Expedia, Classmates.com and Intelius have reaped tens of millions of dollars by steering their online customers into "useless membership clubs," charges a Senate Commerce Committee report.
Expedia, Classmates.com and Intelius have reaped tens of millions of dollars by steering their online customers into “free-trial” offers that result in unexpected credit-card bills from other companies, a Senate Commerce Committee report charged this past week.
The report says the three local companies were among the 19 top beneficiaries from so-called “post-transaction marketing” techniques, which chairman Sen. Jay Rockefeller, D-W.Va., denounced as “scams” by “some very sophisticated online businesses (that) are tricking you into signing up for useless ‘membership clubs.’ “
Two units of Bellevue-based Expedia — hotels.com and hotwire — are on the committee’s list of companies collecting $10 million or more. So is Classmates.com of Renton, which has raked in more than $70 million, the report says; FTD, another unit of Classmates’ parent United Online, also is on the list.
Bellevue-based Intelius wasn’t highlighted by the committee like Classmates, but it may have taken in just as much. The company, which hopes to go public, says in a regulatory filing that it was paid about $65 million from January 2007 to June 2009 for its role. “These programs have been the fastestgrowing sources of our revenues over the past two years,” it adds.
Most Read Business Stories
- Amazon workers on strike in Germany a week before Christmas
- Whole Foods won't have to reopen Bellevue store, court says
- Social Security calling? Nope, it’s scammers out to grab your cash
- Boeing details terms of $4.2B Embraer deal, giving Brazil a voice in venture
- Huawei casts shadow over T-Mobile-Sprint deal
The Senate Commerce Committee spotlighted post-transaction marketing schemes run by three Connecticut-based “partner” companies — Vertrue, Affinion, and Webloyalty — that generally work like this:
After consumers make an online purchase but before they see a confirmation, the Web site’s “partner” inserts a sales pitch that may offer cashback savings for joining a club with a one-month free trial. “Misleading ‘Yes’ and ‘Continue’ buttons cause consumers to reasonably think they are completing the original transaction, rather than entering into a new, ongoing financial relationship,” says the report.
One key to the technique: The Web site passes consumers’ debit or credit-card information to the partner company, so customers may not realize the partner has all it needs to start charging them $10 or more a month once the free trial ends.
The committee says internal documents show the three marketing companies “know most of the ‘members’ they acquire through their aggressive online sales tactics do not understand they have been enrolled” and cancel after spotting the monthly charges, without getting any benefit.
The local companies had differing reactions to the Senate committee’s barrage of embarrassing publicity.
Expedia, which largely escaped media attention because only its brands and not the parent company were named, simply stonewalled. Corporate spokeswoman Katie Deines Fourcin referred inquiries to the hotels.com and hotwire offices, which had no comment.
The other two were more forthcoming, even contrite — though the complaints are hardly new.
“It’s been enlightening to us,” said Intelius chief privacy officer Jim Adler in an interview. “We’ve been poring over it and I applaud the Senate Commerce Committee for bringing a lot of this information to light.”
Intelius executives have been deposed in an investigation by Washington state Attorney General Rob McKenna over post-transaction marketing gimmicks, and in August the company was hit by a lawsuit that seeks class-action status.
Nonetheless, Adler said the company gets few direct complaints from consumers: “We’re not the merchant of record on those products so we don’t show up on the customers’ credit cards.” But it got enough that it established a procedure to transfer such calls to its partner, a unit of Vertrue called Adaptive Marketing.
Adler, hired in September of last year, said that for the past 12 months Intelius has displayed a banner on its Web site that alerts customers when they have signed up for a membership club through Adaptive Marketing. And the terms of such memberships are displayed clearly with the post-transaction marketing pitch, he said: “Right above the button, it says you are signing up for this … it’s not in the fine print.”
Still, Intelius is reconsidering its business with Adaptive Marketing. Ending the relationship “is a possibility” although “we might be able to remediate the things we don’t like and continue,” Adler said. “At the end of the day we’ve got to make sure our customers are satisfied or we’re not going to be around.”
