The advertising media sounded alarmed this week by the news that what advertising agencies variously call “buzz marketing” or “word-of-mouth” could soon be subject to intense regulatory scrutiny.

Industry attorneys have reportedly been warning clients that they need to fully disclose whenever someone is paid to disseminate positive word-of-mouth for a company or its products. While there are no Federal Trade Commission rules specifically dealing with buzz marketing, there are broad guidelines that appear to apply.

“If the motivation for [an endorser] is to profit from his or her endorsement, that connection probably needs to be disclosed,” Douglas Wood, chairman of advertising and marketing law at Reed Smith, told Advertising Age.

And Rich Cleland, an assistant director of advertising practices for the FTC, confirmed that while the agency is not yet looking at word-of-mouth activities, disclosure is important for companies that don’t wish to run a foul of the law. “The real question is whether consumers are being misled in some way,” says Cleland.

“Marketers may face ‘buzz disclosure’ oxymoron,” warned Media Buyer Planner in its headline on a story about marketers’ concerns. And Reed Smith’s legal expert Wood warned that: “Since disclosure undermines the value of buzz marketing, advertisers are in a Catch-22.”

It’s difficult to guess how many advertising agencies—or advertising clients—share they view that a requirement to deal honestly with consumers presents them with a “Catch-22,” but in any case, Smith is mistaken. The real choice is not between full disclosure and effectiveness, it is between bought-and-paid-for buzz and earned buzz.

Since the current enthusiasm for word-of-mouth took hold a few years ago, marketers have faced a choice between two divergent methods of harnessing the power of personal endorsement. The first, which might be characterized as an advertising approach, involved paying people to generate buzz; the second, a public relations approach, involves earning the enthusiasm of consumers.

Examples of the first approach include a much-heralded campaign by Sony Ericsson to introduce its new camera-phones to consumers in New York. The company paid actors and models to approach people on the streets and ask them, “Would you mind taking a photograph of me and my girlfriend.” If people agreed, they were handed one of the new phones—then enough of a novelty to spark a conversation. The actors and models did not disclose that they were being paid by the company.

Similarly, when Schieffelin & Company was seeking to draw attention to its Hennessy Martini brand, it hired 150 actors to visit trendsetting clubs and restaurants in eight markets. The actors would order the drink loudly, and sometimes offer to buy a drink for strangers, in an attempt to generate buzz. And when toy company Hasbro wanted to create excitement around its new hand-held video game Pox, it paid 1,600 cool Chicago-area kids to play the game and tell their friends about it.

Such practices are already generating a backlash. Says writer Matthew Lynn, in an article in The Business magazine, “Viral advertising just takes—and gives nothing back. An e-mail from a friend of a friend recommending a film or a CD turns out not to be a recommendation at all—just a clever gimmick dreamt up by a marketing department. A simple request by a tourist to take their picture suddenly makes us suspicious. Do they really want a picture, or are they just hassling us to buy a new cameraphone? A conversation with a girl in a bar turns from being an innocent flirtation into a marketing ploy.

“The real trouble with viral marketing is that it pretends not to be marketing at all. It tries to mimic real life—and can only end up making us suspicious of every encounter we have.”

Meanwhile, a recent study by Intelliseek (see article below) finds widespread consumer hostility to this kind of word-of-mouth, which is now known as “shill marketing.”

One-third of consumers say they would be disappointed if a trusted contact did not carefully disclose a paid or incentive-based relationship, 26 percent said they would never trust the opinion of that friend again, and 30 percent said they would be less likely to buy a product/service.

Fortunately, there is another model of word-of-mouth marketing, one that does not rely on paid actors and models, but which seeks to recruit authentic brand enthusiasts and arm them with the knowledge and understanding they need to turn themselves into brand ambassadors.

Malcolm Gladwell’s book The Tipping Point identified two groups who are willing—perhaps even eager—to act as brand champions: mavens and connectors. A maven is “a person who has information on a lot of different products or prices or places,” says Linda Price, a marketing professor at the University of Nebraska “This person likes to initiate discussions with consumers and respond to requests. They like to be helpers in the marketplace.”

Connectors, meanwhile, “know lots of people,” Gladwell says. “They are the kinds of people who know everyone… Their importance is also a function of the kinds of people they know…. They are people all of us reach in only a few steps because they manage to occupy many different worlds and subcultures and niches… a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability and energy.”

Several public relations firms have conducted their own research into these people: Burson-Marsteller has studied the way word-of-mouth spreads online, via people the firm calls e-fluentials; Edelman has worked with buzz monitoring specialist Buzz Metrics to produce a white paper on word-of-mouth; Ketchum has established an influencer relationship management function and focuses on what it calls “initial influencers… [who] demonstrate convincingly the ability to impact the opinions, perceptions and behavior of a broad cross-section of industry and society over time in regard to a specific client.”

It’s only natural that PR people should be taking the lead in this area, because in many ways the process by which earned word-of-mouth is generated is identical to the process by which earned media coverage is generated: the firm identifies the people with the greatest credibility and the greatest likelihood to influence the target audience; it provides them with information and insight; and then it relies on them to go out and tell the client’s story in their own words.

The only significant difference is that in traditional public relations, the influencers are almost always journalists; in word-of-mouth public relations, they can be almost literally anyone. That means firms require a much more intimate knowledge of their clients, their clients’ customers, and the sources of information—often down to individual names, operating in the online environment and he bricks-and-mortar world—those customers trust.

It’s not particularly surprising that many clients elected to try paid word-of-mouth first. It offers greater control over the message: earned word-of-mouth, like public relations, requires the confidence to put your message in someone else’s hand, to acknowledge that your brand belongs to consumers as much as it does to your marketing professionals.

But even before this week’s questions about the legality of paid word-of-mouth, there was a growing understanding that earned word-of-mouth has greater value. The Word of Mouth Marketing Association has an ethics code on its website, emphasizing that the organization and its members comply with FCC regulations on endorsements and calls for all participants to disclose by whom they are being paid.

And one of the leading buzz marketing firms, BzzAgent, has found that honest buzz is not quite the oxymoron some critics would have us believe, even when those doing the buzzing are paid by the company. “When we started the business in 2001, everything we read told us that in stealth and anonymity there is power,” says founder and president Dave Balter. “But it’s not appropriate and disclosing doesn’t hurt the process.”

In fact, he says, campaigns are more effective when people are honest about who is paying them.

All of this is good news for public relations people, who now have a clear opportunity to seize a leadership position in the fastest-growing segment of the marketing communications business. And it’s good news for consumers, who won’t have to worry whether the attractive individual offering to buy them a martini is motivated by generosity, attraction, or something altogether more cynical.