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Friday, February 4, 2005

TV Privacy: The Economics of Creepiness
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Those who admit they are comfortable with TiVo or other digital video-recording services monitoring their viewing habits are likely to elicit stares usually reserved for folks who like bathing with the shower window shade open. But for us non-exhibitionists, such monitoring may seem downright creepy -- a sentiment which is presumably fueling renewed efforts [Tech Daily subscription required] in Congress to impose privacy restrictions on these services.

It makes perfect sense for policymakers and consumers to think carefully about who knows what about them. But answering the question of whether privacy regulation is needed to address company business practices such as TiVo's is not nearly as straightforward.

It is worth emphasizing at the outset that questions regarding TV privacy generally do not implicate "Big Brother" in the government sense. The companies collecting the information do so in keeping with ordinary profit motives. So their primary incentive is to collect only the information they can use to reduce their costs or increase their revenues. Usually this means, with respect to collection and use of personal information, using that information to provide consumers service more cheaply or to offer us more features. Or it means disclosing the information to third parties (e.g., advertisers, broadcasters, market researchers) so they can pretty much do the same things.

Service providers' status as profit maximizers raises the question whether there is a "market failure" that privacy regulation needs to correct. Policymakers should be especially reluctant to impose costs on new services like these, or they may inadvertently deny consumers the benefits of these or future services.

To the extent economic forces already and adequately balance the potential harms related to TV privacy against the potential benefits, policymakers may avoid regulation and thereby encourage innovation. Hopefully, the recent dicussions about whether to extend regulation to digital video-recording services will give thoughtful attention to these kinds of economic considerations.

Indeed, several factors suggest that privacy regulation of the sort being contemplated now may be unnecessary or even counterproductive, as economists Tom Lenard and Paul Rubin discussed in their book on privacy and the commercial use of personal information.

For example, there is no clear evidence (anecdotal or otherwise) that consumers are, in fact, being harmed by commercial use of information collected by digital video-recording services. Rather, advocates of regulation rely on consumers' stated "concerns" that are based either on harms that could arise in the future or on some vague (albeit strongly held) belief that collection and use of such information is inherently unsettling. But advocates offer little to explain why no evidence of consumer harm has appeared or why regulation cannot wait, at least until there is evidence of something broken that needs fixing.

Further, if harms to consumers were to arise, advocates of regulation don't say why companies would not have incentives to correct such harms voluntarily. Recall that what's at issue is the type of information that will help companies serve you more efficiently, or serve you more (e.g., sell you more stuff). In many cases, this information is stored and shared in an anonymous or aggregate way, such that "your" information cannot be tied to you. Neither does this information provide anyone with access to sensitive data such as your banking or medical records. So "harm" in this context often would mean only that companies were using information in ways consumers didn't like. But consumers who object to how their video recording service is using their information seem unlikely to buy additional products marketed using that information, and they may cancel their subscriptions altogether. These likely reactions, in turn, would discourage companies from using subscribers' information in ways they find offensive.

In addition, advocates of regulation often fail to tailor their proposals to address what consumers care most about. Those who subscribe to digital video-recording services probably expect that some advanced features -- such as scheduling a recording over the Internet or automatic elimination of repeat episodes -- may require devices in their homes to communicate with the service provider. So they may accept as unavoidable some amount of data collection or monitoring. What may trouble them, however, is how that information may be used or disseminated thereafter. Yet privacy regulation often focuses only on notice and other requirements regarding the collection of information, not on how that information will be used. And notice or other collection requirements are precisely the kinds of things that service providers face economic incentives to and, in fact, do adopt without government mandate. In these cases, if government must act at all, it may best limit such action to educating consumers on options the market already provides, as the FTC has done.

Which brings us to where we might have started: the potential benefits associated with collection and use of information by digital video-recording services. At first blush, those of us who have had our commercial information used to send us junk mail or other mass-market appeals may find it difficult to fathom that collection and use of TV-watching data could benefit us. But that reaction overlooks the fact that such information, ironically, may be most useful in mitigating the junk advertising problem by enabling companies to focus their appeals on consumers who are most likely to be interested in what they have to sell. This results in a "win-win" scenario, in which consumers learn more about attractive options in the marketplace and companies get more bang for their advertising buck. And just like "free" broadcast TV, revenues generated through advertising can support offerings consumers value -- a benefit which may become increasingly critical as TV continues to morph from a communal mass medium to a personalized capability that empowers us to watch what we want, when we want, where we want. As many online companies have discovered, developing a sustainable and profitable business plan in the midst of such turmoil in markets and technology isn't nearly as simple as clicking a mouse or TV remote control. So revenues generated from the sale or use of information like that collected by digital video-recording companies can serve as a life vest to keep innovative new companies afloat or to offset costs that might otherwise flow directly to subscribers.

Despite these benefits and the apparent absence of harm, consumers will no doubt remain concerned about the collection and use of information by digital video-recording services. What remains to be seen is whether policymakers will concede the possibilities that there may be no problem that requires a regulatory solution and that, in any event, such regulation could do more harm to consumers than good.

posted by Kyle Dixon @ 10:53 AM | Cable , Communications

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