Classmates, in a statement issued by United Online spokesman Scott Matulis, said it has received “a relatively small number of complaints” on the subject.
“We believe that our marketing practices provide clear disclosure and we do not transfer our customer’s credit or debit-card information to third parties without our customer’s consent,” it continued.
Still, in a regulatory filing Wednesday the company said that “certain of its arrangements or practices relating to post-transaction marketing will be terminated or modified in the near term.”
It also disclosed that these “arrangements” yielded $14.9 million for Classmates Media and $5.3 million for FTD in just the first nine months of this year.
Washington consumers have lost an estimated $50 million through such deceptive online techniques in the past four years, McKenna told the Senate committee in written testimony this past week. McKenna last year proposed legislation to tighten up promotions and “free-trial” offers, but the bill ran into opposition from some business groups and never reached a vote.
TechCrunch, a Silicon Valley blog that has followed this issue closely, pointed out this past week that post-transaction marketing schemes not only victimize consumers — they have a corrosive effect on online competitors that don’t participate:
“They earn less revenue, meaning they can’t be as aggressive on core pricing and on advertising. So without regulation, sites that don’t engage in scamming users are forced into the practice, or out of business.”
On the outside it was a dark and dreary morning for those who turned out early Thursday in downtown Bellevue for two separate meetings. But on the inside, the messages contained rays of sunshine and talk of green sprouts in the economy.
Eastside business leaders packed a Hyatt hotel ballroom to hear three economists talk about prospects for 2010. But first, vice chairman of economic vitality Bill Pollard shared the optimistic results of the Bellevue Chamber of Commerce’s annual survey about what members anticipate the new year will bring.
Nearly half of the 164 participating execs said they expect 2010 to be better than 2009, 65 percent expect the Puget Sound-area economy to expand next year; and 39 percent said they plan to hire workers next year.
Their top three concerns: generating revenue, the economy and lack of skilled work force.
Three blocks away, Microsoft shareholders heard CEO Steve Ballmer brag about all the new products — including Windows 7 operating system and the search engine Bing — the Redmond company has launched in the past year. Ballmer went on to say the company is more competitive than ever.
As for next year, he said the world’s largest software company will continue to concentrate on software for mobile devices and the launch of its cloud computing service called Azure.
Speaking to about 400 shareholders, Ballmer said, “When we meet back here in 10 more years, we will look back and say, ‘Wow, wasn’t technology really primitive in 2009? Computers didn’t recognize our speech, they didn’t recognize our gestures … we didn’t have instantaneous access to the world’s information, we still used pen and paper.’ … Microsoft is investing to be at the forefront of these changes.”
— Becky Bisbee
Bellevue developer Jeffrey Gow is throwing in the towel on a costly, years-long effort to acquire control of troubled Cowlitz Bancorporation.
Gow and his Crescent Capital colleagues spent $5.9 million to buy 29 percent of Cowlitz by last February. After considerable public sparring with the existing management, they proposed a slate of directors to oppose the board in the next election.
The CEO of local homebuilder Polygon Northwest, Gow first offered to buy Cowlitz in 2007. He saw opportunities to run the company better and expand its Bay Bank branches in the Seattle, Bellevue and Portland markets, adviser Steve Wasson said in a February interview. But on Thursday Crescent said it’s abandoning the proxy fight, may sell its share, and “no longer (has) the intention of controlling Cowlitz.”
With a market capitalization below $5 million, the entire bank is now worth less than Crescent paid for its stake. Wasson did not return a call seeking comment.
Like many community banks, Cowlitz has struggled under the weight of bad loans. After its annual regulatory examination this past quarter, officials imposed a range of restrictions on its lending, the company said in a filing this past week.
Cowlitz shares fell nearly 8 percent Friday after Crescent’s move.
Comments? Send them to Rami Grunbaum:
email@example.com or 206-464-854