DKT/CASE NO.:P951201
TITLE: HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION
PLACE: Washington, D.C.
DATE: November 17, 1995
PAGES: 2476 through 2730
CORRECTED COPY
Meeting Before the CommissionDate: November 17, 1995
Docket No.:P951201
FEDERAL TRADE COMMISSION
I N D E X
WITNESS: EXAMINATION
None.
E X H I B I T S
FOR IDENTIFICATION
Commission's:
None.
FEDERAL TRADE COMMISSION
In the Matter of: )
) Docket No.: P951201
HEARINGS ON GLOBAL AND )
INNOVATION-BASED COMPETITION )
Friday,November 17, 1995
Federal Trade Commission
Sixth and Pennsylvania Avenues
Room 432
Washington, D.C.
The above-entitled matter came on for hearing,
pursuant to notice, at 9:00 a.m.
PARTICIPANTS:
ROBERT PITOFSKY
Chairman, Federal Trade Commission
ROSCOE B. STAREK, III
Commissioner, Federal Trade Commission
JANET D. STEIGER
Commissioner, Federal Trade Commission
CHRISTINE A. VARNEY
Commissioner, Federal Trade Commission
SUSAN S. DE SANTI
Director, Policy Planning
DEBRA VALENTINE
Deputy Director, Policy Planning
EILEEN HARRINGTON
Federal Trade Commission
PARTICIPANTS:
RALPH ANDREOTTA
Director
Technology and Infrastructure, AT&T
WAYNE HUYARD
President
MCI Mass Market, Sales & Services
JAMES DOYLE
Attorney General of Wisconsin
JAMES STEEL
Vice President
Security & Risk Management, Mastercard
KATIE S. SLOAN
Manager, Consumer Affairs
American Association of Retired Persons
SCOTT COOPER
Manager, Government Affairs
Intel Corporation
WILLIAM BURRINGTON
Assistant General Counsel & Director of Policy
American Online
JORGE REINA SCHEMENT
Dean, Graduate Studies & Research, College of Communications
Pennsylvania State University
JOHN BARKER
Director
National Fraud Information Center
Vice President
National Consumers League
ARTHUR B. SACKLER
Vice President for Law and Policy
Time Warner Inc.
LINDA GOLDSTEIN
Hall, Dickler, Kent, Friedman & Wood
OLAN MILLS, II
Chairman, Olan Mills, Inc.
SPEAKERS:
JAMES GALLANT
Director of Marketing
NYNEX
GEORGE BRAASCH
Corporate Counsel
Speigel, Inc.
ERIC BROWN
Assistant Attorney General of Ohio
NORA DOWD
Deputy Attorney General
Office of the Pennsylvania Attorney General
(on leave with AARP Telemarketing Fraud Project)
BARBARA GREGG
Director, Montgomery County (MD)
Office of Consumer Affairs
P R O C E E D I N G S
COMMISSIONER STEIGER: With that I think we're ready to begin. Good morning, and in advance most sincere thanks on behalf of the chairman, my colleagues and the staff for your contributions here. It is very exciting that you're here, and we think it'll be very much in the interest of consumers.
We're going to begin this morning with a distinguished visitor, Ralph Andreotta. He's the director of technology and infrastructure at AT&T.
In his current position he is in charge of all of the cutting edge work at AT&T. I think we would say that this makes him the man whose going to hang the moon and the stars for that telecommunications giant.
He's been with AT&T for 23 years and he has led one after another innovative development. We are extremely pleased to have him with us and look forward to his visit.
Thank you very much.
MR. ANDREOTTA: Thank you very much. How is that for the right sound? Do I sound okay to everybody? What I would like to try --
COMMISSIONER STEIGER: You're still going to use the microphone I think.
MR. ANDREOTTA: Over here?
MS. HARRINGTON: Can you hear him?
MR. ANDREOTTA: Can you hear me?
THE REPORTER: Yes.
MR. ANDREOTTA: Okay. Good. What I will try to do this morning is to talk a little about traditional telephony and telephone communications and how it has progressed.
I will talk about the intelligent network that occurred in the '70s, '80s and '90s and how that changed the nature of telecommunications -- wait, I'll tell you when to turn. Just leave that up.
I will talk to you about the intelligent network and what that did to telecommunications and the types of features and functions that became available.
Then I will proceed to a look towards the future and what we see occurring maybe in the next five to ten years, and I'll close it with some of the implications on electronic commerce.
Okay. So let's start and look at traditional telecommunications and traditional telephony. Essentially what it was was a hierarchy of switching, major switches within the network that existed back in the old Bell system and in today's environment with the local exchange and inter-exchange companies, very large switches connected by transmission facilities.
And it was a very hierarchial type of network, so you would dial a number and the call would be completed up through the hierarchy and down the hierarchy to the end number with which you have placed the call.
The switching and the signaling and the transmission were are all tightly integrated into these big switches, so everything occurred in the switch, and you had to get from one switch to another to get to the intelligence to continue routing the call.
All the signaling would be done in bands. That meant the numbers that were being placed to address the call and throughout the call were going along the same facilities that the call itself was going on, and it was relatively simple. It was sequential.
You would dial a number. The switches would work, go from one from to another and complete the call. And basically each number had an unique end point so the user would dial these digits and it would specifically identify the end point which was being called.
This, I think, is the traditional history of telecommunications. Even when the switches became software controlled, in the '60s this started, software programming controlled, all the features were resident in the switches.
And if you wanted to introduce new features into the network, you would have to go out and replace the software within each and every switch which took a relatively long time to do and was relatively expensive and inefficient.
Think of them as main frame computers, these old switches. If you wanted to change something you had to go change it in all of them. And we basically had simple telephones, which as the interface opened to customer premises equipment, became more and more feature rich consumer electronic devices which were signaling around this network to complete end to end calls.
How can I characterize this telephone network? Well, on the bottom I think it was easy to use. There's almost nothing as easy to use as a telephone. I mean, it has an on and off switch. You can dial digits and it's extremely easy to use so it's really a mass market type of item.
It's affordable and a lot of that has to do with the history of universal services and the Telecommunications Act of 1934. It's reliable, it's secure and it's private and people are extremely comfortable with it because of its economics and because of its ease of use, because of its security and because of its reliability.
So that, in a nutshell, is how I viewed traditional telecommunications and what consumers expect from it.
Thanks, Mike.
Now, in the '70s and '80s things started changing a little and it was the advent of something called the intelligent network.
With the intelligent network you take the routing log, the service lodge, the routing information and the customer database, the services and the applications, and you separate that from the switching.
So essentially you take the computing aspect and the intelligence which routes the calls and contains customer information and put that in separate computers around the network. This occurs in the inter-exchange networks today and it's occurring in the local exchange networks.
And what that means is with this distributive intelligence is the signaling really gets done separately from the switching and the voice transmission, and there's a separate path where inquiries go to decide. How should I route the call, where should I route the call to and what customer information that I know as a network should I use in routing this call.
The implications are much more rapid service creation and deployment because by changing software in a few of these central -- in a few of these distributor computers, I can, in fact, change how these switches route calls and how they interface with the customer to do certain functions.
A lot of new customized services, features and functions such as 800 service, 900 service and 500 service become available by using these distributed computers that route calls in different ways depending on how they're programmed.
These switches also -- these computers also have direct interfaces to the providers of the services so that they can interact with those computers and change routing logic, service functionality or customer databases just based on how they want to provide a service to the end customer.
This is just a little pictorial of what the intelligent network looks like, and as I indicated before the calling -- the call gets routed from telephone to telephone, but what's happening is when the call is originated, one of the switches, in AT&T's case a 4ESS long haul interexchange type of switch, actually sends an inquiry to something we call the network control point.
The network control point takes the dialing customer number and whatever logic it has inside of it and decides where to route the call.
So, for example, we're all very familiar with 800 service. On an 800 service call, the phone dials the call and this 4ESS says to the network control point, Here's the customer number dialing the call and he dialed an 800 number, where do you want me to route it to?
And it returns to the 4ESS, an end number location that in fact the 4ESS can route the call to, so the difference we have now is it can route the call to many places based on a lot of factors versus the old situation where there was always an end to end, point to point type of route.
Okay, Mike.
So what has the intelligent network brought about? Well, first we know 800 services today, toll-free ten digit nationwide dialing. The 800 number is uniquely identified with the -- what we consider a customer, which is the party, the corporation that you have, the firm which is providing the 800 service.
And we offer a lot of features and all the carriers offer a lot of features. Flexible routing, you can change the routing and how that 800 number gets routed based on time of day, based on day of week so you could have service agents in different time zones, for example.
You can change it based on the area code or the local exchange code of the calling party so you can do features like routing to the nearest location. You can change it based on service provider input, however they want it to be routed.
And you can redirect, obviously, when you're busy and don't answer and you can have the customer having direct control on how to route the call.
If you take it to the extreme, most of the carriers provide services that we term intelligent call processing. In that case the customer itself, the service provider whose offering the 800 service actually has a computer on their premises, and they have application programs and can actually control on a call by call basis how the call gets routed, the 800 call that comes into the network.
In this case they can actually do routing based on whatever is in their computer. They can do it based on the customer database, on the customer's history of sales, history of purchases, history of services, so things can get extremely customized on what type of agent or what type of end routing is used based on the information that the person has on the end user.
If you look at all this intelligent networking and apply it to 900 service now, the difference here is the user instead of the service provider, it's paying for the calls and in many cases is charged a premium for the type of 900 call that's being placed.
And the carrier generally bills the end user and takes some proportion of that revenue and splits it with the service provider, and 900 number calls, therefore, since they do that by a functionality have traditionally been used to provide information, to do voting, to do broadcast kinds of services and is essentially a voice information kind of service where you can either access announcements, access data or access live agents in certain cases.
If you take 800 and 900 and put them together and you front end it with interactive voice processing which you're all familiar where you get an automated voice system on the line and you answer certain questions via touch tone, then you can really customize the specific type of service based on the customer's input.
And you can route the call to an agent, to another recording, to a computer based specifically on how the customer responds to the specific voice requests that system is initiating.
I think you know in the financial world, in the transactional world if you think a lot of the automated brokerage services and automated mutual fund services that are available today this is exactly how they work.
Okay, Mike.
Now, what these services have enabled really is a vehicle to stimulate electronic commerce. We think these 800 and 900 services are really an electronic store front or a wall, so the brick and mortar no longer needs to be there but as an end user I can call into one of these 800 or 900 services any time, anywhere, any place usually.
And I can access a system which knows who I am and can have very personalized services offered to me based on my identity and the information they contain in their computers.
Okay? So in many cases if I think of the brokerage or mutual fund case again I could be anywhere in the world, I can get access into the United States, dial an 800 number, be hooked into a computer who knows who I am, what I want and I can actually complete the transaction on line.
So we do 800 service in particular as a real precursor to electronic commerce.
And the difference is -- and the nice thing about it, it is all the telephony aspects I talked about before in terms of ease of use, affordability, security, reliability. So you've taken the traditional telephone network and what customers feel comfortable with, and have evolved it to a point where it can really be a platform for commerce.
But in most cases, the transaction is not totally completed on the call. In many cases these services end with someone giving a credit card number over the phone so the service is rendered and the order is placed.
But the authentication, the authorization, the payments, the settlements, the recordkeeping, the inventory, the accounting often occur off line, and I think the world is going to change and we're going to see much more of that occurring on line.
Now, that's sort of what we've been through. Where do we see things going? I really believe you probably heard yesterday about something called convergence, and what's happening is because of the phenomenon of digitization which is voice, data, image, video, multi media can all be represented by the same bits, that's leading to a phenomenon called convergence by which we mean that platforms which used to be separate can now be used to do multiple things.
When we look at the infrastructure, what's happening in the United States and around the world, we look at information appliances which are the devices people use. We look at communications networks and we look at information resources which are the repositories of stored information.
And we see a lot of convergence going on in each of those categories, which are blurring the traditional lines of distinction between what was communications, what was computing and what was entertainment.
Okay, Mike. So let me give some examples.
If you look at information appliances I think telecommunications equipment, computers and audio and video equipment are starting to blur, on the equipment side, on the devices that people use.
Examples, a lot of small devices today, personal computers, personal digital assistance, you can't really classify them as telecommunications or computer because they're a little of both.
If you look at cable networks and what they're trying to do in terms of providing full service, they're going to be delivering telephony, entertainment and computing.
So the things are starting to blur. Video phones and ISDN terminals are now providing video and multi media over the traditional telephone network. If you look at the communications networks, the same thing is happening. An evolution is starting where I can no longer say, This is a telecommunications network, this is a computing network, this is an entertainment network.
Some examples I give, voice over the Internet. Internet is starting to be used for voice communication services. The cable networks are starting to provide both computer access and telephony type services, and the same thing is going on in the information resources itself.
Okay, Mike.
If you take this to the limits, and I think this is important to keep in mind, we see a future infrastructure where things are really starting to blur, and it's really -- it's going to be characterized by devices, the information appliances, the communications networks and the information resources, but there's only going to be three characteristics.
There's going to be competition, tremendous competition in each area. These devices are going to become more and more generic, and by that I mean it's not going to be as easy to classify them into one category or another, and they're essentially going to be coupled.
So you're going to have computer providers, communications services providers and information resource providers, and one new function which is going to emerge in this industry is something we call hosting or transaction services or brokerage services where a party comes in and makes it easy for the customer, even sometimes on a per transaction basis, to decide what type of communications network should I use, how can I find the content that the customer wants.
So it's going to be much more a -- things may be characterized by individual transaction as opposed to the old hard nailed up connection of the telephone world. Things may happen very fast and connections may be established and broken down relatively quickly .
Those of you familiar with the Internet which you're going to hear a lot about I believe Monday are already familiar with this type of environment, and we see it just trending in that direction in all the sectors of the industry.
Okay, Mike.
Let me do a shift now and talk a little about electronic commerce. Electronic commerce is using electronic tools and techniques basically to exchange goods and services, and as I said, 800 and 900 services are really the beginning of that but we see more and more that electronic commerce is going to become very big in the on line electronic environment as we move from now to the year 2000, 2005.
Today there isn't that much of it, okay, and it's mostly -- by here I'm talking about complete transactions where everything is done electronically. Most of it today is EDI which is a business to business electronic type of data exchange to do commerce. It's about 4 percent of commerce today. And the reason it hasn't extended that much into the consumer ring is really because it's a lot of standards. It's complicated. It's expensive.
There's a lot of interoperability issues that have to be solved, and it's not readily available to a lot of small business and customers to use today. There's interoperability issues. There's security issues.
But what we view in the future is this infrastructure, the evolving infrastructure that I talked about is going to be able to do all in one transactions which enable all of the elements of electronic commerce, everything from hooking up the buyer and the seller, to the advertising, the catalogs, putting out an RFP or an RFI, getting the two parties linked up, having them negotiate with each other on terms and conditions, establishing a contract, electronically on line, doing the actual billing, settling the billing, all in the same on line environment, placing the order, doing the accounting in terms of accounts receivable, accounts payable, inventory control, all of these electronic elements will come together on line, customer service and providing information and knowledge processing where the seller updates their database. This can all happen electronically on one call, one connection in a very short period of time.
Okay, Mike.
We already see this trend starting. If you look at the three sectors of the information infrastructure that I talk about, the appliances, the communications networks and the resources, you start to see trends occurring already.
Information appliances, they're something -- I brought one of them up here, there's something called a smart card which we're going to see more and more of as we go into the year 2000, 2005.
This can -- there's electronics on this Smart card, okay, so this is the next generation of the type of credit or debit cards that we have today with magnetic stripes on them. This holds a lot of information.
It can be used for -- to carry information alone. It can be used as an ID type of enabler, but what it also can also do is carry around cash, and in many cases in the future this card may actually contain something called electronic tokens, electronic cash when you can actually carry value around on it and use it to do electronic transactions over the future kind of network that I talked about.
You will use readers. You'll use appliances and we envision a lot of telephone like appliances or even TV like appliances that are very consumer friendly which will have a place to insert this card in the future to do electronic transactions.
And if any of you have heard of the Mondex system which is in the UK, they've really taking this to the limits and are using it for total anonymous types of electronic cash just like cash is today. We'll talk a little more about that in my last chart.
There's also little searches engines, intelligent agents and browsers. We see more and more of these. These are agents, software agents that help a user find a seller for the type of product or service they want.
They help facilitate, negotiate, and act as independent agents for a transaction, and there really -- these are software middle wear kinds of agents that really are going to help a seller and buyer get together and are conducive to permitting the whole transaction to occur on line as I described.
Now, in order for this all to happen, there are some critical areas I believe that are going to have to get solved. Let me just talk a little bit about these and then I'll wrap up.
Privacy is a very important issue. As all of these electronic transactions are going on in the electronic on line environment, users are very concerned about who has access to personalized information that is made available over these networks, so that's one issue that's we're going to have feel comfortable with.
There's the whole issue of anonymity versus traceability. How anonymous is the value on these cards, for example, going to be versus how easily is it going to be detected if something is being done illegally?
These cards can be done in three different ways. They can be personalized which means when I use it I have to enter some personal information or it won't work like an ID or a fingerprint or a voice print or something like that.
They can be anonymous, which means I don't have to be the individual using this card but this card has -- this card itself has an identity and the central system knows how much value is on this card and is tracking it.
Once the value gets to zero, the card is no longer good or it can be actually totally like cash. And then there's something called electronic purses where I could actually transact between individuals. We can put these two cards together in a little machine and transact value between each other.
Security is extremely important, and I think there's four major aspects of it before the electronic commerce environment will really come about to the level that I talk. Authentication, this means the system knows who I am and authorizes me as a user.
Non refutable means I've sent you some money, let's say. I've sent you some money and I can prove that you've received this and that it's been debited to my account.
Protected or confidential means I know I sent you some amount of value in this transaction but nobody else is privy to it and nobody else knows about it.
Finally, verification means that what I'm sure of is the value that I sent you and the associated information that I've sent you is indeed -- what you've received is indeed identical to what I've sent because in cases where you're worried about the lack of integrity on the network and some errors are occurring in the midstream and all that, you would be very concerned about what the receiver has received is different than what you've sent them.
So all those are areas that the industry has to work on in order to create a proper environment for electronic commerce. Accessibility, it's never going to become mass market until there are a lot of low cost terminals and card readers available.
If we're talking about Smart cards or any other type of apparatus, it has to be wide spread. It has to be ubiquitous. People have to have a place they can go to to access these types of electronic applications. I mean, that's obvious. It has to be reliable.
The service, the network has to be there when you need it and when you want to use it and interoperability has a lot of interesting aspects. How will different service providers, different merchants, different bankers interact with each other in this electronic domain, but also how will we interact with the world of physical cash and physical transactions because all of these electronic techniques are not going to be too good unless people have an insurance, merchants have an insurance that at any point we can go in and do an exchange to different types of more traditional monies for exchange and other ways of providing value.
Let me just sum up then my comments. I think it's very important as we look and we see -- AT&T sees this in a lot of the areas that we're currently involved with. It's very important in looking at regulation or the implementation of regulation or the policy and implementation of policy that I think we take the big picture, you know, the midterm and the long term picture and recognize that a lot of the traditional services we have today are going to be increasingly crossing over and in the future environment we're going to have services which can no longer be characterized succinctly as telephone communications or computer networking or entertainment.
But rather, we need to look in a more generic way at the types of functions and features that are being provided and what has to be done in order to make them acceptable to users and to protect consumers in tomorrow's environment.
Thank you.
COMMISSIONER STEIGER: I don't think one round of applause is right. There ought to be a special medal for people like you who can translate extraordinarily complex information to laypersons.
I would like to hear one more.
Leave your visuals behind, please, and there will be a quiz tomorrow.
Now, with that background of the impact of emerging technology on consumers our next three experts highlight the challenges based on very extensive experience that these developments may well bring to consumer protection.
Before that -- thank you. We're going to get even more expert. Mr. Huyard, pardon me for skipping down my list. Our next speaker is Wayne Huyard who is in charge of MCI's mass marketing and sales departments.
I think we have to call him one of the king telemarketers, one of the country's most respected telemarketing and communications companies. He has been with MCI since 1984 and has been involved in developing its, I think, universally agreed upon highly successful marketing
program.
So let's go from the technology to the marketing and then we'll go on to our worrywarts who are going to help us with consumer protection.
MR. HUYARD: Thank you. Thank you very much. I wish to thank the commissioners and the entire staff of the FTC for the opportunity to speak at this important meeting on the subject of technology in telemarketing and the role of telemarketing today and in the future.
As most people here probably know, MCI operates in the very fast paced and hotly contested world of competitive communications. And in that world technological advancement in both product development and delivery means success or failure for the enterprise.
At MCI, our right to compete was one granted by the courts, but the business was built and the long distance monopoly was broken and the tremendous advantages in reach and effectiveness from selling and servicing by phone.
From day one we made our own product, long distance telephone service, our primary marketing channel. And for over a decade we've had it confirmed time and again, there is no better way to sell long distance telephone service than selling by phone.
Direct, personal, immediate and interactive, it allowed us to introduce the idea of competition then, and today as then it allows us to educate and inform and present the many benefits of choice.
At MCI, telemarketing is the primary sales channel. It's vital to our interests and so is the quality of this important delivery system and the associated satisfaction of customers. We know as all do that true, enduring business success is based on customer satisfaction and retention, so we take telemarketing quality very, very seriously.
Our focus on quality has allowed us to build a telemarketing channel to the tremendous size that it is today, one of the largest such operations in the world, and certainly, in my biased view, one of the best.
There are as I speak at this very moment thousands of conversations occurring between MCI representatives and Americans across the country. Some have called us and many we have called.
In Arlington right now they're speaking in Arabic and Hindi, and the conversation might be an education on the American telephone system or on pricing a call to Bombay, or describing one of our many international plans.
In Sacramento right now the same is occurring in Japanese and Catonese, in Albuquerque in Spanish, in Baltimore in English for business customers, in Denver in English for residential users and in Atlanta for writing in the Internet.
In these locations and so many others, thousands of highly skilled and very talented MCI representatives are on the phone right now and are on the Internet right now working to satisfy customers and working to deliver benefits to the American consumer.
In many of these locations, for a single representative, one call might be for sales, another for service, one from business and another for residential and it's technology and it's training and it's quality management that allows for it to be done extremely well.
You know for the most part the idea of telemarketing conjures up images, fly by night warehouse boiler rooms with banks of old cardboard tables and single handset phones manned by cheap labor selling at half truths and going for the easy buck.
At MCI, as with so many other responsible telemarketing operations, it is completely, completely different. Here, you would witness the most positive, the most efficient, the most effective work environment imaginable, wide open floor space often the size of a football field or more with low walls, spacious cubicles and PCs on every desktop, positive motivated people working to make an impact for the company and themselves.
I brought a video here today just to give you a glimpse of what a telemarketing center at MCI looks like. This is our small business out bound telemarketing center in Atlanta, Georgia. Let's just role a quick tape.
(Video presentation.)
MR. HUYARD: For sales representatives the call records are dialed automatically. They sit at their desk like you saw here, many with headsets, some with handsets and wait for the hello. The addresses are dialed automatically.
In the background the automatic dialer is actually interacting with a very, very sophisticated and robust database to prospective customers at the very best time, and the auto dialer also works to screen out no answers or busy signals to make the representatives work as efficient as is possible.
We do not use recorded voice automatic dialing technology. Here, the automatic dialing technology is simply used for a more efficient and effective internal operation, and the desktop systems that you are able to see there and that are across the company are absolutely state of the art.
When the rep hears the hello and the hello is delivered to the sales representative, a call record automatically from that caller appears on the screen. It tells them where they live and who they use for local service and it goes on to tell them what to say and what products are best to offer.
We obtain our data that supports this calling from publicly available sources, we use it responsibly, and we guard it carefully to protect the privacy of prospects and customers alike. We then enhance that data with information so we can target our contacts and offerings from maximum relevancy for the consumer and maximum effectiveness for MCI.
These telemarketing efforts are complemented and supported by other channels like advertising and direct mail and in some case face to face sales and service as part of highly targeted, integrated and coordinated sales and services campaign.
Advertising plays a critical role in building awareness and understanding. Direct mail is used to further that awareness and understanding and it's often sent before telemarketing calls to complement the effort and is frequently sent after a telemarketing transaction to confirm the understanding of that conversation or to set up a subsequent contact.
When a sales representative doesn't obtain a sale on a given call, information is collected for subsequent calls. Again literature is often sent and call backs are often scheduled.
If the sale is made and once all the detail has been reviewed with the new customer, as you saw a little bit there the sale is then transferred to another company, an independent third-party company in another location who then talks to that customer and verifies the switch to long distance service with MCI.
What I would like to do know is give you a couple -- an idea of what a sales representative system looks like, to give you an idea of the screens that they look at when they're operating in their day-to-day job.
We're not going to be live in this system. We have rather given some snapshots of the screens and I'll walk you there some of those so if we can just do that.
The very first screen that would come up -- and it's immediate, again the automatic dialer is dialing in the background. A representative hears the hello, and then a second or two before the hello is actually delivered to the representative, they would actually see the incoming call.
And I know it's hard for you to see right now but right here is the information, the name of the person that's calling in, their telephone number, the pick fee or the switch fee that the local Bell operating or the local exchange carrier charges in that area and then the local company that they use.
By the time that hello is actually delivered to the representative, they would see this next screen which is an introductory screen. It allows them to begin the process, to make an introduction of themselves and of the company, the purpose of the call and go immediately into a series of questions about their particular calling patterns.
Also in most cases the rep will toggle up as they're going through that. You take a day or two for a representative to really memorize those kind of questions and not have to read it so they're able to toggle up. It's a Windows point and click environment.
They're able to toggle up records like this next screen which would as a representative they might pull up to see if this customer, this in bound caller was ever an MCI customer in the past, so if that person was an MCI customer in the past, they could see what service they were on, perhaps what experience they have had with our company in the past and how much they spend.
The next screen that they would go to based on the answers to the discovery questions that they have asked, this would actually be a product and promotion recommender screen so it would come up and guide the representative's representation on what product and promotion would be best suited to the needs of that individual caller.
Then the next screen after this one would be an add services screen where we would based on those needs promote other products, perhaps cellular phones or pagers or calling cards or anything else that might be appropriate for that particular person.
Then we would go on to the next screen, verify the vital information of the caller, go to the next screen and actually launch the processing of the sale.
Go to the next screen, if the caller was not interested, sometimes many are not interested, sometimes they're quite bothered by the telemarketing call and asked not to be called again, we would launch into this screen which would suppress that record.
It would load it on to our national do not call database so we would never call that prospective customer again.
And then we would -- could click on to this next screen. We had a little bit of an example of the language barrier on the video. If the person was speaking in a language or broken English, you weren't really able to effectively communicate, we will try to discern what that language would be and we would click that button and that would automatically route it to another representative who would be able to speak in that language.
Thank you for the demo.
That's a demonstration or screens for a sales representative at MCI. For services representative who take in bound calls, call records are automatically delivered to them on their screen. The representative has a full range of customer information and service tools to ensure the immediate resolution of problems and issues.
They'll have access to records which detail that particular customer's previous calls and their history and habits as a customer and the representatives have a vast resource of information at their disposal for quick and effective service, often launching off in a point and click environment to the Internet where we have vast resources of information about the industry, about the company and about service offerings in general located on the Internet, protected by fire walls, used exclusively by our service representatives.
I will take you through some of those customer service screens quickly.
When a customer calls a customer service representative at MCI they hear that hello. In this case I didn't even know that. It's Hilary calling in.
This is what would appear immediately when they would get a call record. They would actually get a whisper tone saying there's an incoming call. That whisper tone would tell them what kind of customer service line they're calling on.
Immediately after the whisper tone, they would say, Hello, my name is Wayne Huyard, I'm with MCI, customer service, how can I help you. This would appear automatically on their screen. It would tell them who the caller is, where they're located and what services they use with MCI.
For example, here you can see they're using our basic dial 1 service and what the install date was, what the status of the account is, whether it's active or inactive and what the cancel source and reason and date was and that would be the first screen.
They would probably in most cases -- they have a huge variety of screens that they can do to depending on the call type but they would probably launch into the next screen and see if they're on any special programs.
This part of the screen remained the same. This part is new. This is all encoded but this says, for example, that they're a member of the American Airlines Frequent Flier program. We have a partnership with American Airlines where you can earn miles for dollars that you spend at MCI. The service representative would want to know that information.
