to discuss “wrap around ads” and program sponsorships (citing a sale of a cable miniseries to an advertising agency that would be responsible for its entire advertising and product placement), and other instances in which product advertising is integrated into program content.

In one example of its revival of a very old precedent, the Commission discussed “cwickies,” five-second ads inserted into programs on the CW Network. The Commission cited a warning from a 1962 Policy Statement finding that short teaser ads with no sponsorship identification were impermissible, even if they led up to a longer ad broadcast later in the program that revealed the true sponsor of the teasers. Thus, the television and advertising communities should be on alert that such advertising may be problematic in the eyes of the current FCC commissioners.

The Commission also reviewed a series of its other policy statements on sponsorship identification, seemingly to remind broadcasters, cable companies and advertisers about the rules that are already on the books.

• The current requirements of Section 317 of the Communications Act, which imposes a duty on broadcasters to make sponsorship identification announcements in any programming for which consideration has been received and to use reasonable diligence in obtaining sponsorship information from any person with whom the broadcaster deals directly, and Section 507, which requires that those producing broadcast programming to notify the broadcaster of any consideration the producer has received for inclusion of any sort of message or product placement in that program so that the broadcaster can make any required notices. Thus, program producers should reveal to broadcasters whether they have received any consideration for any product placement in their programs, and broadcasters should make that inquiry of all program suppliers.
  
  
• The Commission has extended the requirements of Section 317, but not Section 507, by regulation to cable television system operators engaged in local origination programming. However, the regulations currently do not apply to cable systems' carriage of cable network programming or to cable program networks themselves.
  
  
• Where a product or service is furnished at no cost or for only nominal consideration for use in a broadcast program, no specific sponsorship identification is necessary, as long as the product is not featured any more than necessary in the program in which it is contained. The Commission cited examples of what is and is not permissible, as contained in the Congressional legislative history, assessing whether the supplied product is being impermissibly “dwelled upon” in the program.
  
  
• The Commission reminded broadcasters that sponsorship acknowledgement is required even if the consideration is for the placement of a product or service into a PSA or noncommercial program. Even government announcements or productions must contain sponsorship identification if there is any sort of consideration provided to the producer for the inclusion of a message or product.

The Commission also extensively discussed its current rules restricting commercial advertising in children's programming, restricting the amount of commercialization in those programs, requiring that commercial messages be separated from program material by “bumpers” identifying when the commercial messages start and stop to make the commercial material distinguishable from the programming, and prohibiting host selling or the inclusion of ads featuring a character who appears on a program within the confines of that program.

Finally, the Commission reviewed a number of more recent controversies about sponsorship identification, making clear its concern about “hidden commercials.” Specifically identified were concerns over payola, sponsored messages provided through Video News Releases (VNRs), and government payments for the inclusion of messages in talk and interview programs (implying, though not specifically mentioning, the recent controversies over government payments to spokesmen for the No Child Left Behind Act, and to military leaders for comments about the war in Iraq).

The Commission also mentions complaints about whether embedded advertising constitutes deceptive advertising under Federal Trade Commission rules and policies. While acknowledging that the FTC had dismissed the complaints as not raising significant issues of public deception, the FCC has apparently concluded that it needs to further review the issues. With this background, the Commission turned to the specific issues it will address in this proceeding.

Notice of Inquiry

The Notice of Inquiry raises several advertising issues related to embedded advertising in particular. Because these issues are raised in an NOI, the Commission will not immediately adopt new rules on these matters, but instead will review the comments and then decide whether it should, at some later date, issue a Notice of Proposed Rulemaking setting out specific regulatory proposals for further comment. The decision to proceed in this manner on the bulk of the issues raised in this proceeding drew some criticism from Commissioner Adelstein, who wanted to proceed directly to an NPRM on all issues. Nevertheless, the Commission began with the NOI, asking for comment on several issues:

• How well are current rules working? The Commission asks how (not whether) the current rules should be changed to address today's advertising environment.
  
  
• Are there hidden commercials in interview programs (presumably things such as the use of particular products when doing a segment on cooking or fashion or similar material on a morning talk program)?
  
