But of course, the reason word of mouth is so effective is that it is understood to be authentic. You tell friends about the great new coffee shop around the corner, and they are keen to try it because they trust the authenticity of your endorsement. You tell friends about how much you like your new computer, and they are interested because they share tastes with you. But if you are paid to tout the coffee or the computer, the value of the endorsement—though not nil—is compromised. And if there's no disclosure of the sponsorship, something deceptive and unethical is going on.
Consider the hypothetical example of a college blogger who writes about video gaming. A manufacturer sends a free copy of a new video game system, and he writes a review. In this case, the FTC reasonably says, the blogger should reveal that he received the game system as a gift. "The readers of his blog are unlikely to expect that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact would likely materially affect the credibility they attach to his endorsement," it says.
Sometimes, in the case of TV, radio, and movies, managing an effective disclosure system may pose difficulties, since disclosures need to be made at the moment of an endorsement or product placement to be effective. But there is no such problem in the case of blogs, where there is no temporal element, nor tight limits on physical space.
Disclosure is about the most mild consumer protection measure there is, and sponsorship disclosure imposes no more than a trivial burden on bloggers. It's hard to see how the argument against disclosure is anything other than an argument for deceiving consumers. We have enough of that already.
Read why the Internet can police itself, from Paul Rand of the Word of Mouth Marketing Association.