Then they would launch in probably to the next screen. Look at the manual notes on previous events. This caller in this case called in as we can see here five times before in their experiences as an MCI customer.
This would give the service representative an immediate understanding of what the purpose of those and nature of those previous calls were.
If you jump to the next screen and they don't want to go through that detail, don't have time to go through that detail, our reps are so adept at just pointing and clicking navigating through the system quickly, they can get a quick summary.
In this case there are some nine events it looks like, previous calls that would show the date that they called in, who actually processed that previous call, what customer service rep at MCI took that previous call and then what the nature of that call was.
We track every transaction at MCI, whether it's a sales transaction or a service transaction so we know who at MCI had an interaction with any prospective customer or MCI customer for reasons that I'll discuss a little bit later.
They would probably go to this next screen then to look at the call detail of the caller. Many times people call in to check on particular calls. They might not necessarily understand who they were calling. Somebody else in the family was making the call and they don't understand it, we'll explain it.
Maybe a call to Raleigh or Hillsboro in this case requires a credit. You would jump to the next screen, the credit screen and actually issue a credit.
There might be some questions about those calls and how the prices of those calls compared to AT&T or Sprint or any other carrier, we could launch the next screen and do a price comparison.
These screens are available. You can see in this case we're comparing a call from Buffalo, Wyoming to Colorado Springs, Colorado. We can put in the product types, the time of day, a vast assortment of information to real time quote the effective rate for the customer.
Then probably to wrap up the call there are a number of screens but we would probably then jump ahead again and go back and make a note on the account as to what transpired on that call.
Thank you.
Then besides just these straightforward long distance sales and service applications we have a vast assortment of some very unique applications at MCI. MCI is more than a long distance company. We're a communications company and we're quickly now as many other communications companies are expanding into contiguous markets like telephony based music retailing.
Last week we announced the revolutionary new service called 1-800 Music Now, and it allows people to call an 800 number to sample music. It's like a listening station in a record store. It allows you to sample music by phone and purchase CDs and records or cassettes by phone.
This is one example of many telephony based products that MCI and others are now introducing that make use of absolutely leading edge, state of the art, desktop technology.
In that Chandler, Arizona, center which is taking those calls for 1-800 Music Now, the representative in a point and click environment can pull up any one of the 5,000, 6,000 record labels, CD labels that we carry in inventory right now and even play sound bites of the music itself.
As sophisticated as all of these systems are it is really only the beginning. Telemarketing technology continues to develop at an extremely fast pace and that's great for business and that frankly is great for the consumer.
As telemarketing grows and as technology develops it can truly become a great enabler for better commerce and a better informed and better served society.
This technological advancement allows for something that we refer to as mass customization, where products and where delivery systems are truly customized individual needs, where the telephone system is fully and completely integrated with application rich computers that are integrated with information rich databases, that are integrated with sophisticated network based inbound call routing capabilities and out bound predictive dials functionality that together enables and empowers representatives to service the interest of consumers in the best way possible.
Today, databases and telemarketing operating systems and telephone networks can interact so that company activity or employee response is shaped or determined by the needs of the caller based on previous events or customer experiences or based on the probability of future experiences.
Today, for example, inbound callers can be routed to representatives who are best suited to satisfy that particular concern or the particular needs of that particular inbound caller.
If a caller, for example, based on their needs is technologically advanced, we know they have a propensity to use cellar phones or pagers, for example, we will route that call to an internal group in MCI who is empowered and best suited to sell cellar and paging service.
If a caller is likely to speak Vietnamese we will route that call to an MCI representative who can speak both English and Vietnamese.
In the outbound telemarketing environment if we're about to call somebody who we know travels a lot, we'll deliver that call to a representative who can enroll them into an airlines frequent flier program, and the examples really go on and on and on.
If executed intelligently and responsibly it benefits everyone. In a society and a time where personal or corporate information management is essential for personal and professional effectiveness, product and system, delivery system technology can serve to direct and simplify choice, save time and really enrich our lives.
Regardless of the diversity or technological advancements in telemarketing applications and systems at MCI there are core principles that we have in our company that truly serve as guideposts for the management of these increasingly complex applications, and I'll just touch on them.
They include responsibility, We accept full responsibility for our actions and for the quality of the interactions with the general public.
It includes accountability. We keep a record of everything that we do as I mentioned earlier, a record of everything, and we hold everyone in our organization accountable for their actions.
Quality management. We monitor the operation closely and constantly work to improve it. We frequently for example enlist outside companies to inspect our processes, and we always, always without exception adhere to the highest quality standards in the industry including those associated with third-party verification and including those associated with the maintenance of do not call databases.
And finally customer satisfaction. If customers at MCI aren't satisfied, we as an enterprise would fail. Our business at MCI was built on responsible telemarketing and our future depends on it.
I'll tell you with more than 750 billion in telephone base commerce in America today, America's future depends on it, too.
There is as we speak a phone ringing over in Arlington right now and that new American who doesn't know the first thing about our telephone system is going to find great comfort in their ability to speak with someone in their language who can explain it and who could put them in touch with a loved one overseas.
Thank you very much for your time today. I appreciate it.
COMMISSIONER STEIGER: Wow. Call home though. Unless they've moved the address is 1600 Pennsylvania.
MR. HUYARD: That's true. I know we'll have to correct that.
COMMISSIONER STEIGER: You can't ask for a more instructive example of the application of state of the art technology to consumer marketing than you have given us. We are indebted and most grateful.
And now that we've seen the future, we've seen the application of current state of the art technology, we are going to go to hearing the concerns of consumer protection experts about the world in which we now and -- currently it seems concrete enough but it's going to get bigger and better as we go on.
First James Doyle. Jim is the Attorney General of the best state in the nation, Wisconsin. I don't hear any argument about that.
MS. HARRINGTON: That would be right.
COMMISSIONER STEIGER: He chairs the Consumer Protection Committee of the National Association of Attorneys General. He is a nationally recognized leader and advocate for consumers in the development of telecommunications policy, and I presume to call him friend.
Thank you, Jim.
HONORABLE DOYLE: Thank you, Commissioner Steiger, and it really is a pleasure to be here. And it's always good to come to the FTC and see Wisconsin so well represented.
We have had a look at the future, and I want to address this from a different angle which is how law enforcement, how enforcement officials from the various states try to keep up with the kind of illegal activity that is using the sorts of technology that is in place now and will be using the sorts of technology that we have been hearing about that will be coming in the future.
There are a couple of sort of general observations that I think need to be made, that when I -- among AGs around the country, it is-- it is commonly in our discussions and we commonly discuss the fact that in the last five years, six years or so, what we do in the area of consumer protection has just been revolutionized, that what we are dealing with, the kinds of problems that we are dealing with now are very, very different than what our offices were doing five years ago.
When consumer protection grew up and was found in the AG's offices in the late 60s and early 70s, we dealt with door to door salespeople. We dealt with the going out of business scams. We dealt with automobile sales. We dealt with a whole range of the kind of consumer protection issues which usually involve a face to face communication and involvement between the person who was seeking the fraud, and the consumer.
And now we are dealing with the mass volume type of consumer protection or consumer fraud put out largely over the telephone lines, also mass mail and increasingly the Internet.
We have some very basic differences, very basic differences of approach, and it's interesting for me to listen to the excellent presentations we just heard to see the difference between companies that are looking at how to develop exciting new technology for mass consumption and how we as law enforcement that have to focus on individual cases -- how we try to get that together.
We -- for example, we have to be worried about how we locate the person who is involved in the fraudulent activity, how we prove a case of that, and that is a very individualized kind of business. That is trying to focus on a particular person whose involved in a particular communication and coming up with particular items of proof.
That's very different than the effort that is made quite legitimately by businesses across the country who are dealing in huge numbers and are dealing in mass volume.
So we always are going to have this problem I think about how is law enforcement focusing in on individual kinds of instances of fraud when the technology is reaching such enormous volumes of people.
Well, there are a number of factors I think that we can look at that show us the challenge. First is the private nature of the communication.
In telemarketing this is a call that comes right into somebody's home, somebody sitting at their kitchen table not wanting to buy anything, not in the mood to buy anything, not particularly interested in buying anything. They haven't gone to the mall, they haven't gone to the shop.
They're sitting in their home going about their business and a salesperson is coming right into their home, and not in the old fashion way of coming and ringing the door bell and knocking at the door but rather with the telephone ringing which often is a welcome sound.
It might be a friend. It might be a relative. It might be the child calling from college which if they're like mine would be a rare event, and you go to the phone to pick it up to find somebody on the other line who is about to sell you something.
It is a private communication. It is not something that is happening in a used car lot. It is not something that's happening in a store. It is happening in a completely enclosed environment between the person who is making the call and the person who is receiving the call.
I might just add on this as an aside incidently that for me as I get around the state of Wisconsin and other places of the country talking to people about telemarketing fraud, it is -- I'm always quite surprised to see that the biggest complaint people have has nothing to do with fraud. It's having to take telephone calls at six o'clock at night.
If I'm in a forum of people and we're talking and I'm trying to focus on fraudulent activity, what comes back to me over and over again is this kind of wave of complaints about, My God, I just sat down to dinner and the phone starting ringing and it rang four times in the last hour.
So what I said about that warm feeling about the phone ringing, I think over time that warm feeling is not becoming such a warm feeling, particularly during those hours from about 6 to 7.
If people are like me, when they hear their phone ring at six o'clock they just say, Oh, no, I know that is somebody whose trying to sell me something.
In fact I have turned out to be very rude to a number of very nice people who when I don't recognize their voice on the phone. And they say, Is this James Doyle or Jim whatever their computer screen may say, I say, Are you trying to sell me something. Then they say, Oh, no, this is your cousin so and so calling and I'm off to a bad start. So we have the private nature which makes it very difficult for law enforcement to deal with.
We have the -- just the volume of calls that -- the kinds, the numbers of complaints that our offices are receiving just because the numbers of calls that people can make is so different, and the great advances in technology that we have all benefitted from, obviously the fraud artists have been benefitted from as well.
The chief access of long distance calls, the ability to do the computerized dialing that we just saw and having that information on the consumer when that call is made, there are a lot of dishonest people who also have that kind of information and can make huge numbers of calls.
And it obviously becomes more difficult for an AG's office sitting in Wisconsin or Georgia or Texas or wherever to deal with that kind of volume than with the kinds of individual cases that we have been used to having coming into our offices.
It also has just -- from an enforcement point of view the jurisdictional lines, the standard jurisdictional lines mean absolutely nothing. We are organized in this country by states, in law enforcement as in many things by states and by counties and by cities, and we have nice little law enforcement understandings about who does what in Wisconsin among various counties and we have some less understanding but we've been working at it among the states.
But when somebody calls in to Dane County, Wisconsin, from Las Vegas, we now have a difficult enforcement issue just to be able to track that call and decide which enforcement agency is going to be involved in trying to investigate this.
And the fraud, the telemarketer fraud people of course know this very well. It is very rare that you see them calling into the state that they're located in when operating telemarketing fraud, and the reason is obvious.
If you're in the very state, now you have a single law enforcement agency that can focus on you and do something about you. We've had only one major telemarketer calling out of Wisconsin. Most of these people like to be in warm clients so we tend to be the recipients of these calls for Caribbean vacations rather than the ones making the calls.
But we did have one fairly major travel scam that was run out of Wisconsin in which we had 5,000 complaints of people who had lost money on this telemarketing effort.
Of those 5,000 complaints only three of them were in the state of Wisconsin, and those must have been a mistake, so there was obviously a very calculated effort to make sure that the call was going out of Wisconsin and into another state to confuse the jurisdictional issues.
We are dealing unlike the old aluminum siding salesman that we -- the sort of classic salesman, who would go from house to house, maybe picking out the houses that didn't have aluminum siding -- we are now we are dealing with people who have very sophisticated lists of people that they are targeting.
They have the computerized dialing and they have the sucker's lists and they know exactly who they are going to, so that anybody who has ever bitten on one of these things is now on that list.
And we have people -- often elderly people, we have people who find themselves on those sucker's lists that receive as many as 10 to 20 telephone calls a day soliciting them to buy things, to go on cruises, telling them they've won prizes and so on.
One of the other very major challenges for us in law enforcement is the method of payment. The door to door salesman -- let me say the method of payment is very important from law enforcement because in fact of all the legal principles I've ever learned the one that's truest is possession is 99 percent of the law. It's a lot easier to keep someone from paying the money than it is to get the money back after they have paid.
And in the old consumer protection model, the door to door salesman, we usually had checks and the check system had various protections built into it, stop payment and so on that would assist us in trying to make sure that the possession didn't transfer over to the person who was trying to defraud the customer.
Now we see -- and all of these are very legitimate technologies by the way. All of these are very important for American commerce. But obviously the credit cards, bank authorizations and so on and increasingly as we heard about earlier cyber cash and the kinds of things that we are going to see where value is transferred on the little cards, make it much more difficult for us to -- for the consumer and for the enforcer to, one, try to stop the actual exchange of value from taking place so that the person is not hurt by this and, second, if it does take place to trace where the money went.
Now, we have had -- and let me make one final point on this. In the area of telecommunications fraud, one of the biggest problems has been the method by which the payment is put on the local telephone bill and the use of the 900 number fraud, it is the greatest -- if you want to get into the fraud system, the old 900 number -- I think we've done a lot to clear it up but the old 900 number had the great advantage that unlike most fraud artists that have to go try and collect their own money, they actually had the legitimate local telephone company collecting the money for them. It was really -- so that has been a significant problem.
Now, we have made some advances, and I know we'll hear from MasterCard, but I think that the credit card industry in recent years has made major steps towards tightening the system up and putting checks in place.
The limit, the $50 loss limit, the rules against factory credit cards and those kinds of things have had an enormous influence and positive effect on cutting down on the immediate transfer of money by credit card which was what we were seeing usually in the telecommunications world get the credit card number, then you had the value exchanged and then you were on your way.
In fact it was when the credit card industry really went to work on this that we saw other kinds of devices growing up which -- including sending couriers out to the doors of the people who have recently -- who have just paid.
Because they couldn't effect that kind of transfer of value through the credit card system, once the fraud was completed on the phone they would have a courier out there within an our or two hours at the customer's door to pick up the checks.
Another factor that makes it difficult for the consumers and for law enforcement in this area is that -- is not the -- is not the technology itself but the increased ability, the techniques that are used by the telemarketers, the much more sophisticated way that they are able to engage people in conversation and to make the deal.
I know you will hear about this when you hear the survey that was done by AARP but one of the most remarkable findings of that, of all in this business, was that pretty much our standard view of who was getting ripped off was not true, that in fact who is getting -- people that are getting ripped off tend to be quite well educated, quite well connected with the rest of the world, not necessarily the isolated person that we always think of, and most remarkable, people who consider themselves to be very skeptical of telemarketers.
Now, it takes a pretty sophisticated telemarketing fraud artist to make the deal with people who are skeptical of the telemarketer who is calling in the first place.
So clearly the kind of techniques that have grown up to do that have advanced and present a great challenge for law enforcement.
There are a couple of other areas that I think that we in general as a -- in our states and as a country have made consumers more vulnerable. These aren't -- these aren't technical kinds of issues but I think they're ones that we have to address.
The biggest type of fraud that we are now seeing in our states and certainly the fastest growing is the phoney prize and the phoney contest offers that are there. This is what people are biting on. This is obviously the fraud artists are going to -- what people are interested in.
Now, why are people so interested in winning prizes? Why do people actually believe when people call them up on the phone and say that they've won a trip to the Caribbean or they won a new Cadillac, why do they believe that?
And they do. Time after time after time they believe that. They believe somebody is actually calling them up out of the blue and telling them that out of all the hundreds of millions of Americans they miraculously have been picked to win a trip to the Caribbean, and they believe it. Thousands and thousands and thousands of people a day are believing that they've won things.
Well, why do they do it? Frankly we better look at ourselves. They do it because we've built a culture in the last ten years that has enforced the idea that you could get rich quick without any work.
In Wisconsin like in most states we have a state lottery that actually advertises to people on television over and over and over again about how you can win a prize, and this is the state of Wisconsin telling people this.
In fact, we had an ad recently that -- it was a radio ad that had the old song of Ernie Ford singing 15 tons, do you remember, it was a great old song and the ad actually mocked the guy whose loading 15 tons, telling him he was much better off going and buying a lottery ticket.
This is what we as a state -- and Wisconsin is not alone. This is what we are doing all over the United States is selling this idea that somehow there's going to be a way to get rich quick, and it shouldn't surprise us now that people who get called and told, Guess what, you're the one person out of 200 million that we've picked to go to the Caribbean for just $60, just send us the $60 and you'll have your ticket in the mail, people believe it and we have really created that kind of atmosphere.
I think that we have also -- in law enforcement we have been slow to recognize that what we are talking about here is criminal and not the old fashion kind of consumer protection behavior that when somebody calls up and says, We've won a trip to the Bahamas or you've won a new Cadillac, all you have to do is send us $200 and of course there's no trip and there's no Cadillac and you send the 200 and you lose the 200, we have had a mind set in law enforcement of regarding that as a consumer protection problem, and our consumer protection people do our consumer protection kind of process with that and we try to get the person their $200 back.
Is that any different than somebody walking in and stealing $200 worth of goods from your home? It is a crime and we have worked very hard. The FTC has really helped us a great deal. The FBI has been involved in this but there -- we have to move away from seeing this in a strictly consumer protection kind of model and understanding that this is criminal behavior.
The other problems -- let me just rapidly say that obviously one of the problems we confront is that we don't have MCI's rooms with all of those people sitting there like that, and we have usually pretty understaffed -- you know when they were talking about the cardboard -- the card table operations, that isn't the telemarketer scam artist anymore. They tend to be in nice big area rooms with computer screens at their tables. I'll tell you whose at the card table. It's the law enforcement.
And they are able to move that -- as the technology moves, as we catch up with one they're able to move to another. The 900 number is a good example. When we got on the 900 number, then the move was to 800 numbers that transferred to 900 numbers.
Then when we got on that, then the move was to go out of country, to have a foreign number that you call that we can't get to, so there's always -- we're always playing catch up on this, and it's obvious that the technology is changing so rapidly and that's what you're talking about here over these days.
But we recognize that the telephone as we know it and the telephone marketing fraud as we have seen it in the last five years is really a very transitional era in this -- in telemarketing, and I'm sure it's a transitional era in fraudulent activity in telemarketing, that we will see -- the biggest issue that I see is as these merge as we've been hearing about that it's no longer going to be just the telephone voice over the phone, that this private communication between the person sitting in the home and the person whose coming into the home is going to be both visual and audio, and we are going to have the enormous selling power of television coupled with the individualized salesperson on the phone as the image -- as those powerful visual images that get people to buy things are there, you're also going to have the all new personalized audio attention by a marketer whose going to be able to really make the pitch at the same time the visual activity is going on.
And so it is clear we are moving in to a -- we are moving along this continuum and that five years from now we're going to be seeing things that we have not even dreamed of.
The Internet that I know will be talked about is -- will make telemarketing -- as I see it you won't need to make the 10,000 calls a night. You can put a single message out on the Internet and reach millions of people, and the ability to track and to detect and to find people in the Internet is even more difficult and it is much more than telephones.
Just in Wisconsin the last several weeks we've had a terrible kidnapping case and the message came over the Internet purportedly from the kidnapper saying, Don't worry, she's fine, quit looking for her.
And law enforcement has been unable to in any way find out where that message originated from so that is the kind of challenge we're going to see as well.
Let me conclude by saying that we do have some models I think for dealing with this, and they are models that it's important we follow.
One of them is the recent telemarketing rules that the FTC has adopted in connection with the telemarketing Congressional Act that was passed a year or so ago.
One of the things that it does perhaps most remarkably is give state attorneys general the ability to go into federal court to get federal injunctions against those involved in telemarketing fraud.
In the past, if somebody was -- somebody was calling from Nevada, defrauding people in Wisconsin, I could get an injunction that would stop them from dealing in Wisconsin which was fine. That protected the consumers of Wisconsin.
But I'm not kidding myself. All we did is just move those calls on to the next state until they got an injunction and the next state until they go an injunction.
The new ability for state Attorneys General to get nationwide injunctions in telemarketing I think will prove to be very innovative and very useful.
We have also stepped up the use of criminal prosecutions. In our office we have brought our consumer protection efforts much more closely aligned with our criminal prosecution unit and that's been generally true.
There's been incredibly good cooperation between the federal government and the states in recent years I think brought on by two factors. One of them is then Chairman Steiger that really moved us in the direction of cooperation among the state AGs and the FTC, and from the old timers who have been around for many years they say the relationship has never been better.
It certainly has been good from my perspective and I think one of the reasons is not only we all think we should do it but just the practical needs of, How do you enforce -- how do you get after these people has required us to cooperate in a way that we never have before.
Finally, let me say that what is really essential is that there be good cooperation between the legitimate telemarketing and the long distance and other telephone industries and law enforcement in this area.
Again, the model has been with 900 numbers. When I first became Attorney General in 1991, in 1991, the biggest number of complaints that we had in Wisconsin were 900 number fraud. It was just pervasive. It was all over the state.
And we did a number of different things. We passed a state law that required the preamble. The Congressional Act was passed. Administrative rules were adopted but I think most importantly all of the states worked out an agreement with the three major long distance carriers by which we now have a protocol by which if there is a fraudulent use of the long distance lines in the 900 number area we can simply contact them and they will pull it off the -- they will no longer permit the service, and they will escrow the money that they have collected pending any kind of court action to return the money to the people who have been defrauded.
Those steps have reduced our 900 number complaints by about 90 percent of what we were receiving in 1991 and I think it's a case where -- and I assume this is true from the long distance point of view, I don't want to speak to them, but -- for them, but I think the fact is 900 numbers were being viewed as fraud lines and sex lines.
And just the simple good, positive, business value of 900 number, there is good reason for 900 numbers, was being lost in the public mind.
If you mention 900 numbers to people out on the street they think of a sex line. They don't think of a business service of some kind. They think of a sex line, and in order for the 900 number industry to really develop as the legitimate industry it can be and is, the long distance carriers had to work with us to rid it of the people who were using it for fraudulent purposes.
So we found a common ground, and I think as we move into all of -- further along this line, we are desperately going to need the assistance of private industry and we need to really work together to see that as this technology develops it in fact develops as a good, honest business that is vital to the American economy.
So thank you very much for letting me share some of those thoughts.
COMMISSIONER STEIGER: There you have it, from the front lines in telemarketing fraud and what it means to consumer experts and to law enforcement agencies. We're indebted to you, Jim. Thank you.
We are going to take a ten-minute break now, not a minute longer, to allow our reporter some time to change the paper and we're going to make a small change in our order of appearances.
We're going to move Bill Burrington and Scott Cooper for a case study in fraud. Then, we'll resume and pick up Katie and Jim Steel with their permission, so ten minutes.
(Break in the proceedings.)
COMMISSIONER STEIGER: Let's resume our morning session.
Scott Cooper is going to lead us. He is manager for telecommunications of Intel. Prior to joining Intel he played a key role in drafting both the Telemarketing Fraud and Pay-Per-Call statutes. He did this in his capacity as legislative director for the Transportation Subcommittee of the House Commerce Committee which of course is the FTC's house oversight body.
And we regard him as a friend and colleague and a co-worker in the field of consumer protection and, Scott, thank you so much for being with us.
MR. COOPER: Thank you very much. Is this on? Can you hear me? My apologies for having to break ranks and go first. Also my apologies for sitting down. I'm an ex staffer and I'm used to shuffling papers and handing them to somebody who is actually at the podium.
And I have all the papers to shuffle but I have to actually do the presentation so it's a little easier sitting down. I also need to give a disclaimer that I'm not speaking for Intel.
This is really a discussion of what I believe the legislative intent was on the 900 number legislation from two Congresses ago and my recollection of that and sort of the genesis of how we got the legislative intent that I think is very clear in this, that there is a dispute resolution in the 900 legislation that we think is going to be or can be made applicable to electronic transactions and cyberspace.
This therefore will focus on Title III of the legislation on dispute resolutions, Title I on FCC authority which is dealing with preambles and non disconnect prohibitions. In Title II on FTC advertising authority will not be covered.
Titles I and II really were regulatory remedies for existing, some said endemic problem of fraud and deception in the 900 industry. Title III was more ambitious -- it was an attempt to bring a system of claims and defenses that are used in the Fair Credit Billing Act which is used for consumer redress for credit cards to the electronic market place.
So Title III was just not for 900 numbers but what is called in the act as Pay-Per-Call technology, a much more generic application, and in Title III the term telephone billed purchase is defined as any purchase that is completed solely as a consequence of the completion of the call.
This is meant very consciously to be generic.
The legislative intent was to create a flexible regulatory structure for the FTC so that the rules promulgated would be valid and effective if there were an evolution from just 900 number calls to other areas of electronic commerce where consumers and vendors consummated transactions through the telephone call itself.
To step back very briefly the chronology of this legislation which very ponderously is called the Telephone Disclosure or Dispute Resolution Act really began in 1980 when AT&T developed 900 number Pay-Per-Call technology.
The key regulatory point was in 1984 with the divestiture of AT&T where the quid pro quo was that the long distance lines would be able to use the billing and collection procedures of the local exchange carriers so that you would have less billing and collection process between long distance and the local telephone companies.
By 1991 there were very clear problems with scams in the 900 industry, and it's characterized by the Attorneys General in a March '91 report as being endemic.
Also in 1991, the FCC issued a notice of proposed rule making discussing among other things the need to make it illegal for local exchange carriers to disconnect telephone service for nonpayment of 900 number charges, mandatory and free preambles requiring disclosure of rates charged, identification of 900 number vendors by long distance companies if requested by consumers, and the blocking of 900 calls if requested by the consumer.
All these provisions are included in Title I of the act.
Both the AG's report and comments by the FTC staff to the FCC and PRM pointed out the obvious discrepancy between resolution or lack thereof of consumer complaints with 900 number calls and resolution of credit card complaints under the FCBA.
The AGs said, and I'll quote, that 900 calls are basically credit transactions where local and long distance companies play much the same role as a credit card company. As such, some of the same protections available to consumer credit transactions should be applicable or applied to 900 transactions.
And further long distance and local exchange companies should establish procedures for 900 number calling disputes similar to the rules mandated for credit sales under the fair credit, ill billing act.
The FTC staff of the Bureau of Economics and Consumer Protection also commented on this saying that the payment and billing procedures in the credit card markets bear a close resemblance to the payment and billing procedures of the 900 number market.
The absence of dispute resolution protections and the collection of 900 number charges stands in stark contrast to the self help remedies available for credit card transactions.
What was it that made the 900 number technology both so popular and also so vulnerable to scams? First it was a very efficient marketing tool. Through automatic number identification, ANI, the consumer and the vendor were automatically connected to each other with the vendor having access to the consumer's name and address and phone number.
Computerized programs for billing procedures were available to the vendors, and the existence of service bureaus who would, in a sense, act as a factor for the vendors, created low barriers of entry for anybody trying to get into the 900 number industry.
Of course, this was both good and bad news for those consumers who use 900 numbers. The piggybacking of the industry on the existing telephone billing and collection infrastructure facilitated the existence of this marketplace in the 1984 divestiture which allowed the long distance companies to, in a sense, create a seamless transaction screen using the local exchange consumer billing procedures and the creation de novo of a credit disbursal mechanism through these telephone common carriers through the 900 number technology.
Just as banks serve as credit disbursers for credit cards, common carriers in a sense perform the same role in Pay-Per-Call technology so we have a very efficient technology but one with low barriers of entry and the ability of 900 providers to hide from irate consumers behind the veil of the telephone billing system. This made the 900 number industry a classic opportunity for fraud and deception.
Briefly, the mechanics for entailing a contractual obligation through 900 numbers are, first, the placing of the call, which automatically entails the obligation. It is only then that the vendor will offer information services or a promise to deliver goods or services. So in all cases, the consumer has no opportunity to examine the good or service prior to the obligation.
This is not the first time that this sort of problem has arisen in credit extension mechanisms. A similar problem existed with the credit card industry before the passage of the Fair Credit Billing Act in 1974. The Federal Reserve Consumer Credit Committee addressed this problem. The legislative history of the FCBA indicates that the billing error provision was a response to consumer complaints typically illustrated in Congressional testimony by a card issuer's failure to resolve or acknowledge a buyer's repeated inquiries about a transaction listed in the billing statement.
