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Making money on the web

1 September 00

The opportunities and possible pitfalls of conducting transactions through the internet

by John MacKenzie

The immediacy and simplicity of the Internet allows new ways of marketing, selling and growing a business. Businesses link to other relevant sites, use affiliate schemes to create a “virtual” sales force, and create alliances to try and hold the attention of readers. This article will consider some of the methods used online, and highlight some of the legal implications of the relationships that are created.

Affiliate programs

Affiliate programs are seen as a driver to profit in the Internet. They are described as “a referral-based marketing strategy (often referred to as revenue sharing), where you increase your web site’s traffic, sales and/or registrations by paying other web site owners a commission after one of their visitors is referred to your web site and makes a purchase and/or registers with you.” 1

A well known affiliate program is that run by Amazon.com, the online bookseller. Amazon.com encourage other web site developers, whether large or small, to put links on their site to Amazon.com. When the browser clicks on the link to Amazon they are “tracked” and if they purchase a book on that visit, the referring web site gets a commission. This will vary from about 5% where the link is to the home page, to 15% where the link is to a specific book.

In this way Amazon encourages web site owners to link to them and to incorporate lists of their favourite books. The web site owners are encouraged to make the books as attractive as possible, thus driving customers to Amazon. While this may be simple enough where it is books that are being sold, all sorts of goods and services are now being sold online.

Amazon now offer DVDs, software, toys, electronic goods, video games and even gardening tools and equipment. All of these items can be displayed individually on other web sites. This arrangement provokes a number of interesting questions.

Where does the contract lie? The obvious answer would appear to be that the contract is between Amazon and the consumer, but the consumer may be given the impression that his first contact in the event of a complaint should be with the web site with the original link. Amazon will try and ensure that terms and conditions make the position clear, but incorporation of terms into a contract is not straightforward, and the applicable law may vary from nation to nation. What happens when the web site gives a false or misleading impression of the goods for sale? The UK statutory provisions relating to misleading price indications2 and trade descriptions3 carry a criminal penalty, but there is scope for arguing that the original web site contains representations upon which the consumer can rely to establish that the goods were not fit for purpose or not of satisfactory quality.

This difficulty would be relatively straightforward except that the typical Internet transaction could easily cross a number of national boundaries. Ruana.com,4 for example, is based in Scotland and offers South American goods for sale. It operates an affiliate scheme. It is entirely conceivable that a web site operated in the United States could be part of the Ruana affiliate scheme, and attract a browser based in Spain, who wanted to purchase South American goods from Ruana in Scotland!

While the situation is complex the lawyer must be in a position to assess the risks that the trader faces and advise accordingly. The key of course to assessing the risk, is to understand the mechanisms involved.

Freeware, shareware and open source

With the new frontier comes a new language, and understanding the language is often half the battle in coming to grips with the legal issues. This difficulty is compounded by the problem that those on the Internet delight in creating new words5, for the circumstances that arise.

Software is the product that has brought the Internet to life, and the concept of software is generally understood. The most common model for the exploitation of software is the licence agreement, a contract where the author of software retains copyright and for a fee licences the software to other users. However, in the new world of the Internet, where there are many thousands of software developers prospecting for business, other models have been developed.

“Freeware” is software that is offered at no cost, but that is still protected by copyright and so cannot be incorporated by a developer into other software. The hope of the developer is that the product is so popular that future versions can be exploited on a commercial basis.6

The product is therefore free. A licence will be required, and will regulate the relationship between the developer and the user. However, just because the product is free, that will not mean that there are no legal consequences. The developer will of course attempt to exclude all liability under licence agreement, but such terms may be subject to attack under the Unfair Contract Terms Act 1977, or the Unfair Terms in Consumer Contracts Regulations 1994. Equally, where distribution is carried out over the Internet, the applicability of other national laws can affect the contractual relationship.7

“Shareware” is software that is distributed free on a trial basis with the understanding that the user may need or want to pay for it later. Some software developers offer a shareware version of their program with a built-in expiration date (after 30 days, the user can no longer get access to the program). Other shareware (sometimes called liteware) is offered with certain capabilities disabled as an enticement to buy the complete version of the program.8

Issues similar to those associated with freeware arise, but the tests of “reasonableness” are likely to be more strict where the product should eventually be paid for. The licence agreement must be carefully drafted to ensure that the transition from trial to complete product is clear.

