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RBC's Jordan Rohan out with a note Thursday arguing that Valueclick's WebClients business engages in sleazy practices that may violate DMA/IAB guidelines and, therefore, invite regulatory scrutiny. Jordan estimates that such practices account for a third of Valueclick's revenue and, importantly, most of the company's outperformance over the past year. He notes that regulators have recently been cracking down on certain lead-gen practices and suggests that Valueclick may be next in line.

Jason Jones's Take: Something is going on here. This is the second time I have heard about FTC inquiries into lead gen. If this accelerates it could potentially be bad for VCLK, TRFX, TRAD.LL, Rakuten/Linkshare, APTM, and the companies most reliant on lead gen (VG, NFLX, the online education companies). This is worth digging into in more detail. I don't think that AQNT has meaningful exposure to the affiliate marketing or lead gen space so it should be insulated from this issue (although it could probably be brought down with the group if this snowballs).

From the report:

Growth from Unsustainable, Aggressive Marketing Tactics: We believe that lead-gen activities represent one-third of VCLK revenue and that the following tactics may not be sustainable: 1) Using the word "free" when multiple purchases are required, possibly in violation of FTC guideline 251.1, 2) Using lengthy surveys to generate email addresses (personally identifiable information) for resale to marketers without sufficient disclosure (discussed in HR 964), 3) Pervasive trademark infringement, as alleged in a lawsuit by Wal-Mart against VCLK's WebClients unit (settled March 2006), 4) Lack of fulfillment of incentives for consumers who have completed eligibility requirements, which may violate Direct Marketing Association rules.

Writing on the Wall – Inquiries May Drive Reform: There are ongoing investigations into companies in the incentivized lead generation space by legislative/regulatory groups, including the FTC, state Attorneys General, and the House Subcommittee on Consumer Protection. VCLK management maintains that it is not under investigation, and that its general counsel ensures that lead-gen editorial and creative assets comply with current laws. However, the legislative/ regulatory efforts may narrow the definition of what is acceptable, making the highly-incentivized tactics unsustainable longer-term.

Source: RBC's Rohan: Valueclick's Lead-Gen Creates Regulatory Risk