That sounds very similar to 900 numbers problems. Again quoting: The legislative history of the claims and defenses provision reflects a desire to encourage line underscoring, encourage the development of a new payment system for the use of credit cards, and a recognition that a credit card is used as a substitute for cash as well as a substitute for retail installment contracts.
I think the intent of the Title III of the 900 number legislation was almost exactly the same, first to develop a dispute resolution mechanism for consumer complaints and secondly to encourage the growth of the electronic marketplace by developing a payment system that recognized the balance between rights and obligations of both consumers and vendors.
The legislation, public law 102-556, therefore states in its findings -- this is where I shuffle my pa -- that first the continued growth of the legitimate Pay-Per-Call industry is dependent on consumer confidence that unfair and deceptive behavior will be effectively curtailed and the consumers have will adequate rights of redress.
But second that vendors of telephone bill goods and services must also feel confident of their rights and obligations for resolving billing disputes if they are to use this new marketplace for the sale of products of more than a nominal value.
So this was the attempt by Congress to be somewhat prospective here. They were looking at more than taking care of existing 900 number problems, which is really the purpose of Titles 1 and 102, but to look beyond that, to look at where the evolution of Pay-Per-Call technology might go.
In brief under Title III, common carriers perform the role of member banks in credit card transactions of: One, receiving written consumer complaints and facilitating responses from vendors. Common carrier responsibilities are limited to this facilitation role. At the request of the carriers, language was added to the bill which allows them to adjust consumer bills, as long as consumers are notified that telephone company forgiveness of the telephone company bill does not eliminate vendor right of legal remedies for payment.
Title III is certainly a grand edifice for the resolution of complaints about 599 sports lines and 995 psychic consultations, and parenthetically that's why the bill offers telephone adjudications because we think in those cases that's obviously the most efficient way to go.
But Pay-Per-Call technology does take advantage of a very ubiquitous and accurate billing and collection system of the public switch telephone network. There have been other attempts to bring electronic commerce on line but at least to date fail save and foolproof software has not been designed that give consumers or vendors the requisite confidence to venture into this electronic marketplace.
And many if not most software solutions still depend upon credit card transactions. We come go full circle back to the FCBA for consumer rights and obligations.
It may be that this edifice that has been created through Title III will be sort of a broke edifice, sort of on the side of the information highway that commerce will pass by and look at it and say, Well, that's a very munificent structure but it doesn't serve our needs.
But it may be as with the 19th century communities in the midwest that the railroads come to some towns and not to others, and those towns that it comes to prosper.
We now have this edifice of Title III out there. It may be that electronic commerce will gravitate to it. It may be that it won't. Nobody knows.
To predict where the market is going to go on this convergence of computers and telephones and other communications media is certainly a guessing game, but certainly the feeling was and the intent within Congress creating Title III dispute resolution was that if there is a place for Pay-Per-Call technology, building it off a very efficient, preexisting billing and payment structure through the telephone system, the public switch telephone network, that there had to be something comparable to the credit card dispute resolution built into the FCBA.
That's what we created. Three years later we're still waiting. The edifices are there. We see the highways, but I don't see them off in other directions either, so again, this structure is out there. We'll see what happens next.
Thank you.
COMMISSIONER STEIGER: Well, from one who watched it being born and coming finally into fruition, that's a very useful look at the possible applicability of current statutes to the areas of consumer protection concern that we have heard about this morning.
Thank you, Scott, and thanks very much for being here.
We will move now to Bill Burrington, assistant general counsel and director of public policy for America Online. He also chairs the Online Policy Committee of the Interactive Services Association which represents the legal and public policy interests of the major online companies, and he previously represented the Interactive Services Industry in regulatory proceedings involving the Pay-Per-Call industry, and a warm welcome to you and our thanks, Bill.
MR. BURRINGTON: Thank you, Ms. Steiger. I'm also a fellow Wisconsinite just for the record having gone to Lawrence University and Marquette, so I think, Eileen, you're from Wisconsin, too, so we have the Wisconsin contingent as always at the Federal Trade Commission.
Chairman Pitofsky, Commissioner Steiger and the FTC staff, I want to thank you for giving me the opportunity to be here. This morning I'm sort of wearing two hats. One hat is my former Pay-Per-Call 900 hat and the other hat is the cyberspace hat, hopefully not too spacy but the cyberspace hat at America Online.
By way of background I used to be executive director and general counsel to a group called the NAIS, which was the National Association for Information Services which later became the National Association for Interactive Services and we represented the Pay-Per-Call industry, the 900, 800 industry.
Our hundred or so members, and this group was started in 1991, consisted of information providers that did the actual 900 programs, all of the regional Bell companies, the three major long distance carriers, and all of the service bureaus that actually help make Pay-Per-Call programs work.
I want to talk briefly today about -- sort of put in context how the Pay-Per-Call industry evolved from a consumer protection standpoint and then draw from that briefly some lessons learned, and I will go into those lessons I think in more detail actually on Monday when we talk about cyberspace issues.
So I'm going to wear my 900 hat and just for the record I've only called one 900 hundred number in my life which was one 900 weather and that was it.
But I think that Scott does a great job, and we've worked together on these issues for awhile, a great job in sort of putting the industry in perspective but I scratch my head to see an industry that grew to a billion dollars in revenue practically overnight, and then literally overnight lost 400 million dollars in one year, and that tells me that there's something going on that's wrong, and that's sort of what I'm going to focus on today.
And I also for the record will submit an article that I had published in the Seaton Hall Journal of Legislation which is called, "Hung up on the Pay-Per-Call Industry?: Current Federal Legislative and Regulatory Developments." Although that was published in 1992 it does a good job of discussing some of the lessons learned that I'm going to talk about so I'll submit that for the record after this.
I would like to walk through what I consider to be eight phases of the development of the Pay-Per-Call industry.
And before I do that I think it's been eluded to earlier by General Doyle and by Scott, why did the 900 industry grow so fast? Why was it so attractive? Well, it was no more really than a simple billing mechanism. It is was a method for payment for services and for information Just like you pay with a credit card at a restaurant.
The beauty of it as General Doyle articulated very well is that the payment for the services would be -- the bill would occur on your telephone bill, and we all knew that consumers -- if there's one bill that they pay religiously it's their telephone bill, and it added a tremendous amount of credibility and it was an easy method of payment.
So all it was was a simple billing mechanism. The other thing to know is that it was the first consumer interactive service. It really was the first one out there that made money in any significant way and we certainly have now moved on to other types of consumer services.
And finally I think the important thing to understand, and I will bring this back at the very end, is the ease of entry into this business. It was a very inexpensive business to get into.
Literally entrepreneurs out there with very little money, less than a couple thousand dollars, could enter the business, and that was very significant.
The first phase of the development in this industry was what I call the bandwagon phase which is that it just took off. People jumped on the bandwagon from major companies like USAToday or Dow Jones or the Weather Channel to a host of other entrepreneurs and others that had ideas for conveying information or entertainment using the 900 number billing mechanism.
And without a doubt the vast majority of those providers certainly were members of the NAIS, were companies that were providing value added services. They were the good actors. But as with any industry there were some bad actors as well.
That moves us into the second phase after the sort of dramatic growth, and that was what I call the bad actor emergence phase, because that was a period of time when so many people were jumping on the bandwagon, which really helped drive this industry into a billion dollar industry overnight. Again they were driven into that industry because of the very low cost of entry, very lost cost entry barriers.
And a lot of the folks that I'm sure the Federal Trade Commission and I know, that the attorneys general have dealt with in the past, gravitated to this medium because it was very simple, and again the low cost of entry allowed for that.
So a lot of the same scam artists and fraud artists that I'm sure you all have dealt with in other contexts started to gravitate.
The third phase was what I call the, "take notice phase," which is that the National Association for Attorneys General started their working group that Scott mentioned, the Federal Communications Commission started to take notice, and most importantly there were articles that appeared in the major newspapers around the country starting to draw attention to some of the scams that were occurring via Pay-Per-Call services.
This was a critical, critical stage I think in the growth of the industry, when the media started to take notice of some of the potential scam artists.
Then we went into the fourth phase which was what I call the "industry wake up phase." But if you were like me this morning, it was a very slow wake up, and during that period we saw the formation of the National Association for Information Services.
The industry started to see itself as an industry, realized it needed to organize because I think the industry was starting to realize that, while everybody was making a lot of money, there were some problems on the horizon. Really, it was the media articles that drove the formation of the NAIS.
And at that same time you saw the NAIS adopt information provider guidelines, our members would have to comply with certain guidelines, and if you look back at those guidelines a lot of the elements of those guidelines ultimately became part of the Telephone Disclosure and Dispute Resolution Act as well as the FCC and FTC regulations.
But it was still too early I think. I think we were going after -- we were providing guidelines for all the good actors but we weren't setting up essentially a process to go after the bad actors.
As this industry wake up phase moved forward, the long distance carriers, particularly MCI and AT&T and Sprint started to impose their own guidelines and set up their own structures because I think they started to realize that they had a responsibility to try to weed out potential bad actors. Then that moved us into the fifth phase which I call the you-better-get-it-phase which was essentially government and the media and a series of forces were coming together to let the industry know that either they needed to regulate themselves or government would do it for them.
And I have to say that I don't think that the industry got that message. At least they didn't get it soon enough.
And that's when we moved into the next phase which was the "policy maker fully awake" phase, which was when we saw Congress introduce the Telephone Disclosure and Dispute Resolution Act. We saw increasing involvement on the part of Attorneys General and certainly the Federal Trade Commission which ultimately did give rise to the passage of the act and went to the comprehensive FCC/Federal Trade Commission rule making.
And then the last two phases I think we led to were the "we-told-you-so" phase which was when the industry did a little soul searching and said, Hey, maybe had we gotten this message a little bit earlier and been a little more aggressive and a little more proactive we could have perhaps prevented the kind of sweeping regulation that did occur with the 900 industry.
And now I have to say that the industry is in the "fully awake" phase which I think that they have worked with government and we've really weeded out a lot of the bad actors in the 900 industry, but there's some lessons to draw from all this.
One is I think is the key for the regulatory community to understand the technology, and I think quite frankly early on in the age of the 900 industry I think it's accurate to say that the Attorney Generals and the Federal Trade Commission they didn't understand the technology and I think we as an industry had a responsibility to help educate them about the technology.
Ultimately they did learn about the technology. Likewise I think there was a role for the industry to play in learning about some of the actual or potential consumer protection problems that were out there.
I think we were aware that there were some scams going on. We were aware of some of the problems but we needed some education from the government about those problems so we could probably better anticipate them and try to rid those people or those bad actors from the 900 industry.
So I look back and say, What if industry, what if the Pay-Per-Call industry and the various government regulators had sat down earlier in the game and done that kind of joint education with each other, what might have happened, and I think the outcome could have been slightly different.
Let me add to that a couple of other lessons learned I think which again I will get into somewhat in more detail on Monday.
How was all this going to translate as we move into some new media, particularly the world of cyberspace, and I'm going to put back on my American Online hat, the world of cyberspace and cyber Congress.
Well, the entry barrier issue is there again. I think the biggest cost for the information provider in the Pay-Per-Call 900 arena was advertising in the market.
It's very easy to get the technology. You can go to a service bureau and for a couple thousand bucks you could have your 900 line and be up and running. The key was to advertise in a market that serviced the people and that was fairly expensive.
However, when you move into cyberspace the technology once again is cheaper and getting cheaper by the day and the marketing advertising costs are going to be dramatically lower if not virtually free.
You can reach an incredibly large audience for virtually no money so what that tells me is you have to be aware of the fact that there's going to be even more people, potentially some of them scam artists, who are going to -- because of the low cost of entry -- are going to be jumping on the cyberspace bandwagon. So we now know what I think up front.
I think some key issues here that emerged out of the Pay-Per-Call arena and they're so -- it's common sense but it's amazing how a lot of people didn't get it until it was too late and that is that I think consumers in the new media area and as we move into broader consumer interactive services simply need to know a couple things.
What is it that they're getting for their money? What exactly is the product or service they're going to buy through online and through other forms of interactive services? What is it that they're getting? What is it going to really cost and who do they need to contact if they have a problem or if they're not happy, if they have further questions?
Frankly if you look back in the early days of the 900 industry our NAIS guidelines for our members had those exact same components and that's ultimately what became part of the law.
Common sense, I think we need to find a way to make sure that that happens now short of government regulation.
Finally it's been alluded to also that in the world of cyberspace we're going to be able to positively identify the vendor. The buck has to stop somewhere, and clearly as General Doyle points out with the situation in Wisconsin right now, we're going to need to -- I think as an industry and with government make sure we find a way to ensure people's privacy, but also ultimately allow law enforcement to be able to identify and to contact a potential scam artist or fraud artist.
Finally, I also think that the ultimate lesson here, and it's my own personal sort of passion these days is based on what I went through with the 900 industry trying to kind of come in as their clean up person after the fact, is there is an absolute role here I think for government and the industry, the online Internet industry to work together in a partnership capacity to educate each other about the technology and to anticipate now some of the very same scam type things and fraud things that we saw with 900 I know we're going to see and we already are seeing in the online medium.
So I want to congratulate the Federal Trade Commission and working closely with NAIS as well for really trying to understand this stuff ahead of the curve and I pledge that we're going to work closely with you to continue that process.
Thank you.
COMMISSIONER STEIGER: Thank you. I hope American Online is patient about pro bono services because I can see you in great demand as we try to avoid repeating history. Thank you very much for that very current picture.
We're going to move now to Jim Steel with another perspective. He is the regional vice president for MasterCard International Security. He's the leader in the bank card industry's efforts to prevent the use of credit card payment systems by scam artists, and he brings to his current position 20 years of valuable experience as a special agent of the United States Secret Service where he specialized in fighting consumer and financial fraud, and we are indeed fortunate to have you with us this morning, Jim. Thank you.
MR. STEEL: Thank you very much. I have to stand somewhere in order to operate this machine so for anybody that I'm blocking I apologize ahead of time.
What I'm going to be talking about this morning is the bank card as a payment system. MasterCard and VISA are bank cards. We are not for profit associations of about 22,000 member banks worldwide, and about 5,000 of those are here in the United States.
Our operating expenses are paid by dues or funding from the members, and this is done on a formula depending on their size and the number of cards they have in operation and whatnot.
I want to make sure that all of you understand how this system works quickly as we move forward. I have a fairly easy job this morning after following some of the other speakers, particularly General Doyle and the individuals talking about the 900 service, because they've pointed out that these are payment systems that the fraudulent, deceptive telemarketers are going after in order to obtain their money and they go for the -- they go for the throat in many ways.
They proceed with the system they feel to be the easiest maybe or the system that affords them the most opportunity to perpetuate some of the scams that they're doing over the telephone.
The first thing I would like to show, this is sort of a busy slide but it's kind of important because I use this when I testify in federal court as a witness, and that is just simply to point out that there's two sides of the equation.
In the bank card rule we have an issuing bank which draws its relationship directly with the cardholder and we have a merchant bank or acquiring bank which actually goes out and services the merchant and signs the merchant to a contract to accept bank cards, in the middle sit MasterCard and VISA.
We are a worldwide payment systems franchise so what happens when a cardholder in a face to face transaction takes their card that's issued by the issuing bank in Wisconsin to a merchant here in Washington, D.C. who is signed by a merchant bank, let's say in Maryland, that card is swiped at the point of sale and the information from the magnetic stripe goes to the acquiring or merchant bank's computer. That decides whether it's a VISA or MasterCard. If it's a MasterCard it sends it to the MasterCard computer center in St. Louis, or if it's a VISA, to McLean, Virginia.
We, the association, determine which one of those 22,000 member banks in the world issued that card and forward the message on to them. The issuing bank then in Wisconsin gets a message saying someone in Washington, D.C., a cardholder, is trying to purchase something worth 400, let's say, and can we authorize.
Their computer checks to make sure that card hasn't been posted for being lost, stolen, never received, fraud, counterfeit or anything else, and that there's enough open to buy on the system to accept that $400 sale, and if everything is okay they'll send an authorization message back through the system, back through MasterCard or VISA, back to the acquiring bank and back to the merchant point of sale terminal, all in eight to ten seconds.
That is what MasterCard and VISA are all about. We maintain this interchange, this system.
Now, let's talk for a second about what the merchant's required to do in a face to face transaction. That merchant must prove the card was physically presented by the stripe or by an imprint. They must get the authorization from the issuer through the system and they must get a signature to prove that there was somebody physically there buying or purchasing something.
If they do all three of those things, the merchant does those three things and it later turns out to be a fraud of some sort, the loser becomes the issuing bank, and in about 90 percent of the fraud situations in the bank card world, the issuer is the loser.
Now let's talk about telemarketing and fraudulent deceptive telemarketing. If the cardholder does not go forward with a face to face transaction meaning they call on the telephone or they are called on the telephone by the merchant or they respond to a catalog or other type of advertisement and purchase something through the mail, that is called a non face to face transaction.
The merchant can get an authorization but they can't prove that the individual that they're talking to on the telephone is really the cardholder or really has the card in front of them.
So what happens is the cardholder is protected in many ways if they follow -- if they follow some certain steps because when the issuing bank presents the cardholder with their bill at the end of the billing cycle and the cardholder looks at that bill and says, "What's this 388.95 for some company I've never heard of?" They can go back to their issuer and they can say, "There's a mistake, I didn't make this charge, I've never heard of this company. I didn't authorize or maybe I was called by somebody over the phone and they told me they needed my credit card number in order to qualify me for some kind of a prize but I specifically did not buy anything over the telephone and therefore I'm not going to pay this $388."
The issuing bank then gets a statement from the cardholder or obtains a verbal statement from the cardholder and passes back what's called a retrieval request back through the system. It's a demand for the acquiring bank to get ahold of their merchant and have that merchant prove the sale, the merchant approving the sale.
First of all it is determined that it is not a face to face transaction. A card wasn't present and therefore there may be an automatic charge back right. The cardholder really has two ways to diffuse a potential fraud situation, one, if the charge was not authorized by the cardholder, and, second, if they did go forward with some kind of description of goods or merchandise over the phone and then when the goods or merchandise or services arrive they were not as described.
We all hear the horror stories. I'm sure General Doyle could tell us horror stories all afternoon, but somebody has bought what they thought was a solar clothes dryer. It was described to them over the phone as being a machine that can do certain things. And then, what you see in the mail for 388 is a piece of clothesline and 20 clothespins. You might be able to argue that that's a solar clothes dryer, but that was not really what was described by the pitch person.
So what I'm trying to -- the point I'm going to try to make here is, who is the victim sometimes? Katie will be talking about the elderly as victims but oftentimes we ought to think of them as targets because if they don't lose money. They may be disadvantaged. They may be aggravated by having to go through certain steps in contacting their bank. They may be strung along by fraudulent telemarketers, but if they respond back to their issuer within a reasonable time period -- the law says 60 days; we give them 120 -- in most of the charge back services we can reverse those charges and bring it back to the merchant.
Let me make one other point. Our banks lose money. We are the victims sometimes because these merchants, these deceptive fraudulent telemarketers blow out of town in an instant, and if a member bank has been unfortunate enough to have signed one of these people as a merchant, they're no longer there to pay back the money and the money comes out of the merchant bank's or the acquiring bank's pocket.
Now, that leads us to something I really want to talk about and this is this laundering problem that General Doyle alluded to a few minutes ago.
Let me just talk real quickly about the fraud scheme. I'm not going to start talking about telemarketing here in terms of telemarketing fraud because we all know what it is but someone General Doyle mentioned or the individual from MCI, talked about how clever some of the telemarketers are because they're sometimes working from cardboard boxes and whatnot.
That's not the case these days. This is a telemarketing boiler room which is very similar to what we're seeing in other parts of the country. It has over the head telephone lines but it has a computer terminal on the desk so the solicitor or the hitter as they're called in the industry can simply ask the person, "The postcard that you were mailed, the one in four postcard saying you've won a prize, what's the number in the upper left-hand?"
They tap it in their computer and up on the screen comes their hit or their pitch, and in fact that computer gives them all kinds of other things. They have ways to overcome objections with that computer.
If the person says, Gee, I don't like to give my credit card number over the phone, they can hit the back slash one button and up comes a whole little nice little pitch about how to overcome the objection of giving the credit card number over the phone.
And many of these telemarketing rooms record, with a recording shown here, part of the sales pitch because oftentimes a fraudulent, deceptive telemarketer may be willing to pay a fine to a regulatory agency as a cost of doing business. They don't want to go to jail for a criminal violation, and by proving that the cardholder, as befuddled as they were, went ahead and made a response to the question, "And we are going to charge your MasterCard 388.95 today for this thing but if you're not fully satisfied you can send the goods and services back and we'll refund your money" kind of a thing, they have gotten away from the possible potential of law enforcement knocking on their door and saying, "What you did was unauthorized." They've got the tape. They've got it on record, and they pull it off the shelf, and they say, No, not so fast, here's Mrs. Kettle saying, Yes, yes, yes, yes, yes, to all the questions we ask including can we bill your card.
Okay. This was covered very well. The payment systems available to telemarketers and why they do or don't work, checks and money orders just don't work for them in many cases. Debiting through the ACH and direct debit, we went through a period of time in 1992 where the telemarketer stopped using credit card and they all went to this particular method of payment because it was simple.
They simply asked the victim or the target, "Can we bill you through normal banking practice?" and the victim said, "Oh, well, sure." Then, okay, give me the numbers at the bottom of your personal check." Well, there's the routing code and the number and then they would send in a direct debit or a debit through the ACH order.
Treasury and the Federal Reserve and other and the states did a lot back a couple years ago to tighten up that system now so we're not seeing that quite as much anymore.
We've heard about the 800 numbers. That leaves us with credit cards, and credit cards really in most cases with these fraudulent, deceptive telemarketers, are the payment system they're going after most often.
Let me explain real quickly what third-party transaction laundering is all about. This is a busy slide. I'm just going to point to the first two things on here because this really explains it.
Credit card transaction laundering is an attempt by a properly signed merchant who has a merchant agreement with one of our member banks but then brings into the interchange sales that are not his own.
Those sales that are not his own are prohibited by MasterCard and VISA, against the law in many states that have a law against laundering, and I'm happy to say that we now have some federal statutes to help us out in that effect because you have to keep in mind this.
Our member banks are not going out and signing, knowingly signing deceptive fraudulent telemarketers. It doesn't make any sense but the deceptive fraudulent telemarketers are not stopping taking the bank cards in terms of payment.
What they are doing simply is they're telling the customer on the phone that they have the authority to accept MasterCard when in fact they do not, and now they have to get that payment into the interchange somehow. How do they do that?
Well, they go to some small unsophisticated merchant and say, Hey, I have a deal for you. I'll give you $100,000 of my excess business but I'm having trouble getting my bank to accept and I'll pay you 10 percent for putting it through your store.
So now you've got some face to face merchant who's been signed by a member bank who's supposed to be a tie shop selling neck ties face to face, all of a sudden is putting sales through that represent some kind of telesex operation or some kind of deceptive fraudulent telemarketing. That's really what the problem is for you telemarketers.
I pulled this out of the USAToday in 1992 and I've never had to update my slide because almost any time I look at a major city newspaper I see articles like this or advertisements like this where it's obvious that the person placing the add is trying to get around our rules and regulations.
You're tired of the hassle of going to a merchant bank to get a number, come to us, we'll figure out a way to get your sales into the MasterCard VISA interchange under cover.
What are our defenses against this kind of fraud? Merchant signing procedures, merchant monitoring, merchant education.
When our members sign merchants they must do these four things. They must do financial investigation. They must check to see if that merchant has been previously terminated for cause by another member and then make up their mind whether or not they want to sign them based on what they find out.
They investigate previous merchant agreements and most importantly they must go out and do a physical site inspection or hire someone to do it for them. So that they know that merchant out there is -- has a commercial space, if they want them to have a commercial space, that they have proper licenses and sales stamps and whatnot to conduct the type of business and that they are really a bona fide business and not some tent out in the alley somewhere with a telephone sitting in it.
Our members and MasterCard and VISA conduct merchant monitoring. We do this so we can stop the flow of this type of activity. Why is this tie shop in Washington, D.C., or wherever it happens to be suddenly putting through thousands of sales in the exact same dollar amount? Why are they trying repeated attempts on the same account number? They start with $500 and then they go to 450, then they go to 400, then they got to 350 and then they to to 300 and they take.
They're fishing for the open to buy on an account. How about the key versus swiped? That tie shop should have 99 percent swiped face to face transactions. None of those should be keyed in unless the mag stripe is damaged on a particular card.
All of a sudden that tie shop starts showing 90 percent keyed transactions. Maybe this merchant is working off a list that somebody gave him and entering these things on the point of sale terminal when the cards are not present at all.
Monitoring deposits, why is this tie shop that does 7 or $8,000 a month in MasterCard VISA sales suddenly trying to put $300,000 through the interchange in one day.
Increases, average ticket size, all those other things are things that tip off our members that the merchant might be doing something and we have an investigation to follow it up.
Merchant education is something that we stress. We want our members to visit the merchant periodically. We want to make sure that that tie shop is not also branching out into some other kind of business that the bank doesn't approve of.
Reviewing the merchant contract, particularly making sure that contract has the appropriate prohibitions against laundering and the merchant knows what he can and cannot do and using statement stuffers with fraud alerts.
I brought some materials here that I'll leave for anyone that's interested, but our member banks send out hundreds of thousand of statement stuffers both to shareholders and to merchants.
Some of the cardholder statement stuffers, for instance, If the Offer Sounds Out of This World it Probably is, Free Travel Can be Very Expensive, helping to educate the cardholder about some of these types of scams, and for the merchants, Don't Let Your Reputation Get Hung Out to Dry, Be Aware of Credit Card Draft Laundering.
These go in the billing statement of the individuals to the cardholders and the merchants.
Merchant education involves a lot of things. They have to know what the card acceptance procedures are. They have to know how to use their terminal. They have to know what to do when they have a counterfeit card but they also have to know about not accepting outside sales.
We support legislative efforts. The bank card industry has worked closely even with the Federal Trade Commission just lately in helping with the new rules and regulations. We do quite a bit of it.
The thing that I have seen in my experience in law enforcement and later my six years with MasterCard has been we have been chasing around doing state initiatives and it's important to do that. I help write legislation in the state of Texas that put a laundering statute in the state of Texas.
But what that does it simply pushes these criminals to other states as General Doyle mentioned to states that don't have these kinds of provisions, so we're very happy to see that federal legislation has come in and helped us.
The crimes act that was just passed last year has provisions in it that give federal agents, federal investigators and federal regulators more tools that they need to go after these types of scam artists and we applaud those efforts.
On the civil side, we have seen a whole rash of states come up with initiatives to register telephone solicitors because, look, here's what happens.
Law enforcement goes out there after the fact and they have nothing. There's an empty building. They go check with the state authorities and they find out that the business was put into somebody else's name. They don't know who it belonged to, where they went or what they can do to track them down.
It becomes very difficult. Some of these telephone registration laws in the various states have been very helpful because they've required the telephone solicitor to post a bond with the state, to list all their principals, all their locations for doing business, give the state copies of their pitches and prizes if they are using pitches and prizes and a number of other things which have been very helpful in helping track some of these people after the fraud has been committed.
And again we applaud these kind of efforts, particularly to give the state officials the authority to sue in federal court and the authority for individuals including banks to sue in federal court in situations involving more than $50,000 so we have our foot in the door now.
The last thing I just want to bring up is that every time we have new technology there's new schemes coming along. The mag stripe was the technology of 15 years ago. We are moving on to the chip. Will the scam artists figure out ways to try to beat us in these types of networking? You bet and we're dealing with rig point of sale terminal cases, pirate computer programs, attacks on the debit cards.
Transactions on the Internet have already been addressed, home banking. There's all kinds of things that are coming out now.
The last thing I want to mention before closing is this. We have a number of things that MasterCard has done in conjunction with National Consumer's League and many others, VISA also has such programs.
Some of the booklets I'm going to leave here to let you look at or take home or whatever you want to do with them, Knowing Your Credit Card Bill of Rights, another one called Defending Yourself Against Credit Card Fraud.
The one I like the best is one we did jointly with the National Fraud Information people, and this is Schemes, Scams and Flim-Flams, also called a Consumer's Guide to Phone Fraud.