  
• Are program producers notifying broadcasters about the consideration they receive for the inclusion of messages or products in the programs that they produce, and are broadcasters asking for such information, all as required by statute and FCC rules?
  
  
• Is embedded advertising so obvious as to fit within the current exception of the sponsorship identification rules that exempt from specific identification requirements where the broadcast material is clearly commercial in nature and the product or service that is being promoted is obvious (and the maker of the product or provider of the service is the one who is sponsoring the commercial)?
  
  
• If embedded advertising is not so obvious as to fit within the current exceptions, and disclosures are required, what kind of disclosures should these be?
  
  
  
  • Should concurrent disclosure be required—when the product appears on the screen, should a crawl or other disclosure be made?
    
    
  • Would a requirement of concurrent disclosure be harder to implement for radio than for TV (because, for example, a crawl can't be run on radio)?
    
    
  • Should disclosure be required at both the beginning and end of a program (when it is now required only once, except in connection with longer political ads where the disclosures must be made in both places)?
    
    
  • Should specific sizes of type be required for such disclosures?
    
    
  • Should specific language be required (such as “this is an advertisement”)?
    
    
  • Should radio disclosure be made at a particular volume level?

The Commission recognized that some parties may be concerned about whether such disclosure requirements would be consistent with the First Amendment and with the artistic integrity of the programmers and the program producers. Specific questions include:

• What is the degree of government interest in making sure that audiences know who is trying to get commercial messages to them, and does that government interest exceed any restriction on speech that may be required?
  
  
• Does the fact that broadcasters and cable programmers often run crawls unrelated to the main programming on their bottom of the screen or superimposed on the picture being shown undercut any concern over artistic integrity that would be disturbed by any visual sponsorship identification?
  
  
• How should the Commission regulate in this area with minimal intrusion onto the programmer's ability to program?

Finally, the Commission asks whether there should be sponsorship disclosures when there is product placement in theatrical films that are aired on broadcast television or cable, or whether the current exemption of product placements in films aired on broadcast television should continue.

Notice of Proposed Rulemaking

In the portion of the Notice containing its NPRM, the FCC asks whether and how it should strengthen its sponsorship identification rules. After public comment, rules could immediately be adopted in these areas. The specific areas in which the Commission proposes to adopt rules include:

• Except for political broadcasts, there currently is no specific requirement for visual sponsorship identifications for commercial ads, other than that they be readable by the ordinary viewer. The Commission asks whether it should adopt the same requirement as for political ads: that the disclosure take up 4 percent of screen height and be on the screen for at least four seconds.
  
  
• The Commission is concerned that broadcasters might believe that product placement in children's programming may be permissible, when the FCC believes that it violates the requirement that any sort of commercial message be separated from programming by a “bumper” identifying the commercial message. The Commission asks whether it should adopt a rule making this determination explicit.
  
  
• As noted above, the Commission's sponsorship identification rules currently apply only to local origination cablecasting and not cable program networks or their programming generally. The Commission asks whether those rules should be extended to all cable programming. It also asks whether it should apply such rules to cable networks directly, a proposal that calls into question the reach of the FCC's statutory jurisdiction.
  
  
• For radio programs the FCC asks whether it should adopt new rules in two very specific instances:
  
  
  • Should an on-air personality be required to disclose that he or she received free merchandise or services if that merchandise or service is mentioned on the air, even where there might not have been an explicit agreement that the on-air mention was going to be made in exchange for the free products?
    
    
  • Should there be some form of specific acknowledgment that a message is a paid commercial message when the message is integrated into the announcer's on-air banter (as in the live-read commercials that radio broadcaster Paul Harvey was once so famous for)?

Conclusion

This is a very important proceeding for all broadcasters, cable networks and cable operators, as well as to those in the advertising and program production communities. Parties should carefully study the Commission's notice to consider the gravity of its potential impact. Please let us know if you wish to file comments in this proceeding to ensure that the flexibility to adapt to changes in technology and the marketplace can be preserved.