… though privacy issues still loom large

You don’t often hear about massive legal and legislative action against the online sweepstakes industry — and online sweepstakes companies are working hard to keep it that way. However, like many Internet-based businesses, online sweepstakes need to avoid the wrath of privacy advocates. To stay on their good side, practices such as selling personal information to third parties or sending unsolicited e-mail to customers are becoming taboo.

While a direct-mail sweepstakes is a promotion designed to sell products, an Internet-based sweepstakes is supposed to collect information, and that distinction helps protect online sweepstakes companies from the barrage of lawsuits filed by states alleging miscommunication and outright fraud that have plagued their snail-mail cousins.

“The bad press and regulatory activity has not affected online sweepstakes at all,” says Marcia Kadanoff, chief marketing officer at iQ.com, a Saratoga, Calif.-based company that provides the software running many online-sweepstakes games. “First of all, the average online sweepstakes is not promising $100 million. They typically run for an hour, day or week so they have more winners (of smaller prizes). They are usually run to collect (personal) data, so there is no confusion about buying products. People are quite willing to give up an e-mail address if the (sponsoring) company is reputable and the prize is something they want.”

Online sweepstakes so far are only a drop in the bucket when compared to the traditional sweepstakes industry, but observers expect rapid growth in the next few years as consumers grow ever-more comfortable with e-commerce.

“A lot of the Web-based companies are up-and-coming, so they are not at the status of the real-world ones,” says Scott Kurland, president of Windough.com, a Boca Raton, Fla.-based online sweepstakes company. “But more attention is being paid to the online ones (by customers and media). I would guess (the industry) should probably be able to outgrow anything in the traditional industry.”

Meanwhile, traditional sweepstakes companies have been the attorneys generals’ preferred targets for years; they have filed lawsuits accusing companies such as Port Washington, N.Y.-based Publishers Clearing House and Jersey City, N.J.-based American Family Enterprises of deceptive advertising. The lawsuits allege that mailings from the sweepstakes companies have given consumers the impression that buying a product, such as a magazine subscription, would increase their chances of winning multimillion dollar prizes. (American Family Enterprises, which runs the American Family Publishers sweepstakes promoted by Ed McMahon and Dick Clark, recently filed for bankruptcy protection to help settle dozens of state lawsuits.) The traditional sweepstakes’ online cousin, by contrast, has so far remained free of the bad-press and state-lawsuit stigma.

Indeed, Florida — one of the more aggressive states in prosecuting traditional sweepstakes companies — recently dropped an inquiry into online sweepstakes. A sweepstakes, by definition, must be free to enter, and the state initially was looking at whether the money people paid for their Internet Service Provider accounts qualified as a cost to enter. The Florida Department of State and Attorney General’s office decided to drop the matter, however — without a shot fired — since most people can now access the Internet for free through public libraries, according to Linda Goldstein, a partner with Hall Dickler Kent Friedman & Wood LLP, a New York-based law firm specializing in advertising and marketing law.

Partof what saves an online sweepstakes from such uncomfortable inquiries in the first place is that they typically are demographic information-gathering tools, not product sales-centered operations. Participants trade personal information for the chance to win cash and prizes. Little chance, then, that online sweepstakes will generate stories of elderly people waiting for the prize patrol amid a garage full of yellowing magazines.

“I advise clients to use the Web to develop a database for eventual one-on-one communication via e-mail,” says Andy Batkin, CEO of Interactive Marketing Inc., a Manhattan Beach, Calif.-based online promotion marketing company and co-chairman of the New York-based Promotion Marketing Association’s Interactive Promotions Council. “Initially, everyone was doing promotions as a way to sell things and drive traffic to a revenue site,” because they used the same business model as the traditional direct mail-based sweepstakes. However, with the Internet’s ability to foster two-way communication between marketers and consumers, they saw the ability to create databases for use in later, more-personalized sales efforts.

That is not to say the online sweepstakes companies have no worries; as with many Internet ventures, the key consumer issue is data privacy, and online sweepstakes are especially vulnerable on that count because their entire purpose is collecting data. As a result, online sweepstakes companies have to walk a fine line to reassure their customers the data will be kept private.

“We don’t sell the consumer data. We ask for permission every time they enter to win a promotion. We establish trust and loyalty with the customer,” says Steve Krein, CEO of Webstakes.com Inc., a New York-based company running online sweepstakes promotions for e-commerce retailers. “The negative stigma (of traditional sweepstakes) is actually helping to drive our business. Philosophically, the way we deal with data gives marketers a great deal of comfort.”

Online sweepstakes marketers have two options to conduct business and remain under the umbrella of privacy protections: Permission-based marketing lets the customers decide whether to receive information on a specific offer, usually in the form of a personalized e-mail, while the second option is an opt-in program asking permission to use personal data in various marketing campaigns. “Either is politically correct,” Kadanoff adds. “The consumers on the Internet realize they are not going to win a new Palm Pilot for nothing. They know personal data is valuable,” and they trade that information for entry into the sweepstakes.

For example, Windough.com runs a sweepstakes promotion in which registered members — those who already have provided their e-mail addresses — check in from time to time to play. When the members enter, a separate screen opens up with a banner ad at the bottom either announcing an instant win or a link to the Web site of one of the companies involved in the sweepstakes drawings. In addition, each week, Windough.com sends members an e-mail hosted by a character named “Joe.” The e-mails are part of a game, and they include advertising.

Windough.com has been around for two years and has 300,000 registered members so far. The company never sells the names or e-mail addresses of members, according to Kurland.

“Unless companies have an opt-in policy, we won’t even do the promotion (with them),” Batkin adds. “People get really annoyed if you bombard them with e-mail that they haven’t requested. It’s important to change these strangers into friends, then customers.”

— James Heckman

Related Link
American Marketing Association