In the front page of that booklet is a MasterCard number you can call to get all of this information free of charge and also the number for the National Fraud Information Center's hot line for anybody that calls you with a problem.
We would like to get that on record so that the regulators and law enforcement authorities can go back and compile a lot of little cases into a bigger case and get more prosecutors' attention.
Swindler's are Calling. This is a four-year old booklet but it really tells the story. I'm going to throw something out on the table that I wrote, not because I think it's anything particularly special but it's something that was done for the Better Business Bureaus and it's called Nothing to Gain, Everything to Lose and Credit Card Laundering Schemes, and it was written toward the merchant who might be approached by one of these laundering brokers to try to set up one of these arrangements.
And the last thing, we did a fairly sophisticated campaign starting about a year ago, in May of 1994 called Know the Difference, Hang up on Fraud.
Many of you saw the television advertisement with Corbin Bernson from LA Law who did the actual presentation. That was the television media part of the presentation. We also have information called Consumer Fraud, the Human Toll which I'm sure Katie will be getting into here in a few minutes, and Know the Difference, Importance of Legitimate Telemarketing Organizations because telemarketing and direct marketing is a very viable method for a merchant to go forward and get his goods and services in front of the customer.
It's that 1 or 2 percent of the slick con artists, the ones that are giving all of them a bad name and making it very, very difficult to tell the difference.
So that's all I have. Thank you very much.
COMMISSIONER STEIGER: Thank you very much, Jim Steel. That's certainly an alert from the experts.
If there's new technology will the scammers use it? The answer is yes. Katie Sloan is going conclude this particular section of our morning before we turn it to the round table.
She's the manager of the consumer affairs division of the American Association of Retired Persons, and she's leading the AARP's very ambitious telemarketing campaign which is using marketing and opinion research expertise to discover why older Americans fall prey to fraudulent telemarketers and what kinds of advertising and education messages would better enable consumers from being victimized.
General Doyle has referenced some of her findings. It's clear we're all taking it very much to heart. We're grateful that you bring it to us this morning, Katie.
Thank you.
MS. SLOAN: Thanks. Thanks for asking me to be part of it.
AARP is increasingly concerned about the growing problem of telemarketing fraud and its disproportionate impact on older consumers. Investigation after investigation unveil a disturbingly large number of older victims. Many of them have lost much of their life savings to fraudulent telemarketing schemes.
To learn more about who these victims are, what their behavior is and ultimately to identify strategies to counter balance the clever and convincing pitches of telemarketers we undertook last spring the first large scale survey to investigate telemarketing fraud among older people.
As Attorney General Doyle mentioned, the survey's results paint a surprising portrait of victims. They are relatively affluent, well educated and informed. They are active in their communities, and they express many of the same attitudes about telemarketing that are widely held among people who do not fall prey to telemarketing schemes.
These results stand in sharp contrast to the prevailing view of older victims based on stereotypes, that they're socially isolated, they're ill informed, they're confused and committed to old fashioned ideas about how one should treat strangers who call.
To undertake the survey we obtained lists of victims from a number of Attorneys General and District Attorneys around the country. Over half of those contacted from the lists were over the age of 50 while census figures indicate that 36 percent of the population at large is in this age group.
A survey done by Princeton Research Associates over a year ago for AT&T indicates that 25 percent of persons over the age of 50 readily identify themselves as victims of fraud.
The discrepancy between these two figures I believe is as a result of the fact that victims are frequently unaware that they have been victimized and they're often unwilling to admit it.
The victim list that we used was recovered in court proceedings against the telemarketers. These were not self reported victims, which may be why the rate of victimization is higher.
Older victims are not necessarily isolated, alone. Only 28 percent live alone. Older victims have extensive networks of family and friends with whom they are in close, regular contact. They are still in the work force and participate in a wide range of social activities including going to church regularly and doing volunteer work.
Women in particular, although more likely to live alone, are especially connected with friends and family members with contact almost daily.
It has been suggested by some professionals who work with older fraud victims that, based on their experiences, people who have had a recent trauma in their lives are more susceptible to schemes of fraudulent telemarketers.
When asked whether anything had happened in the last five years to change the way they generally do things or make decisions, close to 4 in 10 of our respondents mentioned nothing. However, 33 percent did say that they had lost a loved one.
Older telemarketing fraud victims surveyed are very attentive to news and consumer information. Four/fifths read a newspaper regularly, watch the local news and read magazines. Almost all of the victims say they have heard about companies that took advantage of people by selling them worthless products or services or by tricking them into giving something for nothing.
Despite the fact that they're older, victims are more affluent and more educated than other people 50 and over. Almost all victims own their own homes and close to a third have college degrees.
Just under half have annual household incomes of 30 thousand dollars or more compared with just over a third of all adults 50 and over.
Fraud victims are besieged by telemarketers. Almost half of the victims that we interviewed had received a telemarketing solicitation within the week proceeding the interview. A significant number had been called that day.
Four in ten of those surveyed said that they received 20 or more calls over the past six months from telemarketers who tried to sell them something, talk to them about a contest or a sweepstakes or ask for a contribution to a charity.
Particularly beleaguered are older male victims. Half of men 65 and older receive 20 or more telephone solicitations in the last six months. One reason that the victims receive so many calls, and this has been alluded to earlier, is because the scams build on each other.
Once people's names appear on a list of targets or on lists of those who have actually been scammed, they are often reloaded, that is, set up to be recontacted again by the same telemarketer so that they can be bilked out of more money.
Over a quarter of the victims who describe their participation in a sweepstakes fraud went on to tell about a subsequent contact from a recovery room. Recovery rooms fraudulently call victims and offer to get their money back for a fee. Often the same telemarketers make both calls.
Sadly 44 percent of those contacted by a recovery room went on to pay the fee in hopes of recovering some of their initial losses. Only 1 percent received the complete refund.
Quite surprisingly, telemarketing fraud victims seem to have the same perspective on telephone and mail solicitations that the rest of the population age 50 and over has. They don't like them. They try to avoid them; they are skeptical of them.
68 percent say that when a telemarketer calls they try to get off the phone as quickly as possible. Still, a quarter of the victims say they usually listen to what the telemarketer has to say.
Almost all the victims feel it is acceptable to hang up on a telemarketer who is persistent and almost all say that if they could choose, they would reduce the number of calls like this that they receive.
Telemarketer fraud victims also claim to be quite skeptical of telemarketers. For example, three quarters think most companies that offer sweepstakes prizes are trying to take advantage of people like them. There is slightly less but still a high rate of skepticism about companies that sell products and services.
58 percent think that these companies are trying to take advantage of consumers. However, victims are not as weary of organizations that call people for donations to a charity or community project. Only 42 percent say that most of these organizations are trying to take advantage of people like them.
In spite of their skepticism and their acceptance of the notion of hanging up, these victims are still participating in sweepstakes. The victims that we contacted were known to authorities in 1993 or earlier because of their participation in a variety of scams.
And yet in 1995 when the survey was conducted, 21 percent of those between the age of 50 and 64, 27 percent of those between the age of 65 and 74, and 41 percent of those age 75 and older had participated in a sweepstakes scam as recently as the first five months of this year.
Those who repeatedly succumb to requests for money or a donation are women, victims aged 65 and older, and those who live by themselves.
Telemarketing fraud victims, whether they've fallen for sweepstakes scams or some other type of scam, say it is hard to spot fraud when it is happening. The most affluent victims are the ones most in doubt as to how to tell honest pitches compared to dishonest as are those over the age of 75.
The difficultly victims have in recognizing deceptive practices is exacerbated by their suggestibility to pressure. 40 percent say they felt a lot of pressure during phone calls about sweepstakes. This pressure was particularly felt among female victims.
Victims who talk to a representative from the so-called sweepstakes company ended up convinced that they had won and they lacked the skills to end the telephone conversation when they feel some pressure from the person on the other end of the line.
Half of the victims say they tried to break off the call. 47 percent say they asked for more time to think about the offer. 63 percent asked for the name, address and telephone number of the company, and 42 percent had asked for written information about the prize or sweepstakes.
Despite these requests all of these individuals ended up spending money with the telemarketer even though many of them were worried about the amount of money they were sending.
All together, 22 percent of victims surveyed sent money via specially delivery service like Federal Express or UPS. Three quarters of those that sent money said they were not pleased with the outcome. Yet, of those, 47 percent did not complain or discuss the situation to try to get help once they realized that they were defrauded.
Searching to determine whether there might be other intermediaries to help dissuade victims from falling for these pitches, we asked a series of questions about from whom these victims seek advice or assistance about financial matters.
Half of the victims say they never ask friends or family members for advice or help with the problems. Many more specifically said that they don't ask for help in managing money, in understanding official documents, health problems and in making decisions about buying products or services.
We decided to look at the survey data beyond sheer demographics to see what other light we could shed on these victims and did a segmentation analysis of the telemarketing fraud victims which reveals five types of victims.
Those who are open to anything comprise 37 percent; those who we grouped as, "You can't fool me," 30 percent; those who were polite and vulnerable, 14 percent; those who like to buy, 11 percent; and those who were naive, 8 percent.
Those who are open to anything are very social and, while skeptical of telemarketers, will participate in a sweepstakes if it doesn't cost too much. They're regular church goers. 76 percent attend at least once a week. They attend meetings of a club or social group and do volunteer work on a weekly basis. Unlike the victim population as a whole, this group does seek the advice of friends or family members when faced with a problem and are open on advices on purchase decisions. They are younger than the other victims, more likely to be married and relatively affluent. 81 percent of them say it is hard to know when a telemarketer is trying to take advantage of a consumer. They're particularly weary of sweepstakes but yet 84 percent admit they have been a victim of fraud.
The polite and vulnerable group has difficulty rejecting telemarketers. They're also more likely to have experienced a recent trauma in their life leading to perhaps welcome telephone contacts from strangers. They're more than twice as likely than the victims group as a whole to say they usually listen to the pitches telemarketers make. And three quarters of the members of that group think good manners compel them to buy something or to give a donation to someone who offers a gift or sends a gift in the mail. They participate in sweepstakes frequently.
The "likes to buy" group is more likely than other victims to be open to sales pitches, to participate in sweepstakes that require sending money and to send large amounts of money as part of a sweepstakes. Yet they're confused about fraud. 88 percent say fraud is hard to detect when it is occurring. This group is the oldest and the least likely to be married. Most are women and many live alone.
Finally, the members of the naive group are distinguished by their failure to perceive different types of telemarketers as out to take advantage of people like them. They also feel personally in that they have never been victimized by fraud.
In conclusion, I think there are several conclusions that we have drawn from this. And the first is that older telemarketing fraud victims need clear and concise rules about how to recognize an illegitimate telemarketing pitch.
It is clear from this survey that awareness is not enough. Simply knowing about the existence of scams without some way to recognize them when they are occurring is insufficient to help people protect themselves.
Educational efforts need to include simple rules that enable older Americans to tell the legitimate telemarketing pitch from the illegitimate one, knowing the product is worth the amount of money it costs or not understanding their real chances of winning a contest or sweepstakes and recognize appropriate uses of specialty delivery services.
Moreover older persons need help in developing skills to deal with telemarketers. One of the major findings of the survey is that older fraud victims cannot hang up the phone on a persistent telemarketer.
This was supported in subsequent focus groups that we conducted. Contrary to popular belief, for most victims this inability to hang up the phone is not due to the social mores of their generation. Most older people say it's okay to hang up the telephone. They may need instruction in how to hang up, not on why or when.
The polite and vulnerable group need to have that taken a step farther. They need to know that not everyone who calls them is a friend and that some who call may be trying to take advantage of their good nature.
The most challenging group to reach is the relatively large group labeled, You can't fool me. These people are already weary but they are also quite private and think that they know how to be good customers.
A message that communicates that even the most careful consumer can be a victim of fraud may make sense for this group.
In short, what the survey and the subsequent analysis of the results show us is that the messages need to vary to reflect the wide range of underlying motivations and circumstances of victims. It certainly does not make our task easier but I think it brings us to being effective in our public education efforts.
Thank you.
COMMISSIONER STEIGER: Thank you for the invaluable information, which will be widely read by anyone interested in consumer education and consumer protection. We are grateful.
We're going to turn now to our discussion of the events of this morning, and we are delighted to have with us the distinguished panel that has been with us throughout the morning to comment and question and we hope to enlighten further on the issues that we have covered.
First I would like to introduce Olan Mills, II. He's the chairman of the board of Olan Mills, Incorporated.
Mr. Mills's company has made extensive use of telemarketing for nearly 50 years, and he has been an industry leader in efforts to protect consumers while maintaining a vibrant telemarketing industry.
Linda Goldstein is a partner in Hall, Dickler, Kent, Friedman & Wood. She specializes in advertising and marketing law and has worked closely on regulatory and legislative matters that affect promotion marketers.
And finally Jane King, director of consumer affairs for MCI. She's one of the founders of the Alliance Against Fraud in Telemarketing and a member of the board of the National Consumers League.
Welcome all. Mr. Mills, do you want to lead off for us? Do you have a comment or a question for any of our experts?
(Pause in the proceedings.)
COMMISSIONER STEIGER: I think we're ready, Mr. Mills.
MR. MILLS: Thank you, Chairman Pitofsky and Commissioner Steiger and Ms. Harrington and Ms. Schwartz for including me this morning in these happenings. Telemarketing is a vital part of our business and has been as has been stated for a very long time.
Olan Mills Studios was started in the beginning of the depression by my mother and father who bought a bankrupt studio or took it out of bankruptcy, and they found that hanging a shingle out doesn't necessarily bring business in.
They were in Tuscaloosa, Alabama, but they really started -- they left their -- left the studio in the care of someone else and went out into the small towns in rural Alabama where there was virtually no competition, no professional photographic services, and found that by going door to door they could create a business where there was none.
And that technique of our acquiring customers was with this company for a very long time. It continued through the second world war period and on into the late '40s and in 1948, one of our field people, so the story goes, saw someone doing telemarketing and picked up on the idea and begin to do that for us as a supplement to our door to door selling.
At that time, we sold a sitting or a service plus an 8 by 10 portrait for $1. That's what the salesman sold going door to door and that's what we sold over the phone.
Over time, the telephone began to take on the more dominant part of that business and I think by the end of the '50s we saw the last -- probably the last significant number of door to door people working in our company.
One of the reasons for that was that when the business was started, women primarily were at home, particularly a young mother and that's our primary market. Also people lived in those little towns in Alabama that most of them lived right in town.
As time went on, people began to move out into what we called squiggley streets, the streets and houses were further apart. Everybody had his own ranch or kingdom, and it became increasingly inefficient to go door to door both geography wise and occupation wise as women increasingly went into the work force even when they had smaller children and the phone became our salvation if you will during that time and we have continued that.
I might point out that when the studio started in Tuscaloosa it had a camera room, a sales area and a waiting area, and in the back they actually did the finishing. As the company has grown of course the finishing has been centralized into plants. That way we can do a more effective job.
But to a large extent our studios today are the same. As we came off the -- of the little towns and went into larger towns we put in permanent studios. This happened primarily in the '50s and '60s, and the studios are very similar except for instead of having a crew out knocking on doors we now have a telephone in the studio itself in most cases.
And we are calling that neighborhood that we do business in. We primarily call of course older -- the customers that we've had before, but we also have to constantly find new customers by doing what we call cold calling, and we do that primarily from or the way we do it is entirely from those rooms, but we're kind of a dinosaur I think in the telephone marketing business.
We've used some computers. We've tried that. In the environment that we're in it doesn't seem to have come full force enough for us to do it everywhere. That was the beginning of our telephone and today we do some media advertising but it's still our primary means of getting business.
About 20 years ago, I think it was about 1975 or '76, we decided that we were not always welcome on the phone, and a big reason for that was when I first phoned in the late '40s and early '50s I was a student and working in the summers and I also had my chance on the door to door.
My father made sure I got that opportunity as I did with one of my sons. What was happening is it was a novelty when we phoned. We would call people and we had to get them off the phone. Back in the '40s, talking to someone who was very lonely and this was a great event that we would call.
And we had to worry about that because we were only collecting $1 and that had to be collected at the door. Credit cards were not in use then. It was a pretty novel approach to business, and we had a free run of things.
Well, that changed with time. More and more people went into telemarketing, and as we all know today as you sit down to the dinner table there are people on the phone catching you the one time they can catch you.
We found that we were calling people who really didn't want us to call them. They weren't going to buy the items so we installed then our do not, DNC, do not call system.
By that time we were printing sheets, picking up the phone book, organizing it into geographic areas to suit the studios in the large town so that they would call their area, and we would have a little bubble place that they could mark on the sheet, Do not call.
I think the first time we did that we wouldn't call them for a year. We used the sheet until the phone book came out, but over time we did use the bubble system and came in and put it on the computer and we would keep it off.
I think we started keeping it off two years and three years because these are people who are not going to buy so we just felt that was the best thing to do, and it was also difficult on our operators to deal with these people.
If you haven't called them recently they may identify you as someone else. Often these are, they're people who that don't want to deal with anybody on the phone but certainly they told us specifically.
By the way, we do have enough sophistication in our business that we have a bubble for people that have no children, and there are some communities, Tampa, St. Petersburg, with heavy retirement. We collect that information. We pull them off for several years, hoping when we go back of course that there may be a new grandchild or some reason that we could sell to those people.
That tells you about what has happened in the U.S. I thought I might comment on what we have experienced overseas.
12 years ago we went to the United Kingdom and thought we would open some studios, and when we looked at the country, looking at the buildings, the way people acted, lived and dressed, the way they talked in that ancient accent, we decided -- we were told and then we decided that that country had to be 20 years behind us commercially which today would be 30 years.
And so we also looked at their phone books and we would have one studio in a small town, and the phone books there sometimes cover a whole county, up to a thousand pages of very fine print.
And of course we were trying to dig out a few people, and in England there is no commercially available telephone directory, electronically or put together for us as there is in this country.
So we elected to go door to door, and we did so for -- and this is when my son got his opportunity. I didn't want to him to miss that chance, and we -- but within about a year and a half we had gotten back on the phone, went to the expense of breaking down those phone books to get to the local area and found that it worked there just as well as it did in this country.
It was again a newer concept although plenty of telemarketing there. It is growing over there faster than it is here. I hope we peaked out in this country but it is growing rapidly there and I think in other parts of Europe.
We looked at other countries and I think a good comparison would be Germany and England. When we went to England I remember we opened in Portsmouth, the first town, and of course the nights start about four o'clock over there, but say eight or nine o'clock, eight o'clock at night I would walk down to the studio which was right down from my hotel.
We were the only lights on, and pretty soon about a year later a little pizza parlor over across the street opened up. Well, today you walk down that street -- we are not in that location now but if you would, eight or nine o'clock at night half the street is open. The lights are on.
That change took place in England and if you followed it they had a blue law for the whole country, virtually the whole country except resort areas. That blue law was changed just this year. You can open your store on Sundays.
Well, when we first looked at Germany as an extreme the other way because some of the countries have more or less telephone liberalism or conservatism.
In Germany, we had three things in our business that make us successful. We have a loss leader and there are no loss leaders in Germany. We have to sell at cost, and we do business primarily with families and our studios are busiest in the evenings and on Saturday.
In Germany every store closes at 5:30 and at noon on Saturday. And thirdly, we live by telemarketing and in Germany it is prohibited unless there's an actual contact by the customer.
One of those, and I that is the store hours, is changed and I think it's because -- because on their border with France, now that people can freely communicate or freely transit, the business is all going to go across the border because those stores are open all through the night.
In France I think they have some stores open all night long. So we are seeing a change in some areas and in Germany now there's a bill before to open up the stores at night and allow stores open I think up until nine o'clock, and of course they're not ready for Sunday yet, but I think that's a straw in the wind of what may be happening today.
We have had reasonable success in England. There's always the question of why did you go over there. We ask that question of ourselves every day, and we finally have turned into the black but I wanted to tell the story because it does the same thing as it does here. We also have a few stores in Canada and with moderate success and do telemarketing there also.
Why do we use the telephone? Why are we telemarketers? I think there are two things that stand out. One is a family sitting or even a sitting of a child is not really postponable, but a family portrait is a postponable event.
You can get it done or not and the children are getting older but as long as you have pictures of them many families are satisfied.
So we really feel that we create over the phone that event and we also want to work by appointment, both for the customer's convenience and our efficiency.
And to do that we have to talk to the customer over the phone, create the event and get a commitment and that commitment is to collect some money up front. Today instead of the dollar it has progressed that we are selling for about $19 a contract with a customer, a plan with a customer to have a free sitting.
And we feel the creation of the event because we've got to get their hair done, everybody has to make sure they can make the schedule and the fact that we do need to collect money ahead of time is essential for us and we find that the phone is perhaps the most effective way we can do it.
I would like to comment in my closing that I think it is a great idea that you involve some of us in the industry who have these happenings like this, and in particular looking back on the Chicago meeting when we were all concerned about the inadvertent consequences that could have come from what was happening because I think you know the egregious people. There are some of us out here who are selling a product.
I think we are perhaps a little unique but we sell the product and then deliver the product ourselves, and I think it's a comb -- I would like to pass my compliment to the FTC's new policy involving us.
Thank you.
COMMISSIONER STEIGER: Mr. Mills, thank you very much. We are not only thankful for this morning but your reputation as an extremely effective participant in Chicago precedes you by several months.
So for that, thank you too.
I'm going to toss out just a couple of questions and then, Linda and Jane, if you don't like them, do your own. We've seen initiatives from credit card companies, from those that provide ancillary services, and courier companies: what should be the role of legitimate business when you are aware of extensive fraud within your industry?
Should it be more or less or about the same that it is now, and finally what is it about the telephone?
We've just heard from Mr. Mills why the telephone uniquely suits his particular marketing strategy, but is there something about the telephone in and of itself, not just technology that makes it very susceptible to fraud.
I'm thinking here of the fact that this is a common carrier, while Jim and others can perhaps cut off their service as credit card companies, telephone companies are common carriers and do not have this opportunity.
If that is a wrong assumption as far as it making a difference, let me know, and obviously if you've got better questions or even other ones you like better, proceed within the next 15 minutes before we have to let you all go.
Do you want to comment, Linda?
MS. GOLDSTEIN: I'll try to comment on both of them.
First, as far as the rules in the industry, that actually relates to the one comment that I did want to make here which is that if we look at the last three -- two rule making proceedings and where the FTC may be headed in the future in terms of consumer regulation, meaning the Pay-Per-Call industry and the lessons learned from that regulatory process, at least in the telemarketing rule and what may come down the pike in terms of cyberspace, I think that what is unique about all three of those is that it's the first time we are looking at regulating not an industry specific group per se but a marketing method or a method of communication.
And what makes that a unique process is that you will naturally have the convergence both of very legitimate segments of the industry as well as fraudulent telemarketers or fraudulent Internet providers who take advantage of the technology to commit deception on the consumer.
I think that makes it all the more important that at the earliest stages possible industry be involved for a number of reasons: As a resource to identify what are the aspects of that technology that are key to the industry's marketing efforts.
I think one of the things that really stood out in Chicago was that the FTC had the opportunity to hear for the first time how certain things like use of couriers for example or even the draft payment methodology which had been thought of as a uniquely deceptive practice was being used appropriately by legitimate segments.
And when industry had the opportunity to talk about that and explain what was unique about the telephone and about these payment methods and these services, I think the FTC had a better idea of how to go forward and proceed to preserve those causative elements while attacking where the abuses were.
So I think industry needs to play an active role and to get involved as quickly as possible. Again I would contrast Pay-Per-Call to telemarketing just as another lesson to be learned. Unfortunately Pay-Per-Call suffered far more than hopefully I think the telemarketing industry will.
And I think part of the reason for that is that industry did not get involved with the regulators as early on as they should, and so the abuses grew and the regulation necessary to combat the tremendous fraud that had occurred in the interim was far greater than was the experience with telemarketing.
I do also believe that industry needs to take a very proactive role in terms of self regulation. It's very disturbing as an industry representative, for example, to continuously hear the negative comments about prize promotion or prize promotion schemes and contesting sweepstakes almost as a per se deceptive practice.
And I think the only way industry can really combat that is to work proactively on its own with some consumer education programs. We can identify for the consumers in a very simple form how to distinguish a legitimate prize promotion scheme from a deceptive prize promotion scheme.
A legitimate prize promotion scheme never requires a consumer to part with any money and with effective communication the industry can hopefully give the consumer the confidence to know how to distinguish between the legitimate and the illegitimate marketer and with that confidence in terms of making that distinction the consumer may also gain the confidence to know when to throw that marketer off the phone.
In terms of your second question which is is the telephone an inherently deceptive median? I would have to say no. I think many of the practices that you've seen on the telephone were preceded by direct mail, were preceded by door to door and will shortly find their way on to the Internet.
I think that the deception comes in the communication rather than in the medium and the effort should be to focus on what is said and the content of what is said through things such as in the telemarketing rule the mandatory disclosures, the prohibitions on misrepresentations.
I personally believe that's the way to go rather than attempt to cut off a particular medium.
And the last thing I would just like to say in closing, I want to reiterate Mr. Mills's comments really in congratulating the FTC in involving the industry as effectively as it has both in the Pay-Per-Call as well as in the telemarketing rule.
I would like to share with you just one experience we've had since the implementation of the rule because I think it may be helpful in the future.
I know one of the debates obviously is how far do you go in the regulation, and one of the things the industry pointed out in the rule making is that in seeking a balance we have to try to preserve the interest of the legitimate marketers because they truly will be the ones that will be most concerned with compliance.
And I think just in terms of our own experience we have really seen that to date. It has been fortunately but perhaps unfortunately the legitimate marketers who you really have not had trouble with up to date that have really come and requested audits of their programs and are geared up for the December 31 date.
We have not seen the boiler room telemarketers flock to our offices to see how they can comply with the new rules, and so as you go forward and you look for that balance I would urge you as you did with this rule to keep that balance focused on the interests of the legitimate sector because they really are the ones who are reading those rules.
And unfortunately we may continue to need to resort to enforcing it to get the deceptive marketers out.
COMMISSIONER STEIGER: Linda, thank you, and again your participation in Chicago was highly valued. I would be remiss not to pass on your feelings down to Eileen Harrington, who was very active in that effort along with Jody Bernstein and their whole staff.
I think we're going to just ask, Jane, do you want to chime in here?
MS. KING: The one thing I did want to mention is I'm grateful to you for mentioning the common carriage responsibilities of both local and long distance carriers.
It does complicate our ability to deal with some of these issues. We are required to offer service to anyone who asks and only can bring down a line to use our terminology if something either violates our tariff or the law and our tariff usually reflects the law.
So that becomes a difficulty in our efforts with law enforcement. However, I think the 900 industry solution was a good example of how the industry and regulators can work together, in this case the Attorneys General.
And someone did also ask -- I'm sorry, we also will cooperate with subpoenas just as rapidly as possible. We do believe that requiring subpoenas for what we call detailed, billing information, location of the service, is essential to protect the privacy of our customers, especially residential customers.
Also in terms of why the phone works so well in terms of merchant and consumer relationships, I think that's probably fairly obvious, and I think that it's its intense personal nature, that is the call can be individualized to whatever extent necessary.
But on the other hand, the real problem is anonymity, and I think the main thing we have to do is teach consumers to understand who they're dealing with and what the accountability of that company is and also to be careful that payment mechanisms do establish some ability for redress.
COMMISSIONER STEIGER: That's particularly valuable given General Doyle's expressed concern about the siteless nature of cyberspace.
MS. KING: Yes, and there are strong parallels, and I think consumer education will become more and more important in this environment.
COMMISSIONER STEIGER: We've just about reached the end of our morning. Do we have a thought or comment or question? Mr. Steel? Yes, please.
MR. STEEL: Just one quick comment regarding what the industry is doing or has done or will do to help in this effort.
First of all, the Alliance Against Fraud in Telemarketing has been extremely beneficial in promoting the awareness and whatnot of some of these schemes.
Something else that many of you may or may not be aware of, the American Telemarketing Association which started up about four years ago has decided to go forward with a seal of approval program.
They realize -- these are the legitimate bona fide direct marketing people -- they realize that the fraudulent, deceptive telemarketer has their hand in the victim's pocket. They also have their hand in the pocket of the legitimate business because people become skeptical.
I become skeptical. I've been dealing with this for years. My son is 17 years old and ready to go to college. As I walked out the door the other day he tells me that he's received about 30 solicitations for scholarships.