“Open source” is a relatively recent phenomenon. Traditionally, source code is kept secret and only the object code version of the software is available for public use. The source code for software is the key to the operation of the product. If you have access to the source code then you can copy and manipulate it at will.

However, some purists on the Internet find this commercial approach unappealing.9 Groups of developers have come together and written code, exchanged copies of the source code, and gradually developed the products over months or years. The end product is generally not user friendly enough for the consumer, but occasionally the software is refined to such a degree that it becomes commercially viable.

The Linux operating system software is an example of such a product, capturing a significant proportion of the commercial network server sector, demonstrating that the fact that the product is not proprietary does not prevent it becoming commercially acceptable.10

Banner Exchanges

Promotion of a web site, whether in the traditional media or online, will be critical to success.

Banner Exchanges are one of the most common means of advertising a web site for free. Opinion is divided as to whether or not banner advertising is effective, but it does give web site owners the ability to advertise their site to a huge audience. The LinkExchange Banner Network11, run by Microsoft, is an association of web sites that trade banner advertising space on over 400,000 web sites. While the models vary from scheme to scheme, the LinkExchange scheme is typical. For every two banner adverts shown on the site, the web site owner earns a credit to have their banner shown on another member’s site. It is a 2:1 ratio - the amount of free advertising received is directly proportional to the amount you give others.

A variation on this theme is the “web ring”, where web site owners who share a particular interest get together to promote their site.12 Each site displays adverts for others in the web ring.

These models are clearly popular and effective, but there are considerable risks for the unwary. LinkExchange, for example, will attempt to monitor and control the adverts used on the system, but there exists the risk that adverts considered perfectly acceptable in one legal system will be in breach of the criminal code in another. This can work both ways, with an advert created for a Scottish site being shown all round the globe (and the web site owner having little control over where) and the Scottish web site showing adverts generated automatically and randomly by the central server.

“Free” services

The very low entry costs for an Internet business means that a different approach can be taken to promoting and developing the web site and the business. Due to the vast number of web sites now in existence, a different approach must be taken!

One of the most common strategies is to give away products or services, that traditionally would have been paid for. Products may be given away as part of a market building exercise, with the next step being to charge for the product, or as a traffic building exercise – where the intention is to build a popular site and charge for advertising. Freeware is an example in the software industry.

Trends in e-commerce are changing the way everyone does business - even lawyers. A number of firms are moving from the corporate brochure “wallpaper” site to provide valuable information and encourage repeat visits from users. The provision of services from a web site can be a valuable way to promote a law firm.

Many law firms are already using the web in this way, with McGrigor Donald13 offering free articles and comment, and Shepherd & Wedderburn14 offering articles and a Business Briefing by e-mail. However smaller firms are taking advantage of the power of the Internet by providing information and guidance free on the web. For example, Yuill & Kyle provide guidance on debt collection in Scotland at http://www.debtscotland.com and Donald Wright has set up divorceuk.com15 to provide information and assistance in this area.

Out-law.com,16 primarily aimed at the .com and new media sector, provides a daily news feed for clients and prospective clients who have an interest in the IT sector. The features of the site are designed to maintain a relationship with its users and (it is hoped) draw them back to the site time and time again.

In the wild world of the world wide web making money will be a risky enterprise. The traditional contractual relationships can be difficult to establish and a fresh eye needs to be cast over the relationships created. There are traps for the unwary, but proper preparation and a sensible risk assessment can ensure that you can make money from the web.

John MacKenzie is a Solicitor Advocate with Masons, Glasgow