Interactive ad company ValueClick confirmed that it is under investigation by the Federal Trade Commission for possible violations related to its lead-generation activities.
The Westlake Village CA-based company filed a report Friday with the Securities and Exchange Commission notifying shareholders that the FTC is looking into lead-gen campaigns on some ValueClick Web sites that promise registrants a free gift in exchange for contact information and other requirements. The company said the FTC is also examining the way it drives traffic to those Web sites, particularly through e-mail, and whether its activities violate either the Can-Spam Act or other FTC regulations.
The filing says ValueClick was unaware of any pending or planned FTC scrutiny before receiving a note from the commission last Wednesday. It adds that the company “continues to believe that it is compliant with all current state and federal regulations pertaining to its lead generation activities” and will cooperate with the FTC inquiry.
ValueClick operates both a lead-generation network through its WebClients subsidiary and ValueClick Media, an ad network. The company also owns affiliate marketing network Commission Junction, the Mediaplex ad tracking platform, and the PriceRunner comparison shopping engine.
The FTC’s interest is thought to center on some of the promotional initiatives used by WebClients, particularly those that offer “free” iPods, cell phones or other gifts.
ValueClick has been attracting a lot of investor attention recently as one of the largest ad networks still untethered to an Internet search or interactive agency after a quick round of acquisitions, most recently Microsoft’s $6 billion bid for aQuantive. The company’s share price rose 14% yesterday on speculation that it was next in line to be acquired.
ValueClick also posted strong financial results earlier this month, reporting first quarter 2007 revenue of $156.9 million, up 34% from the same period last year. Profits for the quarter were up almost 50% year over year at $9.8 million.
But last month Jordan Rohan, managing director of RBC Capital Markets, issued a research note stating that ValueClick’s current revenue growth is vulnerable because some of its lead-gen tactics are attracting state and federal investigation, and because advertisers are becoming dissatisfied with the quality of leads produced by “highly incentivized” offers of free gifts.
In particular, Rohan said, federal regulators and the House Subcommittee on Consumer Protection are looking into ads that use the word “free” when in fact the consumer must make multiple purchases, or those that collect and then “aggressively re-sell” personal information without adequate disclosure.
While making the point that not all lead-generation companies employ questionable tactics, Rohan maintained that the more aggressive ones such as WebClients could be forced to change their practices, either by regulators or by voluntary industry guidelines. That could have an impact on ValueClick revenue — one-third of which comes from lead generation, in his estimate.
“Many investors believe that the company’s success has been attributed to the secular growth in online advertising,” he wrote. “While true at the margin, we believe the majority of the upside over the past year has been from growth that may not be sustainable.”
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