And I asked him, What are you talking about. And he hands me a card like this. I'm not going to mention who sent it. The card came from Fort Lauderdale, Florida. It was mailed in southern Maryland, and it says: Student financial advisory, please be advised that a recent addition to our file has made your student eligible for our college scholarship and grant assistance program.
We will be accepting a number of students on a first come, first serve basis for a minimum thousand dollars assistance program at the school of your choice.
Then you go down to the fine print, and it says one time service fee, proof of denials required. This company is a private research and referral service and not a loan provider or financial contributor and void where prohibited.
I don't know whether this is fish or fowl, and I'm skeptical. I don't have time to go through 25 or 30 of these for my 17 year old son, and I certainly hope he's not responding.
So it hurts the legitimate direct marketer when people put scams and flams out there for the general public, and again American Telemarketing Association may be one of those vehicles that will help deflect some of that problem.
COMMISSIONER STEIGER: On that note the record should show that eight people reached for that card and we got it right here at the FTC.
We thank you all for a most, most exciting morning and one that I think we just owe you much more than thanks but that's the best we can do.
Thank you.
(Break in the proceedings.)
(Whereupon, at 12:30 p.m., a lunch recess was taken.)
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A F T E R N O O N S E S S I O N
(1:45 p.m.)
CHAIRMAN PITOFSKY: Good afternoon, everyone. We will now begin with our afternoon session on the protection and the emerging issues in telephone technologies.
This morning we emphasized where we are, what the problems are, what possible solutions might be available.
This afternoon we're going to talk a little bit more about the future, and in particular we're going to link these issues of telephone technologies to the emerging nature of global competition.
Our first participant, our first speaker is the Dean Jorge Schement, dean of graduate studies and research of the college and communications at Penn State University.
He's the author of numerous books, most recently Tendencies and Tensions of the Information Age. He'll speak today on some of the social consequences of the production and consumption of information. Welcome, Dean Jorge Schement.
MR. SCHEMENT: Everybody is close enough that we can see each other's face.
I would like to start off with a little bit different take than what has probably been said here before and do something that I guess exhibits my academic license.
I want to start off with a quote from my favorite -- this is my favorite of Henry Thoreau's quotes on the information highway, and he says -- he said this in the 1840s, but he says, "We are in great haste to construct a magnetic telegraph from Maine to Texas; but Maine and Texas, it may be, have nothing important to communicate."
Well, just stop and think about that for a moment. Thoreau's misunderstanding should remind us that even the deepest thinkers can err when predicting the uses of information goods and communications services.
I suppose if we were meeting around the table in the 1840s we should advise ourselves not to put our money with Thoreau but instead to put it with Samuel Morris.
At the core of our discussion today at least from my perspective is that there is something about information that requires new ideas when thinking about consumer protection.
The reason that that quote strikes us as funny today is that the central attitude that makes possible the collective reasoning of the information age which I call the idea of information is that we take it for granted that books and telephones, databases, home pages all have to do with information.
We compare messages according to the amounts. Think about the consequence of the quantity of information that we take for granted. We compare messages according to the amount of information contained.
We choose and weigh the advantages of specific information in our commerce and our relations with others. We value information so much that we buy it, we sell it, we enact laws to punish its theft just as we would for any other valuable material good.
And although information exists solely as the symbolic product of our minds we easily translate it into the material world. That is, we're so secure in our attitude that we experience these assumptions as second nature.
The idea of information, this attitude that allows us to do all of this, enables us to produce, to distribute, to consume information by creating this imagined metaphor, that information is like my shoes, like these chairs here and that therefore we should treat them the same.
That of course sets up a paradox, and it's the paradox that I think we need to consider when we think about new ways, new ideas about consumer protection.
That is, what is clear to us and what was not clear to Thoreau, is that information has become a major consumer good and therefore it makes some sense to ask what kinds of information can Americans consume.
But that question, what kind of information can Americans consume, also misrepresents the nature of information.
After all, the newspaper that most of you read today and that I read today produces no depletion in the information itself, although the value of the information might decrease as it loses its timeliness for the reader.
The paper itself might degrade with use and time but this constitutes consumption of the medium or the package, not the information itself.
Consumption or deterioration of the medium does not cause exhaustion or depletion of the information, nor does it equal the experience of consuming material goods like food or clothing, and that's an important distinction.
Indeed, the movement to articulate a set of protections for consumers of information derives some of its impetus from a paradox of a inconsumable good at the hub of a consumer economy.
Even so, the concept of consumption of information is a potent one because it makes sense to us. I stress the paradox because it raises questions about the nature of information goods that I think are going to be with us for some time, so I have seven open-ended questions to throw out.
The first is that information is recombinant in its value to the consumer and therefore it is subjective. What I mean by that is the value of information to the consumer resides in the integration of that information with knowledge that is already stored in the brain.
We don't consume information independently. We take into an existing mind set that we have. We add it. We synergize it with other existing ideas and as a consequence of that we draw value.
There is no clear-cut way of knowing therefore the value of information to any particular individual. We shouldn't assume that an information product has only obvious uses. Therefore some questions are not easily answered.
For example, what is the essence of an information product? Is there a proper use for an information product? What is actually bought when we buy an information product?
Right now we're comfortable applying the metaphor of a material good to information products. However, as information in its infinite forms becomes central to many markets, the conundrum of its subjective value will recur and we're going to have to start grappling with these questions again.
Number 2, in some categories of information products no two final products are the same. For example, two consumers access the same database. They do not necessarily receive the same product.
What then can a consumer reasonably expect especially if the database cannot be examined prior to payment? The saying you never step twice in the same river applies especially to some categories of information goods.
Number 3, consumers purchase information goods with expectations because they purchase all goods with expectations. Yet by its very nature an information product cannot be fully examined prior to its use.
To do so would be to deprive the seller of the information to be sold. Therefore what proposals can be made to one who buys an information product? Since consumers purchase information goods on the basis of information supplied in order to encourage purchase, can a seller expect to guarantee satisfaction?
Once an information product has been consumed the information cannot be returned in the sense that you can return a pair of shoes that didn't fit you just right. So how do you refund an information product without simply acknowledging that the information provided is lost and possibly copied for further unauthorized distribution?
Number four, the information itself is ephemeral, but the product in which it is distributed may vary from material to insubstantial, and this is what I mean.
In the -- if one purchase is the Wizard of Oz either as a ticket in a movie theater or by watching it on TV or by buying a CD or on a videotape are we purchasing the same product?
If the answer is no then the product -- then the package makes a difference in what it is that we purchase and therefore questions of consumer protection might revolve around the package rather than the nature of information as a commodity.
I suggest we don't make these distinctions very clear when we talk about consumer protection. We mix and match information, faulty package when we talk about consumer protection.
It's important to differentiate concerns for consumer protection that are derived from faulty packages versus concerns for consumer protection that are derived from faulty information, which is by the way a much more difficult proposition than the faulty package notion.
Question number 5, what constitutes unnegotiable standards of protection? Typically the Federal Trade Commission demands disclosure about the product in the form of information. But when the production is information disclosure means giving information about information.
What kinds of information is it reasonable to expect about an information product? What failing of an information product will produce significant consumer dissatisfaction or danger?
And in the use of information products that are aimed at children perhaps parents should have the right in some way to control the information environment from the home as a form of consumer protection.
We've had a lot of talk about the V chip recently. There are other kinds of software safeguards that are on the bench about to come out. Maybe that ought to be part of our discussions and thinking when it comes to consumer protection.
Six, increasingly consumers go to consultants to advise them on information purchases. That raises a question. Should information specialists such as consultants or engineers, software designers, database managers, should they be held to a malpractice standard? What constitutes malpractice when advising people about information in the form of products that they themselves can't directly access?
Seven, more and more information products are consumable only through the use of sophisticated technologies of access. Thus, it is naive to think of many information goods as standing alone.
Moreover, the technology and monetary costs of accessing some categories of information goods are greater than the access costs for most material goods.
So another question, should the FTC be concerned with those costs of access if they are unreasonable and if they inhibit widespread consumption?
In other words, if we only talk about information products because they are standing alone we miss the very real cost of access that all of us have to pay in order to participate in those products.
And I'm simply asking the question whether that's worthy of our discussion, whether that should be part of a discussion that hasn't been there before but which we should introduce because of the different nature of information versus that of material goods.
My guess is that in some form or another these questions are not easily answered if at all but that they're not going to go away. They're going to come back over and over again as we grapple with the paradox that distinguish information goods versus material goods.
So to make this brief, lest we go away thinking that we are charting unknown waters completely I want to end with a quote also, and this is from another favorite of mine, John Milton, writing in the areopagitica.
Milton says: Truth and understanding are not such wares as to be monopolized and traded in by tickets, and statutes and standards. We must not think to make a staple commodity of all the knowledge in the land, to mark and license it like our broadcloth and our woolpacks.
Keep in mind that John Milton wrote this in 1644. It's 1995 and we're still thinking about some of the same issues.
Thanks.
CHAIRMAN PITOFSKY: Thank you, Dean. I know you have to leave a little before we finish so let me ask a question and maybe one or two others will want to ask a question.
You're right of course to emphasize the differences between information as a product and products as products but what about the similarities?
Let's take someone who sells stocks and someone who sells information about stocks. You mentioned that disclosure might be the only way to prevent people from being misled.
Wouldn't a disclosure remedy work in either case if the information is incomplete or if there's something about the stock that's misleading?
I know it's different, but in a way isn't the core problem of fraud, misuse, unfairness, deception, aren't they similar?
MR. SCHEMENT: I mean, clearly the essence of the problem of disclosure is information, and information is necessary in order to make rational choices or at least to make enlightened choices when one is purchasing.
The problem I'm highlighting is it has more to do -- your examples I think are examples I wouldn't contest. You're right.
The problem I'm highlighting is the problem that I think we increasingly encounter is that as private consumers we increasingly are entering marketplaces where we are selecting a subset of information from a database, whether it be something on American Online, whether it be reviewing video CDs to choose those which are appropriate for your children or whether it be trying to buy a house in another city and looking at that CD.
The problem that we will encounter increasingly in a competitive marketplace is which of these databases should I go to in order to make my purchase because perhaps I'm only going to need this once or twice or perhaps I'm not going to need this very often and I can't afford to go out and buy access to a number of databases.
The problem there is that in order for the database manufacturer or vendor to let you know what the database is like he has to in effect give you the database or at least some portion of the database.
And that's an issue that I think we're going to be bumping up against because we deserve to have that. We deserve to know and to have disclosure.
On the other hand the vendor legitimately might say, I can't afford to give you something that is valuable and what I have to give you will have to be distorted in some way and that distortion might limit my ability to make an intelligent choice.
CHAIRMAN PITOFSKY: Very useful way of thinking about the problem.
MS. SCHWARTZ: I thought -- I was trying to think of other analogies as well, and you spoke about the movie, going to a movie.
Now, before you go to a movie you don't know what it will be like until you've seen it and then and only then can you evaluate it. Is that a good analogy of this kind of information?
MR. SCHEMENT: I think that's an excellent analogy because what the concept of movies has done is spawn an industry promoting movies. So producing the information about the information in the movie is a way of attracting you to the movie.
It turns out that the value of the movie, because it's entertainment, is not very high and we're willing to accept that because we live in a culture that has an understanding of the kinds of things others might call blatant, outrageous distortions about what the movie is about, to get us to get in to the theater and sit down.
So we understand that there's a game to be played and we can participate in that. But a greater value we attach to the information such as information about buying a new home, for example, or information that has to do with the health of our children, the less likely we are to accept that kind of promotional approach to it.
Nevertheless, in its essence that's exactly the kind of interaction that there needs to be. We need to have information about information. It needs to be readily available and it needs to be presented in a form that any of us could understand easily.
MS. SCHWARTZ: But the second point you made or I guess it was the first one actually was that the information is subjective, and I wonder if that's not somewhat or if the value, excuse me, is subjective and I wonder if that's not true of a lot of products that we buy.
The value to any individual is based to some extent at least on their needs and their use of the product and so forth. Is this unique in that regard?
MR. SCHEMENT: Well, it's unique in a sense and it's not unique in another sense. I'm suggesting that there are two kinds of subjectivity when it comes to value of the product.
There's a subjective value that occurs to all material products, such as what value is it to me to buy clothes whether it's my 100th suit or my second suit, and what subjective value might I derive from it by wearing it in public. Even though I'm fully clothed wearing one suit versus another suit might cause me more pleasure and that's in fact subjective.
What's different there I think from what information products do is the intrinsic value of any information product to use only has meaning in the context of the preexisting, if you will, information in your brain.
And therefore every one of us drawing an information product is going to have some different and unique subjective value to it that is entirely dependent on what if you want to think of them as assets -- what the assets, brain assets are that we bring to the marketplace.
Now, I'm suggesting the range of that subjectivity is simply greater for information goods than it is for material goods. The chances are that every single pair of shoes I buy is going to end up on my feet. Every single book you buy may not be read.
In fact you might buy it in the hopes that you never ever have to read it as you would a book on poisons and how to take care of poisons. You may buy it because somebody coming to your home expects you to have this book and if you don't have it you're not going to show up so well.
You may buy a book because you simply want to have it available to refer to some time such as a dictionary. Or you may buy the book because you want to read it 50 times such as some people do with the Bible.
That range of possibilities is much, much greater. Or the last book I bought, I bought because it was a very big and heavy one and I needed something to hold down the pile of papers on my desk that's beginning to fall over.
I think those are all legitimate values. With the exception of the last one, however, they all depend on brain conditions and are interpreted differently by the individual informed.
That's the reason that software prices are so difficult to arrive at. It's very difficult for software manufacturers of say games for example or some software to decide what the appropriate price is for software when it first enters the marketplace because it's very difficult to know what value individuals are going to attach to it.
The pricing structure that exists right now is basically historical. It's been derived overtime as a trial and error that people have tried to arrive at, and it's entirely vulnerable to some kind of new entry with a completely different pricing strategy that would cause any category of software prices to either collapse or go up or whatever.
It's not based on any kind of intrinsic value except in the classic economic notion that it's what the traffic will bear. In the case of information it's very difficult to know where the bottom is and where the top is.
MS. SCHWARTZ: The other thing, I don't believe in your statement you quantified the percentage of consumer dollars that will be spent on information purchases, but you do indicate also the trend is toward greater percentages.
MR. SCHEMENT: The trend is for greater percentages.
MS. SCHWARTZ: Can you quantify that in any way?
MR. SCHEMENT: Well, off the top of my head I've been doing some work on the percentages of disposal income that American households spend on goods and services in the 20th century.
There's two noteworthy things about that. The percentage is growing and has grown steadily since 1900. It is the only category of goods that did not shrink during the Great Depression.
It has grown markedly since about 1978 or so when a whole new wave of consumer technology in the home came on the market, and it lessened a little bit in the early 90s and that may have something to do with the recession.
It doesn't appear to be leveling off just yet. Some of it has to do with economies of scale and many information technologies have come down in price vis-a-vis other kinds of goods. Clothing, for example, hasn't come down in price.
But others are simple demand. We are living in an era where people have a very felt need for information, and they're willing to purchase increasing amounts of information.
It's noteworthy that every single new consumer technology that has entered the home, that's been informational, has had a fairly rapid diffusion, and in some cases at an astonishing rate. In the 1930s radio went from less than 10 percent of American households in 1925 to 85 percent of American households in a 15 year period, when the price of a new radio cost about as much as any of the chairs that you're sitting in here today.
In the 1950s of course the rate was even more rapid but the VCR rate has been the most rapid of all in terms of its use in the American household.
So as new technology enters the home the adoption rate is very fast. People have to come up with the money somewhere. They seem to be coming up with the money to make those purchases.
As soon as they come up with the money to make those purchases they create a new market in their homes for a number of other information groups that are then arrived at through those technologies. So my guess is we're seeing a wave that isn't going to reach saturation for some time.
CHAIRMAN PITOFSKY: Thank you very much.
MR. SCHEMENT: Thank you.
CHAIRMAN PITOFSKY: Let's turn now to our next speaker, John Barker, National Consumer League and director of the National Fraud Information Center, which is doing an exceptional job of providing assistance to consumer and data to the Commission and other law enforcement officials.
He'll discuss trends in telemarketing and the increased problem of globalization.
Let me just say that all of us in this field in government are coming to appreciate that fraud is no repector of borders. I know that people in Europe are beginning to appreciate that, and we are as well.
No one that I've spoken to since I've been back in government has highlighted that or enlightened me more than John Barker, and it's a great pleasure to welcome you here.
MR. BARKER: Thank you very much.
Mr. Chairman, I want to thank you and the members of the Commission and the fine staff in the Bureau of Consumer Protection for giving us the opportunity to present our views on your emerging role in an emerging high tech global market.
My remarks today will be restricted to the downside of the market, the bad players so to speak who surf global telephones, telecommunications and data networks to prey on unexpecting and hapless victims.
Future consumer fraud trends, Mr. Chairman, are probably a textbook illustration of the first law of historical inevitability since in our view only the players are likely to change.
I see the year 2000 as a millennium, but not as a time when, to paraphrase the Book of Revelations, the gullible will suddenly turn skeptical, the con artist will go straight, the telemarketer will hang up his ear phones and take his dinner hour when we take ours, and the Federal Trade Commission's Bureau of Consumer Protection will cease to have relevance.
On the contrary, all signs point to a status quo ante.
One of the problems in dealing with this issue is that we rarely have time to step back from the fray, sit back and reflect on the future. You are to be commended for providing us this space and allowing us to give you our best guess as to what you will face as regulators and enforcers.
Your basic charge, to ensure a stable competitive marketplace for both legitimate business and the consumer will take on increasing importance during the next few years, as the nation changes and as the technology changes to keep pace with an expanding but polarizing marketplace.
My thesis is simply that, during the next few years, consumer fraud will be driven by increasing economic pressure on individuals, relatively static personal income, rising prices, declining opportunity for personal advancement, an aging population, the growth of impersonal, electronic transaction and voiceless communication systems, and increasing demands to deregulate.
By the year 2000 the American consumer will face a dazzling new array of sophisticated new frauds, born aloft by an equally dazzling array of telecommunications, data processing and tracking systems, transaction devices and computer-based commercial opportunities -- all of them cashing in on some fundamental shifts in our national character -- a rude awakening from the American myth that anyone can succeed in this country as the result of hard work and perseverance.
Economists and social scientists believe we will become a nation of the super rich and the super poor. According to a recent series in The Washington Post this transformation is already taking place, as we change from an economy of enterprising self starters to an increasing polarized society of haves and have nots.
An important side issue will be a growing national acceptance of legalized gambling which promotes the fantasy of getting rich quick, but fails to educate the American consumer that the odds of doing so are infinitesimal. All you need says the New York Lottery, is a dollar and a dream.
I also want to give you our best estimate of what form consumer fraud will take, based on fundamental changes taking place in our society. I want to share with you our concerns about the growing international character of fraud and the need to work more closely with other governments to stem the growing toll of foreign-based scams directed at our citizens.
My wife and I woke up early one morning this week, both of us wondering why it is we're always broke. Bills pile up. Our car has become a steady source of income for Martens Volvo. The faucets are dripping. And property taxes are due.
We turned on the radio and listened to a talk show guest moaning about the same thing and we started to laugh, nervously of course. And what we laughed about was the fact that just about everybody is in the same boat.
Economic pressure seems to be a constant with all of us. Outstanding consumer credibility is at an all time high. Our nation is maxed out. Prices are rising. Sales are down. There's no really growth in personal income, and at the same time certain baseball players, movie stars and corporate executives are earning obscene annual incomes.
Continued stagnation in personal income and a sense of powerlessness in dealing with it will inevitably generate increased susceptibility to fraud. Maxed out, we are easy prey for con artists who tell us that we have won a big pile of cash, the person on the phone who is selling us an investment which will more than double in value in the next six months and make it possible for the credit card bill to be paid, the telemarketer who tells us we are pre approved for a credit card.
The easy loan. The multi level marketing scheme. The work at home project which we can all do at night and bring in some extra money for Christmas presents. All these opportunities to ease the pressure, erase the debts and get us ahead of the game make potential suckers out of us all.
Increased economic pressure will also make it more tempting than ever to lead a life of crime, not just for the professional con artist, but also for normally law abiding citizens who can no longer resist the pressure.
I'm a hearing examiner for the D.C. Court of Appeals board of professional responsibility. In that capacity I participate in disciplinary actions taken against members of the D.C. bar.
The board is experiencing an unprecedented flood of complaints against attorneys accused of defrauding their clients, converting escrowed accounts to personal use, failing to turnover settlements to clients and other fraudulent practices. What motivates this is undoubtedly economic pressure, as well as greed. Even lawyers are sometimes strapped for cash and a few take the easy route.
We see more complaints now involving individual con artists working alone or with two or three accomplices as opposed to the traditional boiler room operation, or formal corporate structure which masks an illegal operation.
These self starters often disguise themselves as going concerns but are actually just individuals operating out of pay phones, telemarketing fraudulent offers to unsuspecting victims.
They claim to be prize distributors, claims agents or some such, and they convince victims to wire funds via credit card cash advance to secure payment. The funds are then collected at a convenience store outlet and the con artist is off and running.
Almost impossible to detect, there is no phone number to trace, no mailbox address to monitor, no office or phone bank to raid. Federal and state enforcement officials must be prepared for a massive increase in phantom phone fraud, using cash advances, instant wire transfers and even ATM transfers in the next few years.
Many of these con artists prey on elderly victims. The American Association of Retired Persons as you've heard today is doing some impressive research on the nature and extent of victimization of the elderly. The AARP data confirms what many of us thought was the case. The elderly are prime targets of con artists, and as the country ages, with the median age increasing each year, we can expect that more and more elderly persons will become victims. This population segment is already huge and will remain a lush feeding ground for the con artist.
As you are considering what the future holds you should be concerned with the likelihood that this major target victim pool is bound to get larger during the next five to ten years. This will affect enforcement strategy as well as consumer education initiatives.
We are working closely with your staff, Mr. Chairman, as well as with the AARP to tackle the problem of elderly fraud victims. We are aware that at present we are fighting a losing battle against fraud directed at the elderly. We just aren't getting through.
However, we expect to announce some major initiatives in this area in the next few months. Initiatives which we hope will stem the terrible toll of elderfraud and also provide senior citizens and their families with the tools to educate and protect themselves against consumer fraud.
We are also working to develop strategies which will convince the elderly that we are the nice guys on the other end of the telephone, not the con artist in Las Vegas who promises a major prize or chance to strike it rich.
The new telemarketing sales rule which you will introduce in January will change the character of fraud and eventually your enforcements strategies. The National Fraud Information Center is already monitoring changes which we believe are the direct result of the new telemarketing sales rule.
The TSR may be responsible for the recent breakup of some boiler rooms into the single operator, or lone wolf, enterprises. Since boiler rooms operating out of a detectable physical location are visible, and subject to scrutiny by state Attorneys General as well as the FTC and other agencies, we believe that many more boiler rooms will break up and reappear as smaller, more highly mobile, phantom operations.
We also predict the end of advance fee loan schemes, credit repair clinics and recovery rooms. Since the new rule requires these operations to perform their services before exacting a payment and demonstrate that an actual service has been performed we expect most of them to turn to other enterprises, since the advance fee operations are no longer worth the trouble and the exposure.
Con artists will also take advantage of new technology. Wire transfer of funds, direct debit of checking and savings accounts, mailbox address, other forms of covert operation will become the rule rather than the exception. Here, however, we think we have matched them.
A few years ago we could all talk about the technical superiority of the con artist. Today that is no longer the case. We're able to track new operations often from the day they start scamming. We know whether they're operating out of the real business locations or simply phone answering services, mail drops and prison addresses.
We are able to get information to appropriate state, federal and local and foreign enforcement authorities within minutes of detection, and we are adding to our technological arsenal every day.
Recently we transmitted a report of victimization to authorities in Canada within three minutes of receiving the call at NFIC. This is routine. The local authorities immediately dispatched police officers to the illegal operation, intercepted the victim's cash as it was being delivered, seized it and informed the victim that the money was in safe hands, all within one and one-half hours of the time the victim reported the crime.
NFIC is now working on ways to monitor, detect and report to you and state Attorneys General on fraudulent commercial transactions on the Internet and online services. We can now take consumer reports and complaints of financial loss on these computer based services and report them electronically to the FTC/NAAG Electronic Fraud Database.
Here our goal parallels yours; prevention and deterrence and an aware consumer. The state Attorneys General are working closely with us to improve our detection systems and provide a constructive dialogue on what can be anticipated as this new technology increases in popularity, and new, inexperienced net surfers go on line.
We will continue, Mr. Chairman, to improve or technology.
This incident I related concerning a quick recovery of fraud losses involved a Canadian boiler room. We expect to see many more foreign-based boiler room operations. It is interesting to note the number of incident reports involving billing increased dramatically shortly after August 16, 1994, when President Clinton approved legislation authorizing the Telemarketing Sales Rule.
Canadian fraud cases have increased 300 percent since that date. They include everything from lotteries to recovery rooms, sweepstakes promotions which were once the exclusive domain of Las Vegas and Houston boiler rooms, now operate freely out of Toronto and Montreal.
The trend toward foreign based fraud directed at U.S. victims will continue, simply because it is so easy. At this point Canadian authorities are fully cooperative in monitoring local boiler room activities. We have seen some joint enforcement efforts and anticipate more. But like the potential terrorist threat against the U.S., the potential fraud threat presents massive detection, apprehension and enforcement problems that may remain unresolved.
We have also seen in recent months the spread of telephone scams using foreign long distance telephone services. The reason for international toll call scams is that some countries supplement their postal and telecommunications earnings by soliciting the business of U.S. based chat lines and Pay-Per-Call schemes.
The U.S. promoters in exchange for directing expensive telephone toll calls to these countries, receive kickbacks. U.S. long distance carriers can sometimes block calls to these exchanges but the problem will remain until all parties to international postal and telecommunications agreements and conventions begin to police the international long distance networks.
The Federal Trade Commission, Mr. Chairman, is committed to an aggressive enforcement strategy, using its new authority under the Telemarketing Sales Rule. The Commission is no doubt aware, however, that we are faced with growing demands for deregulation.
We all agree that many existing regulations are frivolous, unnecessary and in some cases harmful. But organizations like the National Consumers League retain their commitment to a federal regulatory structure which protects the consumer, encourages legitimate bills and maintains a truly competitive marketplace.
The Commission's mandate to curb deceptive and misleading marketing practices helps everyone, business and consumer. However, we expect the pressure on your agency and other agencies to continue. You face cutbacks in your budget and must focus your energies and budget dollars on most egregious and harmful practices.
Deregulation and industry self regulation will become rallying cries for those who do not value the deterrent effect of federal regulatory agencies in preventing fraud and deceptive practices.
It will be tempting to embrace industry self regulation, since enforcement dollars and market surveillance dollars will be in short supply. We hope however that while applauding conscientious industry efforts to police themselves and rope in or kick out bad players you will oppose efforts to weaken your statutory authority.
The national craze for gambling will hamper fraud enforcement efforts. I appeared on a Christian variety show earlier this year. The program host and I talked about telemarketing fraud.
What was unusual about our conversation was that while I often talk about the evil con artist our host was much more concerned about the evil victim, whose greed and passion for gambling was really to blame.
Much of what we see at the National Fraud Information Center revolves around sweepstakes, cash awards, foreign lotteries, prizes, and other strike it rich opportunities.
The gambling craze seems to have struck a responsive national chord. Intending to revive depressed local economies, many states and local jurisdictions have authorized casino gambling, and the number of states involved has risen from two to 23 in the past five years.
Once relegated to Las Vegas and Atlantic City, gambling operations now prosper on the Mississippi River and on tribal reservations in Connecticut.
As long as this phenomenon continues the con artist will be riding the wake of sweepstakes frenzy. You can expect in the next few years for con artists to continue to use some form of instant cash as the bait to lure unsuspecting gullible or greedy victims to the trough of fraud.
Now, even the probability of losing does not deter a victim. Counselors at the National Fraud Information Center report increasing resistance to their entreaties to think it over and don't send money in exchange for promises of a cash award.
Many accept the fact that they are likely to lose their money. Nevertheless they pick up the phone and call Western Union. Maybe this time the consumer protection people will be wrong, maybe, just maybe I'll win.
I suspect, Mr. Chairman, that as you conclude your deliberations, weigh the information, opinions and prognostications you receive from us during this set of hearings you'll become dismayed at the difficulties which lie ahead. But I encourage you to keep up the good work.
You have some progress to report, you have at least achieved technological parity with the con artist, you're processing timely and detailed incident reports on what is going on out there, and you have an impressive array of new regulations at your disposal to fight crime.
Now, if we can only get the consumer to cooperate we will have the problem licked.
Thank you very much.
CHAIRMAN PITOFSKY: Thank you, John. That was wonderful. Would you say a little more -- I had not heard about foreign long distance phone call scams. What was that about?
MR. BARKER: What happened was that after the Federal Trade Commission put out new regulations covering marketing practices on Pay-Per-Call or 900 number services many of the bad players simply moved offshore.
And what they did was to get different countries, many of these countries which don't get very much income from their PTTS, postal telegraph telephone systems, to give them kickbacks if a person called a long distance number to that country and took part in some kind of a chat line or recorded spiel.
The person on this end pays a very expensive daytime toll rate for that international call. It's not simply an 011 number and proceeds to make the call. It does not fall under any of the restrictions that the 900 numbers do. There's no way of -- I guess you can block international calls if you want to, but most people do not suspect that they are actually calling a foreign number.
Many of them are 809 area codes which are in the Caribbean and therefore not immediately detectable as being a foreign call.
CHAIRMAN PITOFSKY: You mentioned the great increase in complaints against fraudulent operators in Canada. Have you also gotten the beginnings of complaints about people from Mexico, Bermuda, and so forth?
MR. BARKER: Yes, at this point to a much lesser extent. One of the things that we worry about is whether or not some of the people that claim to be in foreign countries are actually doing just a very complicated kind of call, switching the call forwarding service and actually may be sitting right here in our own neighborhood. So we really don't have a good fix on that yet but there is a significant amount of fraud at this point emanating from Canada to the point where we now found it a good idea to add Canadian postal code software to our systems since we get so many calls pertaining to Canadian addresses, mostly Toronto, mostly Montreal and to a certain extent on the West Coast in Vancouver.
CHAIRMAN PITOFSKY: Teresa?
I thank you very much.
Our next speaker is Arthur Sackler, vice president for law and policy of Time Warner and previously general counsel of the National Newspapers Association.
Mr. Sackler will discuss kinds of industry government partnerships that can work well in the consumer protection area. Welcome to the hearing.
MR. SACKLER: Thank you, Mr. Chairman. I have to say I was fairly depressed by Mr. Barker's presentation.
On behalf of Time Warner I appreciate the opportunity to participate on a key topic in this timely and forward looking set of hearings you're conducting.
The education of consumers and self regulation by business should always be a major component of marketing by telephone. They will very much retain that importance as the telephone converges with other technology to form one pipe into the home for the carriage of video, voice and data.
For those of you who may not be familiar with us Time Warner is one of the world's leading media and entertainment companies with interests in magazine and book publishing, recorded music and music publishing, field entertainment, broadcasting and theme parks and cable television and cable television programming.
We're one of the nations leading telemarketers, interstate for magazines, books, video and audio products and intrastate for cable television subscriptions.
We are also on the leading edge of developing and applying the new communications technologies as will be demonstrated by our Jerry Levin when he appears before you next Tuesday.
It's a brave new world out there. I'm sure I don't need to tell all of you there are some truly wondrous technologies that exist or are under development that will dazzle with their technical wizardry and with the astonishing breadth and diversity of information and services that they can offer.
The opportunities for business will be similarly breath taking and unfortunately there will be broad new opportunities for the unscrupulous and the criminal as well.
So consumer protection will continue to be a critical issue in the world of converging technology and globalizations, globalization. We commend the FTC for attempting to anticipate what consumer protection needs will be in that world.
In this statement I'll briefly review where consumer education and self regulation stands in telephone marketing including Time Warner's experience and then turn to some of our thoughts for the future.
In attempting to ascertain what the optimal consumer protection approach would be we have the advantage of not starting from a blank slate. Where you have asked us to start this afternoon is with the telephone, and it is in telephone marketing that you will find what is, in our opinion anyway, an excellent working model that can and should be adapted for use in a converging technological environment.
Telephone marketing today is a very well functioning business-government partnership in protecting consumers. It consists of consumer education and self regulation by business and an effective but minimal framework of guidance and enforcement directed by the Congress and implemented by the Federal Communications Commission and this Commission.
Specifically those include regulations implementing the Telephone Consumer Protection Act by the FCC and the FTC's Telephone Marketing Sales Rule implementing the Telemarketing and Consumer Fraud and Abuse Prevention Act.
The partnership has a market orientation and is animated by the concept of balance between the needs of commerce and the need to prevent violations of consumers' rights.
The consumer education and self regulation piece of this partnership comes in two forms: Actions by businesses themselves and jointly among them through trade associations, notably the Direct Marketing Association.
Long before there was any regulation under the TCPA or the Fraud Act, many legitimate businesses undertook protective steps such as suppressing the use of names of those that made it known that they did not want to be called or mailed to for that matter.
This was and continues to be an exercise of it enlightened self interest by business. No one wants to market to a consumer whose been alienated by unwelcome business practices.
Permit me to give you a quick tour of what businesses are and have been doing. For 25 years the members of the Direct Marketing Association including Time Warner and one of its predecessor, Time, Inc., have supported and guided DMA in its interrelated efforts of consumer education and self regulation.
DMA first formed the mail preference service and then the telephone preference service to create one centralized place where consumers who so desire could go to reduce dramatically the use of their names by industry for promotion.
Companies regularly have referred customers who express a desire not to have their names on mailing or telephone promotion lists to DMA's MPS or TPS. Companies further have scrubbed their own promotion lists against the TPS and MPS regularly.
This is in addition to companies not calling their own customers who said they no longer wanted to be called. DMA conducts a major outreach campaign not only on do not call but also on how to recognize and avoid fraud and prepares pamphlets on both and has created a relationship with consumer and governmental organizations to exchange information and to help create and distribute those pamphlets.
Notably these organizations include consumer groups like the CFA, business groups such as the Better Business Bureaus and governmental organizations such as the Postal Service and again this Commission.
DMA has helped sponsor and create FTC brochures on sweepstakes, the mail order rule and others. DMA wants to do the same with respect to the recently adopted Telemarketing Sales Rule.
It also offers general guidance to its members on how to establish procedures to respond fully to consumers on do not call requests and more. So industry's efforts have been fairly extensive.
The other part of this partnership, governmental action, in our view has been constructive. Between the TCPA and the Telemarketing Fraud Act as implemented we now have rules and enforcement governing what must be disclosed in a telephone sales call, recordkeeping, hours of the call, that additional calling must be suppressed on the request of the consumer and much more.
But virtually all of those requirements track and expand in a modest way on responsible industry practices that were already in place. It is the industry's view and certainly Time Warner's view that while imposing some additional burdens, both the FCC and this Commission reached a balanced, fair approach insofar as legitimate businesses which used telemarketing are concerned. Those who defraud or otherwise ignore consumer preference I doubt would have the same view.
Time Warner's own experience is in the business mainstream and may be helpful here. In addition to supporting all of DMA's efforts we do the following with respect to telemarketing: First, and this preceded the TCPA, when a customer indicates that he or she does not want to be called we put a permanent electronic check mark if you will next to that person's name.
That person is then no longer marketed to over the phone by us nor is his or her name supplied in any list that we might rent to any other marketer.
We also scrub our database against the TPS list every 30 days in general and with each list segment to which we are going to market a specific product.
We've also been quite aggressive in exploring notice and opt-out, at no charge to consumers, for our books and magazines. This is despite there being no regulatory requirement to provide it and understandably against the conventional advice on how to market most effectively.
Our efforts are yielding results by the way that run contrary to the marketing naysayers. The notices we've experimented with have been included on bills and even published in our magazines such as these, and we can do a commercial for everybody, several of them.
In fact these notices draw a very large percentage of phone calls, but only a minimal percentage of opt-outs. Most of the calls are to change addresses or do other miscellaneous business, and some are even for new subscriptions or renewals. Notice and opt-out may become a new profit center.
To recapitulate Time Warner believes there's an effective combined regulatory and self regulatory regime in effect for telephone marketing. There's also an ongoing major effort at effective consumer education. We hope that it's bearing fruit.
But where does this leave us as we are entering our brave new electronic world? On the telephone itself no matter how much it may be dressed up with new technology so long as it remains a voice medium or just voice and data, the existing regime should service it very well.
The telephone in other words has been dealt with appropriately for the foreseeable future. A larger question arises about what to do with marketing as the telephone becomes folded in with other technologies such as interactive television and the computer.
To state what's more than obvious, there are some evident similarities and differences between the telephone and converged technologies. This is both on the technology itself and the behavior of individuals using it.
It's equally obvious that all of us, the Commission, other relevant governmental agencies, businesses and consumers must study and give considerable thought to how consumers can be protected both in their privacy interest and from predators in the new environment while not stifling the commercial possibilities inherent in these new forms of communication.
Time Warner's view in this early stage of the development of the interactive world is that the principle of a business-government partnership combining regulation, self regulation and consumer education can and should be applied.
The telephone marketing approach is a successful one and should serve as a model for the electronic environment. In fact we believe so far anyway that model probably can be rolled forward with only modest adaptation into the electronic environment.
In this general sense some of your colleagues in other federal agencies have come to similar conclusions on other disciplines. The Administration's Working Group on Intellectual Property Rights, spearheaded by the Patent and Trademark Office of the Department of Commerce, recently issued a white paper on intellectual property protection in the National Information Infrastructure and concluded that very little change is necessary from the existing copyright law.
In fact bills have been introduced by both sides of Capitol Hill that would make only modest changes to the Copyright Act for purposes of adapting to the electronic environment.
Similarly the NTIA also recently issued a report on privacy and the NII. Again the conclusion was little change was necessary. NTIA supports continued use of notice and opt-out with the exception of certain sensitive information such as that related to health or personal finances.
These would require affirmative consent. NTIA sees a continued role for self regulation in this critical area.
Also the NII advisory council, a private sector group appointed by the president to advise the government in developing a policy for the NII has come to a very similar conclusion on the treatment of privacy.
We do not believe that consumer protection is that different and self evidently it includes aspects of the very privacy concerns to which I've just referred.
For proactive, direct marketing promotions, one can draw an easy parallel between a telephone number and an E-mail address. Both can be targeted. Lists can be made and marketed and so on.
Commercial communications on each can either be welcome or intrusive depending upon the individual consumer's expectations.
Web sites, home pages and self electronic structures can be centers for possibly attracting commerce and reacting to inquires. In this they're more similar to television advertising today than telephone marketing.
It goes almost without saying that both E-mail promotions and passive web site marketing could easily be turned to fraud or deception by unscrupulous individuals.
Having said that clearly there are some differences. On E-mail, unlike the telephone without special software equipment, a recipient automatically has the number of the sender.
One can easily envision the kind of reaction an E-mail promotion might get from recipients who would rather not receive. The netiquette has been to flame or respond, I'm learning a whole new vocabulary here, or respond angrily to someone who crosses the line in communications, including in advertising.
The most notable example is the Canter & Siegel Green Card case. Communicating in bulk to E-mail address is called spamming, and there has been a rudimentary electronic self regulatory response to it with reportedly an Internet black list of advertisers that's been created overseas. We're not sure exactly where that is.
The culture of the Internet so far has not been to tolerate promotions easily. But that might be in the process of change as the universe of those using cyberspace expands dramatically into the general population of computer sophisticates and as the technologies converge.
The compelling nature of combined full motion video, voice and data cannot be underestimated as we hope to show you on Tuesday.
In recent months, for example, advertising has become more acceptable over the net. At web sites such as that of our subsidiary Time, Inc., PATHFINDER, advertising has been included. Not only has it not drawn flames, it has had no effect on dramatic growth.
At 17 million hits a week PATHFINDER is apparently one of the most popular sites on the Internet.
PATHFINDER has even conducted a small experiment on promotions by E-mail. In one very limited sample PATHFINDER had zero negative reaction to promoting. Rather its heavy responses related to the offerings largely on PATHFINDER. That either augurs for a change in the culture in cyberspace or distinctions based on the substance of the promotion.
Globalization if anything may be even more important than the convergence of technologies. As NII becomes the GII Global Information Infrastructure, marketing possibilities should positively blossom.
The economic efficiency of promoting electronically is impressive in the extreme. The start up and operational costs are virtually nil especially as compared to marketing by telephone or mail, and one would have after all ultimately we hope the whole world as a market.
But different perceptions abroad on the treatment of information, especially individual information and fraud, may create new artificial barriers just as real borders to communications starts to disappear. Not only could this inhibit marketing efforts abroad, but it would slow bringing America the best the rest of the world has to offer on information, entertainment and commercial offerings. This would be a genuine loss to our consumers.
As you know the United States is well in the lead on the development of the technologies, the systems and regulatory regimes that should be applied in the electronic environment. It should be the same with respect to consumer protection.
This Commission is extraordinary well positioned to relatively expeditiously fashion a consensus U.S. position. That consensus position can then be used to lead the world to a harmonized approach on consumer protection that will remain market oriented and encourage the building and use of GII.
In this it would be well to recall that the United States is not only a leader but unique in its self guarding of the right to be left alone and of the right to speak. The First Amendment will not be left at the Navigator when we enter the electronic world, and its principles can and will help set the regulatory, self regulatory balance both here and abroad by example.
In sum, Time Warner believes that the world of converging technology and globalization offers unprecedented opportunities to both consumers and businesses. The stunning breadth and diversity of information, entertainment and other content in that converged environment must be encouraged even while thriving to appropriately protect the interests of consumers. There must be a rational balance between commerce and consumer protection.
The regime that governs telephone marketing provides an excellent model that can and should be rolled forward into the electronic environment with only modest perhaps adaptation.
We commend again the Commission for looking forward in these hearings. We encourage you to emulate the PTO and NTIA, as you conduct this forum on consumer protection in the electronic environment, and produce a consensus blueprint for addressing electronic protection issues here and around the world.
Thank you. I look forward to participating in the round table discussion. I would be delighted to answer any questions you might have now.
CHAIRMAN PITOFSKY: Thank you very much. Let's -- I guess what I would like to ask about is how do you see marketing on the Internet? What products do you think -- I know we're going to see the interactive TV demonstration next week, but sticking to the Internet, where is it now in terms of products and where do you think it's likely to go in the near term, not --
MR. SACKLER: Well, last count informally I heard there was 100,000 web sites and growing on the Internet. Virtually everybody is putting something on the Internet. I read one this morning about Sony putting on a new web site called Sony Station.
That's going to have music and films and you name it, everything that they produce available for -- eventually for not only viewing but down loading and so on and so forth. If you can get to that then you can posit anything that is short of a real tangible product.
I mean, you can't down load a game player say but you can down load games, and you can order the game player over the Internet. All of these things are available. A lot of things that we have to order are audio and video products, video cassettes and CDs, books, magazines and that sort of thing are available on our web site.
So I would imagine we haven't done any kind of exhaustive search -- but I would imagine that a whole broad range of products are available now.
COMMISSIONER STEIGER: Hello, Arthur.
MR. SACKLER: Janet, how are you?
COMMISSIONER STEIGER: I'm encouraged to hear that you think that the Commission got it somewhere close to right on the telemarketing bill and that it provides a vehicle that could be moved forward to cyberspace.
But we heard concerns expressed this morning and we have in other forums that the problems will be whether this will deal with the fraudulent cyberspace market. Some of the concerns expressed is hard enough when they are cited somewhere.
They actually have a boiler room or they have an operation somewhere. Here there will be this non cited anonymous voice if you will that will make it much more difficult to know how to go about tracking fraudulent activity.
Have you given that any thought?
MR. SACKLER: Well, I would think that the kind of thing we mean by after having some room for adaptation. There may be some features of what can be done over the Internet in cyberspace that can't be done now with the conventional use of the telephone.
Our point was there's a very good partnership that has developed and that that can continue when you go into cyberspace. You do have to make some allowances. We're not saying, Don't change anything.
It's clear that there are some differences that have to be addressed. There have to be some additional tools for you, for the AGs to get at the truly bad guys as they develop new techniques for evading law enforcement.
But it's got to be again within the realm of recognizing there has to be some balance with commerce that legitimate businesses want to help you do your job. It's in our interest to eliminate the people who are committing fraud if you can as well.
COMMISSIONER STEIGER: Thank you. Thank you, Mr. Chairman.
CHAIRMAN PITOFSKY: Thank you very much.
Our clean up speaker in this first half of the afternoon session is James Gallant, director of sales from NYNEX, responsible for direct marketing and telemarketing, 11 million consumer accounts and 1 million small business accounts.
Today he will discuss the role of the -- that telephone companies should play in preventing telemarketing fraud. Mr. Gallant, welcome. There he is.
MR. GALLANT: Thank you, Mr. Chairman.
Good afternoon and thank you for inviting me to come to speak here today.
I speak as a practitioner. We have a telemarketing operation at NYNEX of 1,400 people and have been very active, actively involved with both Direct Marketing Association and the American Telemarketing Association and in working with the FTC and TCPA development and working with the FTC on the Telephone Sales Rule.
Let me take this opportunity to applaud the FTC for the development of the sales rule. It's a masterful full job done in short and it was absolutely magnificent. The consensus that was drawn among various groups not without much hard warning and the Commission should be applauded for that.
I don't think it needs to be belabored that the telemarketing industry is a vibrant, growing, legitimate industry. A recent study released by the Direct Marketing Association indicates there are 11.1 Americans employed in some fashion in the direct marketing industry including telemarketing.
Last year's sales were $600 billion worth of goods and services purchased through direct marketing medium. That's expected to grow 30 percent by the year 2000, truly a significant number of the community of commerce in America today.
I do have a fear, though, of extinction of telemarketing. I think there are two significant issues that face us in the industry and we must tackle those issues.
One has been discussed significantly today and was the major driver for the legislation and development of your rules, and it's well understood that though there are many, many legitimate telemarketers in America today the preponderance of the telemarketer is legitimate and well intentioned. There is a core of fraudulent, unscrupulous individuals who will prey on anyone they can to make a dollar.
I probably can't tell you anything new about that. You probably could educate me. But there is a second and I think equally serious issue that the industry itself has to grapple with, and that issue is what I feel to be very much in parallel with what's happened in the fishing industry.
That sounds funny. I come from a small sea coast town just south of Boston where fishing is a significant industry up and down the coast. And it saddens me to see what's happened to the fishing industry.
Over the years too many fisherman have fished too heavily. Some have used too small nets. Taken in too big catches and extreme measures have been taken by the U.S. government closing down fishing grounds, initially for small periods of time during the year and eventually closing down some fishing grounds permanently.
The issue has gotten so drastic that this year, maybe some of you know, the U.S. government is actually out buying fishing boats from fisherman on the proposals that they will get out of the business and then destroying the boats.
What does this have to do with telemarketing? I won't say that our customer is a fish. But they are a limited resource, and also a limited resource is what our customer's offer to us as time, patience, attention and money, and with too many fishing boats out there the fish disappear. With too many telemarketers out there the customers may disappear.
It's an issue that we have been addressing at the American Telemarketing Association earlier this year at their annual conference in South Carolina, last month at the Direct Marketing Association's conference in Dallas, and it's an issue I feel very strongly about. It doesn't have to happen.
On a practical note this morning General Doyle mentioned that as he traveled to Wisconsin to discuss with his contingency the evils of telemarketing fraud, what he got more often than not were people that didn't want to want to talk telemarketing fraud but wanted to talk about those nasty telemarketers that call me at six o'clock.
I do think there are some people that think we have specially designed software that can predict when you have dinner. That is really not so.
But I agree with General Doyle on that issue. I give you a real life example that you may think is humorous.
About two months ago I was at my office and it was getting late in the day and I realized I would probably work well into the evening so being the good husband or father I am I called home to tell my wife I would be late be.
And I dialed the number and she picked up the phone and said, Hello. I said, Honey, what's the matter. She said, You're the fifth telemarketer that's called this hour. So I put her on my do not call list.
We can laugh about that but it truly is a danger for whether it's a fraudulent telemarketer or a very well intentioned telemarketer. If there were four of them there before me, she's going to be mad at me.
It's a real risk that we run and I think the industry is stepping up to it. There are ways to deal with this. There is significant technology available to us today. The power of -- the evolution of power of computers just in the past two or three years have made list segmentation much easier.
There are some very, very good segmentation and predictive modeling capabilities on the market today. We're experimenting at NYNEX with a model called chase analysis where we hope that we will be able to get the same end result of our telemarketing efforts by calling our customers half as many times.
The trick in telemarketing is to call the customer that's going to buy. There's no sense in calling customers that won't. To the extent you can predict that not only do you benefit by utilizing fewer resources but those customers that have no intent to buy also benefit by not be bothered at home.
There are two very real dangers, fraud and abusive telemarketing as well as over telemarketing by legitimate telemarketers. I'm confident that the industry is going to address both of these issues. I think we can more readily address the second.
But we must because the marketplace will rebel and the regulators will intervene and there are stringent measures that could be taken that very frankly scare me.
Several weeks ago we were visited by the PPT from Germany that came to see our call center just outside of Boston, and they were planning on opening a telemarketing center of their own in Germany.
And while they were there they explained to me in Germany it's illegal to make a telemarketing call unless the individual you're calling has given you permission in writing and as a telemarketer I don't want to see that kind of rule in America. That would be like buying my fishing boat and smashing it.
I think we have to take the steps before drastic measures are taken and I think the industry is up to it.
Why is NYNEX so concerned about that? NYNEX is in a rather unique position here and we share that position with only very few in the United States. We are a major telemarketer.
As I mentioned we've got 1,400 people employed in our telemarketer operation. We sell optional telephone services to between 10 and 11 residential customers in the northeast throughout New York and New England. It is a very, very, vital piece of our overall corporate strategy.
We do take great pains in doing it in a very quality fashion as do most genuine telemarketers. We take some unusual steps that I'll share with you just as an example. Many, many companies do follow-up telephone calls or surveys about customer satisfaction. That's not unusual.
But typically in American industry and commerce today satisfaction studies pertain to the product that's purchased so when you buy the car you get the call to find out, Did you like the car.
And we do some of that at NYNEX. But within my organization we do follow up calls and mail surveys to find out if the quality of the contact was to your liking. So we are concerned that you like the product you bought but the primary purpose for these calls or mail surveys is how did we do on the contact.
A rather unusual extension of that concept is not only do we do this, our target is with 4 percent of the people that buy anything from us, but I think rather unusually we do it with 4 percent of the people that don't buy anything from us because that customer that we talked to that didn't buy anything is still valuable to us.
And perhaps we will call them next year and they will buy something and if we've done anything wrong on either the contact that results in a sale or not in sale we want to know that.
We are absolutely fanatic about training and coaching and supervision levels. It can be done and the price is not exorbitant. The price of not doing a quality job is exorbitant.
I said we were in a unique position. So far I've just said that we're a fairly large telemarketer and there's plenty of us around. But at NYNEX we also have another role in another state in this issue, and that is we are the supplier of telecommunications service to some major telemarketers.
Within our region we have such companies as Talbotts, Brookestones, Chadwick, L.L. Bean, 1-800 Flowers and the list goes on and on and on.
They are some of our very best customers and to the extent they are doing telemarketing within our region they are generating revenues for NYNEX. NYNEX has a dual interest in the preservation of the telemarketing industry and taking steps to help to avoid what I call the -- sorry, the extension of telemarketing.
What can be done? I've been asked to speak about two issues pertaining to this, self regulation being the first. Self regulation will not take care of the entire problem but there are self regulation steps that be taken and are being taken.
Mr. Sackler described very well the efforts of the Direct Marketing Association in addition the American Telemarketing Association which is very active in self regulation effort.
I believe this morning Jim Steel made an announcement of a decision that was made earlier this week by the ATA to develop an ATA seal of approval, a certification process, if you will, that will hold telemarketers to a very, very high level of standards.
We have not set those standards yet but the general perception coming out of the conference earlier this week was that the set of standards that will be adhered to under the seal of approval will likely be more stringent than the standards that you've even set for us.
In addition within the industry, within these two associations, education internally has been critical and one thing that we're going to be stepping up is the education of our own people.
For the members of the American Telemarketing Association and Direct Marketing Association have done an awful lot of education on these issues and about self regulation over the years. Unfortunately not a lot of that disseminates through our organizations and we'll be taking formal steps to begin to educate our own people on a lot of these issues.
Another means of self regulation that we propose and I think will be adopted on the platform of both the ATA and DMA within the near future is a formal program that will encourage the 11.1 million people that I said were employed in the direct marketing industry in America to be vigilant to unscrupulous telemarketing and to be active in reporting that.
I will have to admit that on several occasions I've been the victim and have recognized that these have been unscrupulous telemarketers that have called my home and I've not reported it, and I'm embarrassed about that. But it's not always that easy to do the reporting. You don't know where to report or maybe you're just too busy to do so. But unless we the 11 million people in direct marketing take this opportunity and have our family and our friends try to do the same thing we still run the risk of extinction.
As individual companies we're continuing to train all of our employees both within telemarketing and outside, about federal and state regulations stringent monitoring of adherence and a topic not really explored yet today is the whole area of responsible use of new technology of telemarketing.
Predictive dialing and database technologies have the potential to be greatly abused and those are being monitored as well by the associations. But again, the scam artists don't belong to the ATA and DMA. We must watch out for them.
The second and last area that I want to discuss is an offer that NYNEX would like to make to the Commission, something we've been discussing to your staff for a number of months. We would like to partner with you in a consumer education effort ongoing, not one time. Some of the proposals I will make today I'm making as firm proposals and others I am personally telling you I will take them back as proposals to my leadership.
I think that it's important that we educate customers to understand the differences between good and bad telemarketing, how to recognize it and what to do with it and as Mr. Barker said, If we only get the consumers to do something when they're abused maybe we could put an end to it.
But I think educational efforts on a frequent basis could help with that, working with the FTC and other groups. What we would like to propose is that in the 3 million thank you letters that we send out from my organization, we sell approximately 3 million items a year through telemarketing and everyone gets a confirmation letter mailed out that says, This is what you bought, this is the price, if you have a problem, here's the quality department's number you can call with a question and it just confirms the sale.
3 million pieces of mail going out of New York and New England every year is a perfect vehicle, if I can find it, for perhaps the insertion of this item that you folks have developed and this is very, very good -- you're smiling, Teresa.
MS. SCHWARTZ: I'm writing also.
MR. GALLANT: As soon as we can come to terms on clearance on wording, et cetera, we will begin putting this into every one of our confirmation letters, approximately 3 million per year.
Also I may surprise you with this one. I just thought of it a couple weeks ago, and what we're going to do is form a formal telemarketing consumer awareness speakers bureau funded by NYNEX.
NYNEX employees who are outside consult or consultants to our business customers specifically in the area of telemarketing and direct marketing will be trained to be made available for any consumer group in New York or New England that would like a speaker to help in the educational process.
Other proposals that I'm taking back to my leadership when I get back to Boston, and I think work has been done on this and we're very near our commitment, is NYNEX's involvement of production of public service announcements, both audio, for radio and video for TV.
I believe we're a fair way down the road in reaching agreement to do that. We'll also be proposing that a standing procedure of once a year, a bill insert all 10 million customers along with their bills, that we would ask your assistant in crafting.
Unless the inclusion of a full page -- in the early portions of every phone book throughout New York and New England that talks about -- I kind of like this actually, While you were out, advertisement that would cost you dearly if it was on blue and yellow paper but we'll put it on pink.
These are just some of the efforts that NYNEX is willing to step up to. We're excited about doing it. We think it's vital for NYNEX. We think it's vital for the telemarketing industry and we think it's the right thing to do for the consumer and I would like to encourage operating telephone companies in the country to file suit.
CHAIRMAN PITOFSKY: I think there will be follow up questions but I think we can handle them as well in the round table format that's going to follow and therefore it's just about time. Let's take about a 15 minute break and then we'll resume right here.
(Break in the proceedings.)
CHAIRMAN PITOFSKY: Ladies and gentlemen, let's continue and let's convert our format now to a round table description.
Some of our principal speakers are here, most of them are still here, and we also want to welcome four additional participants, George Braasch, corporate credit counsel at Spiegel, Eric Brown, Assistant Attorney General of Ohio, Nora Dowd, deputy Attorney General in Pennsylvania Attorney General, who is on leave with AARP telemarketing fraud project and Barbara Gregg, director, of Montgomery County Office of consumer affairs. Welcome to all of you.
I think we're open to any comments you might want to make on the earlier presentations but in addition let me try to formulate a theme to introduce our discussion the remainder of the afternoon; that is, let's jump ahead five years.
Let's not think about where we are now but rather where things are likely to be and as far as telemarketing is concerned, what technological changes are we likely to see and how will they -- will they make a difference in the way telemarketing occurs, and do they pose a greater opportunity for misuse?
Do they pose a greater opportunity for us to crack down on scam artists? What will be the problem areas not today but five years from now?
And, Ms. Gregg, would you like to start? And if you have comments about our discussion earlier please feel free to state those.
MS. GREGG: I appreciate that. I want to thank the Commission for inviting us here. This is an interesting format and I think it's really a wonderful opportunity for all of us to talk with each other and listen to each other.
I would like to talk just give you one idea of something that I think that the Commission might be able to do or to encourage and facilitate, that is in the area of prevention rather than law enforcement.
CHAIRMAN PITOFSKY: Good.
MS. GREGG: Let me first say what my perspective is, and that is I run a local consumer office. We do primarily two things. We enforce a mini-FCI act so we're always interested in following your enforcement activities. We also handle a large volume of individual consumer complaints. We're not unique. There are offices like this all over the country.
We belong, most of us, to an association of administrators whose president is Susan Grant who is with you today and I know you know her.
But let me try to explain the kind of work load we have and I can really appreciate what John Barker was saying.
We had 5,000 written consumer complaints filed in this one office last year. We serve a population about 700 thousand, that's written complaints, that's people that went to that trouble.
Last week I checked with staff, we answered over 2,000 requests for information from consumers people who were, I commend them, trying to prevent the problem, trying to get information. We returned over $2 million to consumers last year, but the one area where we have very little success is in the telemarketing fraud area.
And I think the same will be true in the new technologies that offer great opportunities for consumers and for marketers. But also in looking ahead as you said I think we're going to have some more problems because consumers are going to understand even less about the medium in which they're purchasing and also about the various methods of payment and that's what I would like to focus on just for a moment and then maybe look to you to help.
The real problem it seems to me is those people that -- the legitimate institutes that put in the hands of the fraudulent telemarketers and the fraudulent sellers that I'm sure we'll now find on the case and on the net and these are phone companies, banks, credit card companies, shipping companies, mailbox companies and companies that help people wire money.
This is where we have the real problems. We really aren't able to get money back for people in the traditional ways and I think the public doesn't understand it. They barely understand that they have some charge back rights on their credit cards and they certainly don't understand nor do they have maybe rates when it comes to electronic funds transfer and a lot of other cases.
What I would hope that we could do and as I said maybe with the Commission's encouragement or even facilitation and that is get together with these legitimate companies, institutions that do unwittingly put the hands, put tools into the hands of the fraudulent telemarketers.
And I would like to -- oh, I would say probably they can't do as much as maybe as I think they can. I've talked with some of my friends in these industries, so maybe I'm hoping for too much but my guess is they can probably do more if we all sit down at the table than maybe is being done now.
So I think there would be a wonderful opportunity to start talking about what we can do and it really is a form of self regulation, but not regulating or self regulation of the legitimate telemarketers but these other people could maybe do something to stop putting the tools into the hands of the fraudulent people, and I would like to give you one example and then I'll just listen.
Some years ago we had trouble with a 900 number cases, and we had a particular case, I can't say this but this was in a print ad, and it said to call this 900 number and you would get a credit card. That was certainly the implication. And they used the VISA, MasterCard logo in this ad.
What would happen is people would call up and they would pay anywhere between 9 and 40 dollars and what they would get in the mail was a packet that would give them an application form to apply for a security credit card which they wouldn't have been answering this if they could have afforded $500 to get the secured credit card.
We were very proud of ourselves. We caught one guy and he went out of business and low and behold two months later I saw the same ad in the paper and we thought we had done our job.
What happened was each time we would take care of some small operator someone else would buy the advertisement because that's all they were and put them in the local newspaper.
And we went to VISA and MasterCard, Your logo is being used here and it's your goodwill being at risk and that's your logo selling these to people. They're calling up because they're really excited they can get a MasterCard or VISA so what they agreed to do is to tell their member banks, Don't let your member banks use third-party marketers who place these kinds of ads. And that stopped this problem, just cut it off at the pass.
So this was a relatively simple thing. We were really pleased with the cooperation we got from VISA and MasterCard. But I think that's only one example of all of these institutes and what they might be able to do to cut off the fraudulent telemarketers which that would certainly be good from the point of the speakers we heard. John wouldn't get so many calls maybe and I wouldn't get so many calls -- I'm not suggesting it's not all that easy for them to always do something even though I say I would like them to.
Banks I think already screen some of the vendors to give people vendor status and ability to use electronic funds. Shipping companies don't have to allow CODs. Mailbox companies might be persuaded not to use the word suite because that -- if you have a mailbox company you put an address, then you put suite 300, and you never know, the consumer never knows that they're writing to a mailbox, just simply to a mailbox.
They think they're writing to an address in the street and in Montgomery County they've prevailed upon them to use the street address and suites number so consumers wouldn't be defrauded.
Those are just some examples and I hope we can do this because I would agree with Mr. Gallant, I think they really do run a risk of the legitimate people not being able to do business or losing out because of the fraudulent telemarketers.
I know one person who, when he speaks to senior citizen groups suggests that since we know they're very vulnerable, that they just exercise. And this exercise he gives them is just "pick it up put it down, pick it up, put it down."
And clearly that is not something that's good for your business nor is it good for consumers that might want to deal with the legitimate person.
So I guess I would just ask for your help and maybe support in working with some of these other institutions to prevent the problems. Our resources are limited. Yours are certainly limited and no matter what we do in putting people in jail or getting them off the street somebody else pops up, so I do hope we could work on prevention and self regulation.
CHAIRMAN PITOFSKY: Maybe that's where we ought to be five years from now. That's an interesting thought. Ms. Dowd, would you like to comment?
MS. DOWD: Yes, a couple things but more directly on your focus question, and that is on technological changes. One of the things we came up with in our survey when we talked to older consumer victims was that they can't draw the clear bright line between legitimate industry and the fraudulent telemarketers that they get.
Two or three phone calls come in, and the fourth one, no matter who it's from, they're going to hang up the phone. We would be able to teach them the skill to hang up on the first fraudulent telemarketer. I don't have much concerns about legitimate telemarketing but that's our concern and that's really the difficultly.
People can't tell the difference. To get back to the technology you're talking about, the changes, the web, all these things, the Internet, how do we get some of this consumer protection information once we decided what the message should be on that, on the computer, on the Internet?
And also how do we send some of this wonderful information, timely information that John Barker's organization is able to collect to the law enforcement agencies? We need quick access to that. John's agency sends the information to us. We get it pretty quickly but we need it more consistent. We need federal agencies involved in that network, and that's really the question.
That's important I think to the future.
CHAIRMAN PITOFSKY: John, how does it work? We've sort of privatized that process, the government does and you do.
MR. BARKER: A unique partnership.
CHAIRMAN PITOFSKY: What is the usual time span from when you get a complaint, you process -- I say your people process it and to get it out? How long does that take?
MR. BARKER: Three minutes so it gets where it needs to get rather quickly. Unfortunately at this point it doesn't going enough places quickly enough. We could certainly expand what we do.
Then also for law enforcement there is the availability of the FTC NAAG database which any state regulatory, any state regulatory agency, law enforcement agency that's a member of it can go in there and check on a particular company, see how many complaints there have been and also who else may be investigating that company, coordinate with other law enforcement agency, get witnesses, each use that to go into district court in some cases to get a search warrant.
CHAIRMAN PITOFSKY: Yeah. I recommend to all people in law enforcement to take a look at the kind of data that this group puts together and realize what a resource that could be for law enforcement.
Eric Brown, did you want to comment?
MR. BROWN: Thank you, chairman, and thank you for including us here today.
You talk a little bit about the changes that are coming in the next five years and the changes are rapid and the technology is probably beyond what any of us can imagine in five years from now, and I think what we need to do as government regulators is to continue to challenge the development of these new technologies in ways that force the legitimate folks to take responsibility to distinguish themselves from the crooks, and I think the legitimate responsible industry is really in the best position of anybody to make that distinction.
I think that we also need to better articulate some very, very basic principles of consumer protection and basic principles of consumer rights that apply to these transactions today. They applied 20 years ago and they will apply five years and 20 years from now.
Things that consumers and I think that we can all agree on -- consumers are entitled to know who they're doing business with. That's becoming increasing difficult. You don't know who that is on the other end of the telephone.
We heard a presentation this morning from the marketing, telemarketing perspective of MCI and it was a wonderful presentation on videotape about how they have just spectacular information on their computer screen at the point that they make a telephone call, telemarketing call.
The fact is on the other end of that call is a consumer, and what it sounds like at the other end of the call is, Hello, I'm Wayne from MCI, and I'm here to sell you telephone long distance services.
Well, that consumer has no way to know who they're actually dealing with, and I think the legitimate industry is going to be the one who can best distinguish who they are and set themselves apart.
I was pleased to hear some talk about the seal of approval notion and I would like to learn more about that, but what I've been thinking about and I want to ask perhaps some of the presenters earlier, how do you do that?
I mean, one idea, for example, is to provide a network where a consumer can do business with safety where there is maybe a broker that has access to these different services and as long as you do business through the broker or through the network you're assured that you will have these basic consumer protections as part of your package.
For example, if I want to make a call over my regional Bell company over at Meritech that I can know that I'm going to have certain consumer protections built into that transaction because I've chosen to do business through a Meritech.
And the same would be true of the Internet and we can provide a system where voluntarily legitimate industry might sign up and associations, much like the MasterCard association we heard about for its payment systems, where they have a standard and principles and assurances of certain basic consumer protections so that consumers can know if they do business with somebody whose got that representation, that part of that network that they will be assured that they're going to get what they're entitled to, get what they bargained for and have a dispute resolution mechanism so they can undue the transaction if that's appropriate, and I don't know whether there's some thought being given to those kinds of concepts these days.
CHAIRMAN PITOFSKY: We've got the right people here. Let's follow up. We have Mr. Braasch with Spiegel. I never thought of Spiegel as a scam or Time Warner or NYNEX so what do you do now to try to create the person that's receiving the call a sense that they're dealing with a legitimate business other than reputation of your company?
MR. BRAASCH: First of all my position here I am wearing so many hats this afternoon I don't care to count them. Yes, I'm with Spiegel and Spiegel is a merchant or a direct mail provider. We're also a user and a purchaser of high tech equipment. We're also a banker. We own a bank out in Portland, Oregon. We're also a marketing partner with Time Warner. So it's difficult to try to figure out where to begin here.
Let me address the question that you put to us initially. A prediction five years down the road, I think it's impossible for anyone to predict where we're going to be in the future five years down the road.
Yesterday there was a comment made about what the future holds and someone said, Why have voice activation on computers, it's here today. I didn't know this until I went to a Radio Shack and they have a new IBM piece of equipment, and there's a microphone there.
And I said, What is this, how does it work. He said, This is called voice navigation, and he explained it to me and I couldn't believe the price for this particular equipment. And then I said, How about me, I don't type very fast, can I just talk into this and use it as a word processor. No, but there's a piece of software available that will cost about 7 hundred dollars and you can do that.
So now I'm looking at this. Now here's -- I've been basically computer illiterate and now I've got the ability to buy something and I can just sit there at a work station all day long and I can do all kinds of things and I'm using the phone lines on this.
So this I think is going to foster five years from now a dramatic change in the marketplace. You see today over in Europe because they're more advanced in this area than we are they're already undergoing changes over there. Places of entertainment now are closing up early. They're not staying open until late in the evening because people are going home to work their computers or turn on their television set.
The work force, the estimates as I read it by the year 2000 one-third of the U.S. work force is going to be involved significantly in the information highway. When you hear and read statistics like this you have to ask yourself, what kind of a customer base are we going to be having in the future if this many people are going to be involved in information systems?
I suspect that there will be a great many people with knowledge about how these symptoms work because so many people will be involved in it. On the other hand I think that the telephone, the concept of the telephone is always going to be here. We're going to have -- that is still going to be the major line of communication.
It may take a different form. It may be a hands off type thing or a thing that you can pull out of your shirt pocket or your watch or whatever but it's still going to be there.
In our company our business on the merchant side we rely on -- 93 percent of our business is done over the telephone. It's basically inbound calls. We do some telemarketing through outside agencies but very, very little but 93 percent of our business is based on the telephone.
We receive approximately 26, 27 million calls a year. This process is about maybe 14, 15 million orders at Spiegel.
As I said on the text side we're already involved in Internet. We're testing the waters here with Time Warner. We've got -- there are two other providers that we're involved with where we have different pages from our catalog.
As a matter of fact the other day before coming down here I wanted to see how this worked on the Internet so I went to one of our people and I got some information. I said, Can you give me a demonstration on how someone buys something from Spiegel on the Internet.
So we went upstairs and we started playing around on this thing and we brought it up and I wanted to order a box of chocolate covered pretzels, and my first thought was this is very awkward.
I mean, by the time we finish getting all the different files up and figuring out what buttons to push I could just as easily picked up the phone and order directly from Spiegel.
But the big thing I wanted to see because my background is in consumer credit, I wanted to see the payment mechanism involved on that. And on this particular set up the consumer is offered five different options, five different payment options.
There are two credit options, one of which involves this netscape and another one -- there's another thing that's called a secure or something which are ways to secure the credit card number. But we also offer the availability to have someone simply fill in the order over the Internet and then call us once it comes in and then we'll take the credit card number over the phone or they can fax an order in or they can mail it in.
And of those options, of course this is very, very early in our testing I said, Well, the orders that we have processed so far, what is the predominant payment mechanism that's being used and in all cases it was the credit card. They all chose to use the credit card.
COMMISSIONER VARNEY: Right on line, type it in.
MR. BRAASCH: Right on line. Right on line. I was a little surprised about that. Another observation in the paper this morning. Many of you may have seen it. The article was that don't throw away your old computers. The 286 and the 386 things that are now outdated instead of throwing them in the garbage, use those, keep those because you can use those on the Internet.
You can download all the information you have on that and put it on the Internet and you'll have everything on the Internet and you'll be able to use your computer to do other things. That article didn't say a single thing about privacy or the exposure. Now, who would want to put everything in a computer on Internet where there's a possibility for access.
There's another emerging technology that's coming out that I don't know that is really being adequately explored during this session and this is the smart card technology. There are between formats of this.
There's a European format and there's a U.S. format, one of which will actually become predominant. It's sort of like the VHS Beta type concept. But this is very interesting.
You people will be able to have an electronic wallet where they can transfer dollars from one person's account to another person's account. These things will be used certainly in small transactions, but there are a lot of issues being raised about this type of technology, everything from privacy to security, whether this is a banking transaction, et cetera.
Five years from now I think there will be a lot of use for this type of thing. It will be an alternative to credit cards. The stored bailey contract. The problem is you have one of these things, you lose it, you lose it. It's just like cash and there's no way you can effect the recovery.
Some of the concerns that we have in our company of course are the -- we've got a lot of costs involved. Our experience is that if a consumer gets involved with a fraud it's not only the consumer's loss it's also our loss because we get charged back for a lot of these transactions so we take -- we have to take this loss.
And an example on the merchant side I think we're looking at something like maybe close to a million dollars in charge backs. Now, this is only on the bank card side of our business, but for every dollar that we spend it costs us in charge back we spend 50 cents putting together some sort of verification system or handling. We get a lot of time to this.
When we get calls at certain times of the night or a certain sequence of events or a certain type of merchandise is being used and the request is being mailed to have that merchandise shipped to another address, this goes through our system and sometimes it will create an automatic disapproval.
Sometimes it will come out that, Well, this is something that maybe we better call the customer and find out whether they've actually authorized this.
And we catch a lot of this. It works. It's expensive but we think that's worth the time and the investment.
Another observation that I would like to make on the bank card side again there is -- and this goes to the issue of consumer education which is very, very expensive in order to try to come to grips with this thing, but when you get down to the basic fundamental aspect of this, consumers don't look at their statements when they get them at the end of the month.
They don't look at their statement. We have had instances of fraud, and this is an example where we will go out and we do some what we call a run, we'll put a run on and we'll rent a big warehouse or something and we'll have a tent two-week sale and we'll go out and hire a lot of temporary people and this is a problem.
Sometimes we uncover conspiracy. There will be a con as far as between the person at the register and two or three of the sales clerks. A customer will walk in, make a purchase, check it out using a VISA card, MasterCard or whatever, and then about ten minutes later someone else will go through that checkout line with some of the merchandise and the cashier will charge that merchandise to that customer's account who walked out.
Now, we uncover this and eventually we're going to -- we'll uncover. It often happens, we don't uncover it until actually several weeks have gone by and we interview the people involved. We found out -- we find out how much money that they have stolen. As an example it might be $100,000.
How do we identify who those consumers are that have incurred that loss? We can't because we don't know who they are. There's no way for us to identify them unless they look at their statement, call us and say, I didn't make that purchase.
In the couple of cases that I've looked at, it's unbelievable the low percentage of customers that will call us. It's less than 5 percent. I mean, there are people out there that have incurred major losses and we don't know how to identify them. so this is a major problem.
One of the things of course that we can do from an industry perspective is to do a better job of screening our people and interviewing them and doing investigative searches, so on and so forth, and this is something that we're doing.
On the private label side of our business through our own bank. our fraud losses there, of course are much more. They're running -- I think we've run up to about 8 million dollars annually on that, and part of that problem of course is the nature of our business.
We take a lot of applications over the phone and that creates problems for us because we're very vulnerable to -- on the liability side when you don't have that face to face contact with the customer there again we use different ways of trying to screen out individuals using a different scoring techniques and building models, so on and so forth.
As far as an effect of this technology and the changes that are incurring, one of the concerns of course that we have from an industry standpoint is what law enforcement and what the regulatory agencies are going to do to meet this challenge.
The concern, one of our concerns -- a major concern we of course have is that we don't want to be faced with premature regulation. We don't want to we faced with over regulation.
What we're hoping for is a balanced type of approach to this as was done with the FTC Telemarketing Sales Rule which I think was a great effort that was put into this thing by everybody and we came out with what I felt was a very balanced rule.
The other thing that we're concerned with from an industry standpoint is uniformity in regulation. That's very important to us.
There are a couple of other comments I wanted to make from a regulatory standpoint, and that is sometimes we're seeing an over extension of regulation in another area. As an example, telephone monitoring, we're concerned with that because we think it's important for us to be able to monitor some of the phone calls that we get in and there are a lot of states out there where this poses problems, the question of whether you need the consent of one party versus two parties.
Another area where we're seeing this same thing happen, there are a lot of states that have enacted legislation that makes it -- that prohibits the taking or recording of information in a credit card transaction. You can't ask for a customer's telephone number. You can't require it. In some state's you can't even ask for it.
In this situation I talked about before if we had the customer's telephone number on the sales slip where he might have been able to much easily or easier identify some of these people who incurred a loss.
And I think in one state I think it was Maryland that has recently reversed some of its legislation because of the extent of consumer fraud, that they had relaxed it somewhat to allow a merchant to take more information.
Another area that I have some concerns about putting my lawyer hat on the changes that are taking place in technology. I think there's going to be a change in a lot of the legal principles, sort of we're going to run into a situation where there's going to be some imputed liability claims. Why didn't you spend more money to screen your employees? Why did you utilize this equipment when you knew that it could be breached by an individual?
Consumer or an individual can suffer a loss and they can bring an action against the software provider or the manufacturer of the equipment that caused the loss. I think we're going to see some of that in the future.
From a trade association standpoint I think someone had made a comment that trade associations may not be very effective in the area of self regulation.
My response to that is I think you can find a trade association that can be very, very helpful in this area. DMA is very effective in this area. The merchant's research council that we belong to is also very effective in this area.
As a matter of fact over the years we have -- we work hand and glove with some of the -- some of the different sections in your agency, the marketing section. One of our last programs we had speakers to come down and talk to us about the telemarketing rule and for years we've always had enjoyed the favor of having someone from the Commission come down and talk to us about the enforcement area in truth and lending and all of the consumer protection laws and that is enormously helpful to this particular organization because the whole purpose of it is consumer research and education.
How you get -- how you get the message out to consumers I just don't know. We try. We put out brochures with monthly statements through our bank and we've done it. We've tried to get little bullets about don't give your credit card number over the phone, if you lose it call right away and there's about 16 or 17 different little points that we make but people just don't read that.
I was on the consumer advisory council several years back and at one point we had a consumer education subcommittee. We disbanded that subcommittee because really the whole council -- it was one of the whole entire council's responsibility.
I know the feds put out those brochures by the thousands. They send them out to banks but the only people that are going to read this is someone that goes into one of these banks and picks it up off the rack.
That's just too expensive to mail that kind of material out unless you can get the support or the cooperation of business to include these statements when they send out a monthly statement.
On the other hand that is a very expensive proposition because if you talk to a merchant about that to take out one piece of information that's going to generate a couple million dollars in sales and put in a disclosure statement it's a very tough sell.
I don't know what else I really have to say or that I can add to this but I do think it's very, very important for us to work very closely with law enforcement agencies. I think this is a great, great start on this thing and I certainly hope that it would continue, and I know I would be much -- very willing to sit down with any of the staff people here to go over a lot of this material.
When I came down here I put a book here together and there's a lot more information in this book in these pages than is in my head right now, and I can assure you of that, but we've got -- we're doing everything we possibly can to identify potential areas of fraud and to do whatever we can to help the consumer because to the extent that we can help them we're helping ourself.
CHAIRMAN PITOFSKY: Thank you. Thank you very much. Mr. Sackler, Mr. Gallant, do you want to pitch in on this?
MR. SACKLER: Perhaps at least part of the solution can be technological. The technology really exists today that you can see as it all comes together so that you have video voice and data together that it will be very easy for a consumer five years from now to even by voice call up a white list of businesses when they're being importuned over the phone the company with video to try to buy something.
That's compiled either by a governmental agency or maybe via Better Business Bureau or something like that that will tell you which businesses are legitimate. That's one thing.
The second thing that can be done now with technology and that it be incorporated into the one pipe thing is an automatic call back and check, who is this really calling, is this someone from Spiegel or Time Warner or is it someone posing as Spiegel or Time Warner.
You can do that to check. And a third thing and I know one of the central conundrums in front of the FTC and the AGs is it's extremely difficult to tell the difference between a legitimate and a fraudulent call but there are, John, or anybody -- are there any words, phrases, terms, conditions, any kind of identifier like that that could be sort of a tip off that it's possible, that a consumer might not recognize especially one who is elderly, but a computer sure would, because there are filtration devices that exist today and new technologies that are being developed?
There's a program, for example, going on at MIT right now developing building blocks for screening out at the consumer's will certain kinds of content that might be objectionable to that individual for him or herself or as a parent for their children.
So the same kinds of principles especially as technology evolves and about every 18 months there's a completes turnover so in five years we're three generations down the road. Are there these kinds of things at all that can give some guidance especially to a smart electronic filtration device that could kind of tip off the consumer with a beep or something or other that says, Hey, wait a minute this may not be on the up and up?
MR. BROWN: It's an interesting idea. I guess our experience in dealing with the thieves that perpetrate fraud over the telephone is that, yes, they use a lot of phrases commonly, and we often in our consumer education efforts try to inform consumers about those phrases and to watch out for these things to sound to good to be true.
Yet at the same time the talent, if you want to call it that, it's misguided talent, that these folks are capable of will beat any system that is devised I'm sure of it. They are very good at what they do.
They will look and sound as much as they possibly can like real legitimate companies. I'll give you an example just last -- two weeks ago we sued a company that was doing telemarketing fraud and what they were selling by telemarketing was long distance services, slamming them, and they looked and sounded very much like AT&T.
That's who they wanted to model themselves after and what they were -- they were claiming a connection to AT&T when they made their telemarketing pitch and they had one. They leased their lines by way of that service and they were selling a program they called discount plus.
Well, all of the folks that do long distance services have names for their programs. This one sounded like anybody else's. In fact, the consumer when they eventually got their telephone bill from their local telephone company, the only thing that would appear on the telephone was the term discount plus.
They still didn't know that they were doing bills with a slammer, with a fraudulent long distance company that had telemarketed them.
Now, we discovered it, we shut it down, but it's a drop in the bucket. They know how to model themselves after the folks who are legitimate and they're going to use all of their whiles to be able to do that.
I don't know -- I think the technology itself, I think some of the suggestions that you make in putting a stop to are helpful and the technology can be useful, but some of it we're still going to come back to teaching consumers customer basics.
We talked earlier about skepticism. The AARP survey was great because it showed that, yes, consumers are skeptical but they don't know what to do with their skepticism. They don't know how to be skeptical. They don't know how to distinguish between sources of information.
They hear something that somebody tells them over the telephone and that sounds just as good as what their state Attorney General is telling them or what the FTC is telling them. They don't know how to distinguish between good information and bad information. We so overwhelmed them with information over all of these media that we're talking about that they don't know any more who to believe, what sources to believe.
We want to tell them if it sounds too good to be true, stop. But yes there's all these lottery winners General Doyle this morning talked about, yeah, Wisconsin and New York have lottery winners and Ohio to does, too.
So we're giving them mixed messages and consumers simply don't know to what to do with all of that. And we're probably not doing an adequate job in primary education of teaching kids how to distinguish between various sources of information.
Just one last analogy on this and that is some years back when I was in private law practice and doing a lot of domestic work. I would frequently have trouble talking to a divorce client and giving them advice as their attorney and they would then go down to the beauty shop and get advice from somebody sitting in the chair next to them.
And they frankly did not distinguish between the sources of information. And I think that's a good -- we've got to give them better tools and better skills and teach them what to do with their skepticism. They have the AARP survey that was a real helpful tool is telling us that but they still can't act on it.
MS. DOWD: Something else too about your suggestion. It sounds like a great suggestion. I don't think it will work. The scams change as quickly as we catch on to them. It's a truism in consumer law and I'm sure you know that what I'm really concerned about and what we're really at this point looking for in industry is to work with us and come up with some techniques.
Jim, you mentioned some really enticing things and plans. I really would like to hear more about that. We need legitimate industry to distinguish itself from fraudulent. We try, we will continue to try and we will come up with some messages that work with people, simple clear concise messages.
It's difficult as the marketplace gets muddied for lack of a better word with legitimate and illegitimate games, schemes, sales pitches. How can you really look at what's going on up there and come up with some strategies to help educate. It seems the key.
MR. GALLANT: I really think education is the key, and I don't think that we as an industry or we as a government agency can protect the customer 100 percent of the time.
MS. DOWD: I agree.
MR. GALLANT: Something that has been said several times here today struck me and that is that perhaps there are consumers who don't want to be protected. There are consumers that don't look at their bill. They just pay it when there are charges they never made.
MR. BRAASCH: One of the reasons this happens is consumers are not aware of this type of fraud. In this particular -- they look at a bill and they say, I bought here, I bought here, I bought here, I bought here but they don't look at the purchases, the dollars that may be an extra $100 that reads in there and it's a simple oversight.
The best way to get at this issue of consumer education I think is at the high school level, to begin -- we have to begin somewhere and may not be the answer for people that are out of school although there are other means but the high school level is where a continued constant focus should be made. This should be part of courses in consumer affairs or whatever you want to call it.
MR. GALLANT: It might be effective if we put it on the web.
MS. GREGG: I would like to raise a question about that and really question the value of consumer education. I know that is -- we're not supposed to say that, but let's face it. Even 25 years ago it didn't work very well because people don't have the time to understand the product or the service as well as the person whose selling that product or service. Their mind is boggled.
They hope they can find someone to trust. They want to, just someone and trust them, and I don't care how we pound at people, and I don't think we should blame the consumer and it's even more difficult now.
We're talking new technologies that people barely begun to understand and new payment methods so I think I guess we can't stop because some people really will look up the information and we ought to make it available but I don't think we should -- I certainly couldn't recommend to the Commission that we're going to solve these problems by better educating the consumer. I really am tired of hearing that.
MR. GALLANT: That's just a piece.
MS. GREGG: The high school thing, that sounds good but we go and talk to lot of high school students. Come on. Let's face it, they're not going to zero in on it.
Their minds are on all kinds of other things. Sometimes they'll listen if we talk about record sales or used cars but again I don't think we should blame the kids that they aren't at the point in their lives where they are going to listen and you'll teach it to them and don't forget.
MS. DOWD: Barbara, you're really talking I think about the messenger. I don't think high school kids are interested in hearing consumer laws. I think we saw that in our AARP study. People want the information.
Sure. There are some folks that don't. Sure there are some people that don't read their bill but the bulk of people want a technique to determine who they should trust, maybe not specifics as to whether the product is good or product is bad. I'm sure some people want that too. They need a bright line to whose a good telemarketing --
MS. GREGG: I don't know how that is done, what you were talking about anymore than I want all these other institutions to step up and help us but I think we have to work toward that. I think I was being more negative on consumer then when it's old stuff.
COMMISSIONER VARNEY: I think we're probably talking about effective consumer education. I know it's getting late and I am not Commissioner Steiger and this is not Commissioner Steiger. This is Eileen Harrington who probably knows more about the telemarketing rule than any person in the Federal Trade Commission and as much as I want to hear from everyone, I think I would like to get Eileen's thoughts.
MS. HARRINGTON: It makes me such an interesting person. I'm a heavy sought after dinner guest.
MS. HARRINGTON: The point Art made or question Art asked is there something we can do with technology at least to better equip consumers if not completely to inoculate them and I was thinking the other day about how my phone here at the FTC rings faster when the call comes outside of the FTC then when it comes from inside of the FTC.
COMMISSIONER VARNEY: It does?
MS. HARRINGTON: Common carriers for years have known who their residential --
COMMISSIONER VARNEY: Are you sure about there?
MS. HARRINGTON: I have really hot people outside the FTC calling me. No, but the phone rings at a different speed depending on where the call originates from.
Phone common carriers know who their residential customers are and who their business customers are. Whether their business customers are calling from a residential setting or a more traditional business setting.
What I'm wondering is does the technology exist to make the phone ring differently if a business is calling than if someone is calling from a residence and would that be -- and I would be interested to know whether that would be a useful technology, whether there would be an incentive for anyone to develop the technology and whether the people that are in business calling for business would just die if that technology became like widely available?
That is, would your business die if the phone rang faster when a commercial call caller was calling and would that be useful information?
MS. DOWD: I think it would be very useful information and I think of friends and families logo. If consumers could identify a dozen or so phone numbers of people that could be a key and they would know during dinner time don't answer the business calls that are coming in. I think that's very novel and interesting.
COMMISSIONER VARNEY: Or any time.
MS. DOWD: But dinner time.
MR. GALLANT: If I can have a crystal ball in the not too distant future, areas of the country have caller ID it's a bone in contention of a lot of people with privacy, the next generation of caller ID type technology and actually we're introducing on a limited basis a version of it in a couple areas next month in New York, where -- and in its first iteration, one of the things that annoys me at home when the phone rings and I look at the caller ID and it says anonymous, that means somebody went out of their way to block their name from me, all right?
And I don't answer it. I refuse to answer the phone. But it irritates the heck out of me when it rings. With the new service anybody that calls me and has blocked their number my phone will not ring. They will get a message that says this individual does not accept calls from anybody that shows they blocked their number.
Okay? The next iteration, next generation I think we're only talking a year, maybe a year and a half before we have widespread distribution around the country is a service where you'll actually manage a calling list where you can either put numbers into it, that it's going to be in a telephone or computer or whatever, but you will put numbers into the network to say don't ever let that person call me or you can put numbers in the network that says, I only want calls from these people.
COMMISSIONER VARNEY: Can I get this in my house?
MR. GALLANT: Oh, yeah. The kids will love it really.
COMMISSIONER VARNEY: Like soon that would be a test.
MR. GALLANT: That technology is beyond drawing board stat.
COMMISSIONER VARNEY: I would like to know what Art has to say about that?
MR. SACKLER: For you I think I will bite the bullet and say no we wouldn't like that. You would be stigmatizing all business whether legitimate or fraudulent. Chances would be in a lot of places that all calls like that would be rejected. And that's something that would be very difficult for a whole long range of businesses.
COMMISSIONER VARNEY: What about the NYNEX technology, what do you think about that?
MR. SACKLER: Where you have the anonymous?
COMMISSIONER VARNEY: The ability to block the people that want to call you anonymously. I would assume telemarketers would disclose their numbers.
MR. SACKLER: We don't call anonymously. We tell the people who we are and what we're talking about.
MR. GALLANT: What I'm saying though is in a future that type of technology will be one step further than we know it today. The name of the caller will show on the box, right, so when Time Warner calls --
COMMISSIONER VARNEY: It will say Time Warner.
MR. GALLANT: One of my options is to look and see oh, I know it's Time Warner, I'll talk to them, they're a good company. So we're also going to get name and number displays so the emergence of technology in the telephone network, AT&T talked about, MCI, is going to give a customer a whole lot more choices where telemarketers like it or not.
COMMISSIONER VARNEY: Unfortunately what's going to probably happen is that what we found in the telemarketing rule is you told us scam artists gimmick legitimate telemarketer so even with the new technology then you have someone that registers their phone number as Time W. There's Time W and of course it's a scam. It's not real.
I was a little more intrigued about your technical solutions much further off interactive and being Time W comes up. You can scroll down by your finger and see if there is such a company whether it's government, private, that a business bureau, whoever it is.
But now that's a long way around the company we have -- along way away in terms of its penetration of individual households right now.
I think the statistic we keep hearing from 30 percent of all households have PCs but 10 percent of those only have modems.
MR. BARKER: One of the things that I think we're seeing and what's going to be very important to you all in the next five years is that we're seeing parallel developments. We're seeing a lot of technology coming on to the market.
In fact we've gone in recent years from face to face stake oil salesmen to print to print mail order to voice to voice which is telemarketing and now beep to beep which is all of the things that were going to be happening on the Internet.
But we're also becoming a nation of haves and have nots, and that this technology will be available to only a very few people. And I think the perspective that you have to keep in mind in the next five years as we're more and more and legitimately so about technology and what we can do with it and how it's going to work against us is that many of the people that we're dealing with in fraud are people who are the elderly, the poor, the disabled.
We need to worry as much about that poor women in the double wide in Connway, Arkansas, as we do about the person who is engaged in some sort of investment fraud.
COMMISSIONER VARNEY: Precisely. There's a person between a person that doesn't notice an extra $100 in their MasterCard and an extremely vulnerable elderly person whose never going to block out and get some, two different types of people and clearly the programs that government and industry ask or should undertake on behalf of either of them I think in my mind are very different.
MR. BRAASCH: Can I ask a question about caller ID and telemarketing? If a company uses an independent organization to do its telemarketing how does that -- how does caller ID work when the phone rings at the consumer household?
MR. GALLANT: At this point in time it's not permitted to transmit caller ID signal across lateral boundaries so when I make a call from my center in Massachusetts to my center in New York there is no caller ID sent. It actually is sent but it can't be displayed because of the FCC rules.
Those are being deliberated right now. You suspect within 90 days, maybe 120 those rules to be returned and we'll start transmitting across state lines so let's assume that's done.
Now we have a telemarketer in Dallas whose now calling customers in Wisconsin on behalf of a company from Seattle, okay? That's utilized to make those calls from Dallas and readily have the originating company's name on it.
Just because the calls coming from Jim Gallant, the name doesn't have to say Jim Gallant. I can register and it's going to take some regulation. I can register what I want that name to say.
Today the thinking in caller ID main delivery is it will say whatever your phone bill says, the name in which you get your phone bill, so immediate solution could be that I'm a third party telemarketer and you've hired me, Spiegel has hired me to make telemarketer calls. I would tell the phone company I want these 50 trunks making my own calls in the name of Spiegel.
COMMISSIONER VARNEY: What obligation currently exists on the phone company to verify the veracity of the billing information?
MR. GALLANT: The incentive to do so is the creation of the service and establishing credit verification on the customer so doing a credit check background check.
COMMISSIONER VARNEY: You must do something to ensure that the bill is going to get paid.
MR. GALLANT: Sure. We want to get paid.
COMMISSIONER VARNEY: And presumably you either will because you're required to or because it makes good sense to weed out those that can't be verified or shouldn't be verified.
MR. GALLANT: Right, right.
COMMISSIONER VARNEY: Then do you get in trouble because of your common carrier obligations or this fault.
MR. GALLANT: We can require substantial credit deposits if necessary.
MS. GREGG: I think another thing this enforcement agencies could look at that and say you should have known or if you knew and should have known that there was some indicia of fraud or you hadn't checked into them enough then they have a responsibility to do that, not just because they want to get paid because somebody might go after them in the long.
I think that's happened at AT&T I think.
MS. HARRINGTON: I would like to pick up on a point, on John's haves and have nots and another point of technology and that's where a business can, between the telephone and all the technologies we've heard about from yesterday and today in terms of convergent and narrow casting and all that other stuff, whether a fundamental difference is with all the new technology consumers are able to choose the information to receive or decline it.
That is when information comes in online you don't have to pull it down. You don't have to read it. But with the telephone there still isn't really that kind of ability to choose or as Mr. Bell said with the new technology the consumer is sovereigned but I'm not sure with the telephone that the consumer is.
That is, that once the phone rings the consumer has the same informed ranges of choice that the consumer does when the information is delivered in the new medium and whether a distinction here that makes the telephone suitable well into the future is that consumers just cannot be as well informed when they make the choice about whether to answer the phone as they were when they make a choice about whether to select a program or to pull down information and whether that is going to further draw the distinction between the haves and have nots.
Are the have nots going to be the people with phones that can't choose and the haves the people with the technologies and the means to obtain it that enable them to make the choice to receive only the information that they want, to only be contacted by the people they want?
MR. BRAASCH: Correct me if I'm wrong there are phones now on the market that I don't think are that outrageously expensive that you can simply program, you can put in 20 numbers there that when that call comes from any one of those 20 numbers it's going to ring a certain way, and if it comes in from any other source it's going to ring differently.
So when that phone rings at six o'clock you can hear it and you can say, This is either a member of my family or a friend or someone that I have put in there that I want to hear from or I would not object to hearing from, and if it's that phone rings differently you know it's going to be from some other source you don't know whether it's telemarketer or whether it's an -- you won't know what it is, but those phones are on the market right now.
MR. BROWN: I think a lot of these new technology and those ideas we're talking about, those conveniences, I think those are good and I wouldn't want to discourage developing those things. But I believe they focus more on the conveniences that all of us who I would put in the category of haves would like to have in our lives to make those distinctions for us and to make things easier for us.
Just like the rules about not making telemarketing calls at night. But they don't get at the have nots and they don't get at the fraud that is perpetrated at those folks. It doesn't really help to the folks that are really most vulnerable and are most likely to be true victims of fraud.
It's helpful to me to go home and not to be interfered during my dinner hour that I don't want to take certain kinds of calls and that certain calls aren't going to ring on my phone and I'll have that technology to do that. But I'm not the likely victim of fraud and those that are most vulnerable are both not going to have access to the technology and I don't think the technology are really going to get at stopping the ability of the crooks to take money.
For example, I think we need to continue to focus on payment mechanisms. I think we need to continue to focus on many of the traditional things that we've been working on and we're not there yet.
I know I heard a comment from Mr. Gallant earlier in the presentation that maybe we're far enough in some of the telemarketing regulations and I don't believe that's the case. We are continuing to see development of these international scams, foreign scams and they're more prevalent than ever coming from Canada, coming from other foreign countries and I don't think we do yet have the necessary regulations in place particularly with payment mechanisms to protect people and their money, and not allow that to receive.
Let me give you one example and it's because it's pretty recent. We saw a classified ad just a couple months ago in a small town central Ohio newspaper, and I brought the ad, in fact there were two ads and I brought them with me.
One is airline tickets for sale, two round trip in the 48 states $89. The other one is for a '95 Ford Mustang GT. It has a fair number of miles but it's available for $5,900. These are in your typical small town newspaper classified ads, and the telephone numbers that they provide aren't in that town but they're in the next area code over, they're in the 216 area code.
You call up that 216 number and it's a toll call but it's a modest toll call over the local carrier and it gives you a recording and it says, for further information if you're interested in this ad we would like to provide you more information, here's a number to call.
The number that you call is an 809 area code. First of all most people don't recognize that as being an international call. Most people see an area code and it's not that 001 in front of you, Oh, this is a domestic long distance call, I'm going to call that for information.
They call the 809 area code and they hear cleverly scripted recording answers that call and keeps that consumer on the line for an extended period of time for an outrageous high rate to the Dominican Republic.
And what's happened, there's no plane tickets available at $89 and there's no Mustang. It's absolutely purely fabricated. We know that. But what occurs now is that the consumer is going to get billed on their regular local telephone bill and the 900 rules that we've developed aren't going to protect the consumer from this.
One of the things we've just done in Ohio and by the way this story we gave to CNBC Steals and Deals and they aired it last night on Steals and Deals, but one of the things we've done and I would like to hear from Mr. Gallant and I don't know what's occurred across the country.
But in Ohio currently the local telephone company is going to do the billing and collection for this call, and if the consumer is smart enough to see this on their telephone bill and they don't always do that and they're not identified very clear on their phone bill, but if they happen to spot it and they challenge it, they're still subject to paying this bill or risk disconnection of their basic local telephone service, and that's an awfully coercive payment mechanism. We would like to see that stopped.
In Ohio we've asked our regulators to change the rule so that they could not disconnect local basic telephone service for nonpayment of this type of international call. We're going to see this more and more.
Canada -- and Mr. Barker mentioned earlier the increase that you're seeing in the Canadian scams and other foreign scams. We're seeing more of it too. How do we stop this kind of scam? How do we protect consumers? And I think some of it has to be in the payment mechanism that is currently being run by the local phone companies. Where do we go with this?
MS. GREGG: Could I just add that part of the 500 number could that same question be --
MR. BROWN: Same question, would apply to the 500 number.
COMMISSIONER VARNEY: Rather than have Mr. Gallant take that on I think there is a growing concern about that problem. We here are certainly aware of it and we're working on it to the extent that we can.
What you've identified I think is absolutely the right first step, is you have to go to the phone companies in your jurisdiction and say, What are we going to do? Clearly it's not in anybody's interest to let that continue.
Let me just pose maybe one final question to the panel unless Teresa has some questions. Do you have anything to ask the questions?
MS. SCHWARTZ: I don't want to drag this out but listening to all the discussion about technology and thinking back on something someone said earlier is about the reason this telephone is such an important marketing tool is it's so personal that you actually talk to a human being. They have an interaction.
They're very good at what they do and as we think about how we're moving into much more interactive and the computer and so forth I wonder if this tool actually becomes even more effective because it is in fact personal. There's a conversation going on and people may in fact like this as a way of doing business.
Is that around the table that the telephone communication with another person is going to be extremely important as a marketing tool for the scam artist and the legitimate offer?
MS. DOWD: I think that's an excellent point and I would go back to the survey. One of the things we found was people valued that personal interaction so much they couldn't hang up the phone. Conjecture, is it's due to courtesy, traditional ways of dealing with the phone as a guest in your home and all that stuff but there is a real sense that this is our genuine interaction.
If it's a machine, it's a computer dialed number I'll hang up. There's a real person on the other end of the phone. I have to be courteous -- it's not even courtesy. I have to respond to them as one human being to another.
I think that becomes more compelling in the Internet as Eileen pointed out where all the connections and connections are very impersonal. The phone remains sort of the last personal contact.
MR. BRAASCH: We are looking at technology on this issue and the other side of the coin is if you make a phone call as a customer you're calling the company, you want to buy something. There's so many times today that you're put on hold or you get the recorded message all our lines are ties up and it will play a song and you'll hear some news and sometimes depending on who you're talking you could be on the phone for ten minutes.
We're looking at technology now to give a consumer an option. When they first hear that message there will be a message out there, If you wish to place an order or you wish to do this, you'll be connected with our automated response and you hit pound star whatever and then follow the instructions. . Give your name, and you give us the order number and the date so and on and forth. That's the end of it all.
There's no personal contact at all but I think it's something I think consumers would like because they're not going to be kept on the phone for an extremely long time.
COMMISSIONER VARNEY: Although I have to say I differ with Ms. Dowd a bit. You look too young to have a 10 year old son or an 8 year old son like I do.
MS. DOWD: I do.
COMMISSIONER VARNEY: It's generational. If you watch my kids, my eight year old will get on the computer on the network before picking up the phone because he's on there. He sees something really cool and he mails his friend, Hey, Bucky, did you see this and two minutes later, Bucky, says, Oh, yeah I saw that yesterday but did you see this one, this one is better.
So there's a whole generation of kids that at least I find the net is much more faster and gives them a greater variety of tools to communicate with and they're not so tied to the telephone as the personal people of communication.
It would never occur to him to pick up the phone and go downstairs and call him to say, Go look on this web site and pull this up because it's really neat and it's what we're talking about at school. They do it all on the web. and the question I wanted to close with is as we heard in these hearings the news prints did not replace the written word and radios did not replace newspaper and television did not replace radio nor will the Internet likely replace the telephone.
And if you will assume for a moment whether or not you agree or not with this proposition that this issue of have and have nots is probably a great issue. It's very real and I don't mean to diminish it, but there's some writing in commentary that says in the long run whatever that is 20 years, 30 years, whether you view it as some Time Warner executives have put forth this vision of a whole home center that is your television, computer, telephone, or something else that the telephone and television enjoy huge penetration in the United States and so likely overtime will the new technology.
Do we create a new class of vulnerable citizens as this technology expands and does our existing framework of law and regulation, how we think about consumer vulnerability, should it change as we see the expansion of this technology?
MS. DOWD: That's a big question.
COMMISSIONER VARNEY: Would you like to start. You really don't look old enough.
MS. DOWD: Thanks, I guess.
COMMISSIONER VARNEY: How old are your kids .
MS. DOWD: 8 and 3, and I'll confess we don't have an Internet computer at home.
COMMISSIONER VARNEY: The problem now is it actually ties up your phone line if you only have one line.
MR. GALLANT: Would you like another phone line?
MS. DOWD: I think though that we're really talking about a consumer protection whether it be educational enforcement, a consumer protection environment that is probably not sufficient today. With technology increasing at warp speed I can't imagine it's going to be more effective tomorrow and next month and 18 months when things turn over.
I think what I come away with after working on this survey which does focus on older people God knows we didn't look at children, we barely can segment the older populations into meaningful groups that we can communicate with them.
That's what we need to do I think. I think we need to look at the technology whether it's a telephone or Internet or whatever it is and say the personal contact is on the telephone. That's where we can have some -- that's where we need to have some impact because it's going to be consistent.
As we go into the next phase the telephone will be an integral part and I think that's what we need to look at and that's what consumers need to identify the fraud and engage in practices they want to have and stop the phone calling during dinner.
COMMISSIONER VARNEY: Let's jump back and forth here. Mr. Braasch, what do you think about that?
MR. BRAASCH: Well, one of the things I wanted to mention from a consumer concern and that has to do with accountability, aside from fraud, that other family members being involved and so much activity over the phone, children, et cetera, it's very difficult to put some sort of a control over the amount of telephone usage or Internet officer whatever.
They get that bill. I get a bill for -- I have a daughter in school and I look at this and I can't believe all these charges in here. What's going on, and it's difficult, and I don't know how to manage that.
COMMISSIONER VARNEY: Mr. Brown?
MR. BROWN: I don't see any diminishing of telephone in our lives. I think we're going to continue to have it. I think that the anonymity, the intensely personal nature of the phone that were mentioned earlier and that Eileen mentioned a few moments back I think are very much true.
If they're going to stay with us I think we need to continue looking really hard at not only the regulation, but as the technology develops there's an inherent belief that improving or getting more high tech is good.
And I think that we need to challenge that from time to time, that simply improving and giving better marketing, whether through the telephone or the Internet or whatever, it doesn't have any inherent evil but it also doesn't have any inherent good, and I think we need to challenge that. And that we don't need to move through these things necessarily as quickly as those developing them are proposing.
I know they would like to be out there doing all these things as quick as the research and technology allow, but I think we need to go back and really focus hard on basic consumer principles and make sure that until we're satisfied that the new technology meets those basic consumer principles, just very fundamental things that we can agree on, that we ought not go forward with the new technology, even though we've got folks that want to sell things in that fashion we need to go slower and make sure people are protective.
COMMISSIONER VARNEY: Ms. Gregg.
MS. GREGG: I guess I would think -- I'm not sure that we can make things slow up, and I think particularly responding to you and your kids I think everybody has that experience of the younger people, it's nothing new to them.
I could see some opportunities in the new technology where we ought to be using it for -- if I sounded off about consumer education before, but I think it's an opportunity to get some important information at the point of sale if you will which is harder to get on the telephone or even on the TV when it -- the ad is just so quick and it's over.
So maybe we ought to look and not just at your home pages but some ways to get important information right along with the sale. I don't have an answer. I don't even understand it that well. I'm just getting there myself.
But I think there may be some opportunities that you and staff might want to look at for getting information on the net at important places where people would be able to use it.
COMMISSIONER VARNEY: In fact we are doing that. Some of the biggest online services have carried the FTC logo on their front page and it says click here about more consumer agency.
MS. GREGG: We have it on in the county but the darn thing is you click the thing, there's the page but there's this much information.
MR. BRAASCH: Can I ask a question? As far as the jurisdiction of the Federal Trade Commission how does this -- how does this differ from the jurisdiction that the FCC has over telephone communications from a consumer protection standpoint? Are you recognizing a problem here or is there a clear line or division of authority where you can step in as opposed to --
COMMISSIONER VARNEY: I think there's nothing clear as we move further in this technological evolution. But what we're doing is looking at the consumer fraud issues and our goal is to convene industry -- is including other parts of the government to address the problems as they arise and to try to figure out sensible and coordinated -- in a nutshell the jurisdictions are different.
MR. BRAASCH: Congress is now looking at this whole area of communications and there are two very clear lines that are being drawn in the house and the senate and I know they're looking at some of the same issues that we're exploring here. I am just curious when that legislation comes out who will have the enforcement and the regulatory authority under that legislation.
COMMISSIONER VARNEY: If some in industry have their hearts desire, no one will for the time being. That may not be such a bad thing. Mr. Gallant? Would you like --
MR. GALLANT: I tend to agree with you that we're in a bridge period here and I do think that there will be a convergence of telephone, television, Internet. I don't think five years from now anybody will recognize what we now call Internet.
I think people will be browsing through the department store on the Internet, will click on hopefully the NYNEX department store and there will be one of my reps talking live face to face and we're going to go back to the personal selling face to face which will have an added benefit.
That there will also be integrated text and video so that my rep perhaps today has a difficult time explaining all of a particular product so when you get it you're dissatisfied, okay? You said it was going to be blue. I didn't know it was going to be that blue, all right?
I think the new technologies will allow for a better informed decision on the part of the consumer.
I think this new technology, and I don't think it's far away -- we're experimenting with video sales right now between kiosks and a couple retail partners we have back into our centers.
It's in its infancy now but I see that happening. And yes there will be haves and have nots over time but as you said 98 percent of the household of America have a telephone. 96 percent have a television. 90 percent of the households in America have VCRs.
That's absolutely -- where are the have nots? They can afford a VCR, I don't mean to be little those that are very poor but I think in time that integrated communications device, whatever form it is, whoever sells it, is going to be integrated, will afford us better controls and safeguards, will afford commissions like the Federal Trade Commission opportunities to help a consumer make a better choice.
I love your idea about the white sheet. That could go right along the lines of the American Telemarketing Association seal of approval as long as it's monitored very closely and the consumer can put comments in that.
I mean the instrument could have that screen. If that's a telemarketer and it's not on the list, don't bother answering my phone. That's where I see things.
I think technology use responsibility can be very, very beneficial in consumer protection.
COMMISSIONER VARNEY: Mr. Barker.
MR. BARKER: I totally agree with you that it's a bridge issue. I think where we might differ slightly is I see it as golden gate where other people -- as opposed to Madison County. It's going to be a long time and it's going to -- not going to come right away and I think we're going to have the have nots with us longer than possible.
But in dealing with this technology and I think it's wonderful what you all are embarking upon this simply because with all these other new media, these new developments, these rapid advances in technology, we haven't sought out to understand what the problems are before they have gone really into the -- into a mass marketing situation.
They have just in the last four or five years begun to regulate children's advertising on television, and we're still dealing with content of television. We are now dealing with the telecommunications industry and telephone. So for you all to have the luxury in a way to be dealing with these issues now is wonderful because I think there are a lot of things that you can anticipate when you deal with the consumer protection issues that are involved.
You guide them between enforcement and consumer education which are two basic missions of your bureau consumer protection. Now is a good time to be thrashing out some of these jurisdictional issues because we're all sitting back and I think the little subject, we don't really want to discuss who has jurisdiction or what happens on the worldwide web, and so those are going to be some tough ones for you all.
And also in the area of consumer protection I think the issues are probably less tough. I think that we're going to have to do the same things with this new technology that we've done with the telephone in terms of what we warn people, what we advise people to do.
But once again I congratulate you for doing this. I think it's fantastic and it's got all our juices going in terms of trying to figure this out.
COMMISSIONER VARNEY: Let me on that in terms of the jurisdiction on the world wide web. We're not at all hesitant when this comes to fraud. We have jurisdiction and we've prosecuted fraud on the web and will continue to do so. Some of the very complicated issues about jurisdiction on the web are due to the lack of geographic boundaries internationally and nationally.
For probably all the time in its history Time Warner gets the last word.
MR. SACKLER: Maybe it's alphabetical. Let me say first that what Mr. Gallant was saying a little bit into the future we're doing now. As you will see on Tuesday when Jerry Levin is here, we are doing fully interactive switch digital television and among the things that are available on that, among the video on demand and news on demand and games on demand and a whole slew of other things that are available we're doing marketing, not direct marketing but passive marketing, offering it and letting the customers come to us.
We have a video mall that has Eddie Bauer on it that has Spiegel on it that has a variety of other well known marketing names on it, and you the consumer can sit there with your remote control and you call all this information up and it is a combination of texts and full motion video.
So that if you want a blue sweater you see what blue it is because a model will come out with a blue sweater on and turn around. And you hit a button on there if you want to see it in green or red or brown or anything else. And you can get with it the information about whatever product it is printed out right there in four colors because we include a printer in the home with this interactive set.
So we're doing it now. We're going to be offering telephone capability over this network.
Eventually I agree with everybody else that the telephone is not going to go away but the convergence of the technologies will be here and there are all sorts of the possibilities for those who are creative with technology, I believe to find a way to help the Attorneys General, to help you folks at the FTC, to help all of us to try to clamp down on those who are fraudulent or otherwise deceptive in their marketing.
The one statistic I might add to those that he mentioned before was that right now cable television serves about 65 percent of the country, and there is another increment that's served by satellite services and microwave services so it's a fairly high percentage of the country.
And those are the symptoms that eventually, and I don't think it's that far away, five years, seven years, ten years will have -- interactive television will have all of there convergent technology. It will be there. The have not problem is real. I think it is probably a bridge issue but it is real but it is not going to be I think as large as some might think it might be.
There is an awful lot of technology that is out there that will be available for everybody but I think in the end the way we'll be able to address the problems that we've been talking about all afternoon will always end up being imperfect, but it will always have to be a combination of things.
It's always going to have consumer education, regulation, self regulation by business, a rational approach to regulation by the agencies of jurisdiction and all together hopefully through the finding of new techniques and adding in you can find a way to help those that really can't help themselves, because they're the ones we all have to worry about.
COMMISSIONER VARNEY: Any closing thoughts, Eileen? Any closing? Let it be said I'm not buying one of these integrated systems unless it also does the dishes.
Thank you all so much for coming. We have benefitted greatly from your participation, your comments, your insights and we look forward to this being a continuing dialogue as we continue to struggle with these issues.
Thank you.
(Whereupon, at 5:02 p.m., the hearing was adjourned.)
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C E R T I F I C A T E
DOCKET/FILE NUMBER: P951201
CASE TITLE: HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION
HEARING DATE: November 17, 1995
I HEREBY CERTIFY that the transcript contained herein is a full and accurate transcript of the notes taken by me at the hearing on the above cause before the FEDERAL TRADE COMMISSION to the best of my knowledge and belief.
DATED: November 17, 1995
SIGNATURE OF REPORTER
Debra L. Maheux
(NAME OF REPORTER - TYPED)