Monday, June 29, 2009 - The Progress & Freedom Foundation Blog

A Posterboy for Advertising's Pro-Consumer Quid Pro Quo

The advocates of regulation pay lip service to the importance of advertising in funding online content and services but don't seem to understand that this quid pro quo is a fragile one: Tipping the balance, even slightly, could have major consequences for continued online creativity and innovation.


Who is this handsome young man and why does he have "Mr. Yogato Stamped Me!!!" on his forehead? More importantly, why does he look so darn happy?

Flashback: Earlier this week, my partner Michael (pictured) and I visited Mr. Yogato, a frozen yogurt shop in Washington's Dupont Circle neighborhood which describes itself as "the FUNNEST yogurt experience you'll ever have."

Apart from serving exceptionally tasty frozen yogurt and letting customers play a vintage Nintendo, Mr. Yogato is famous for the eight "Rules of Yogato," which offer discounts if users achieve certain feats, including:

But the best discount, which Michael does every time (unless I'm there to help identify, say, countries that end in 'L'), is offered for wearing the Yogato stamp on your forehead. Being stamped is, of course, almost as much fun as singing along to "Mr. Roboto" if you're lucky enough to hear that played while you're in the shop (10% off). But the real fun is in engaging passersby on the street about the icy-sweet joys of Yogato. It's also, of course, probably the most effective advertising Mr. Yogato could ever want.

So, the next time you hear Adam Thierer and I talk about the benefits of advertising, especially online, just remember that while there is no free lunch (nor free frozen yogurt), there is discounted frozen yogurt. It's a simple, obvious quid pro quo: 10% off in exchange for spreading the Gospel of Yogato.

The most obvious example of a quid pro quos is the use of discount cards in grocery stores: Users receive discounts in exchange for having their purchases tracked, which allows advertisers to target advertising to them and the grocery store to better manage its inventory. Online, Microsoft's Live search engine (now Bing) pioneered the use of rewarding users with "cashback" for purchases made through the search engine.

But the more significant quid pro quo online is indirect: users receive "free" content and services in exchange for seeing advertising and sharing data about their browsing habits, which makes advertising significantly better targeted, more effective for advertisers and therefore more profitable for online content publishers and service providers. As Adam and I noted in response to the FTC's recently-released self-regulatory guidelines for "behavioral advertising" (now likely to be superseded by pre-emptive "privacy" legislation):

The advocates of regulation pay lip service to the importance of advertising in funding online content and services but don't seem to understand that this quid pro quo is a fragile one: Tipping the balance, even slightly, could have major consequences for continued online creativity and innovation.

[FTC] Commission Harbour talks about companies competing on privacy as a "non-price dimension"-and that is clearly a positive thing. In traditional economics, there are three primary variables that are considered when discussing industry competition and efforts to regulate market structures: price, quantity, and quality. But in the context of the Internet, where digital economics have relentlessly driven prices down to zero, and where advertising support has become the only viable business model for most providers of content and services, the price variable has largely been removed from the picture. This means-unless industry could somehow find a way to make pay-per-use, pay-per-view, or subscription-based models work in the future-that regulation of online advertising would have its most dramatic impact on the quantity and quality of content and services provided.

Depending on how regulation is structured, therefore, it is possible that new privacy mandates would severely curtail the overall quantity of content and services offered-and greatly limit the ability of new providers to enter the market with innovative offerings. Alternatively, or perhaps additionally, companies would change the character of their offerings and water-down sophisticated services that cater to consumer demand; in other words, the quality of service would deteriorate.

Bottom line: Something must give because there is no free lunch. Regulation is a giant game of economic whack-a-mole: Attempting to control one of the primary variables of price, quantity, or quality inevitably results in non-optimal adjustments in the other two variables. The absence of price as a variable in this context means there is one less variable for the government to control in the first place. Simply stated, stifling the evolution of the online advertising marketplace will likely result in fewer free online services and less content, less high-quality online services and content, or some combination of both....

Apart from a hardcore fringe who embrace the Marxist dogma that advertising is inherently deceptive and wasteful, most participants in this debate at least pay lip service to the economic importance of online advertising. One might therefore be lulled into a false sense of complacency that "sensible" regulation (or government-led co-regulation) would surely avoid crippling this dynamo. This widespread assumption calls to mind the famous quip of Chris Patten, last British Governor of Hong Kong, who paraphrased those who dismissed his concerns about the potentially negative effects of a Chinese take-over of the British colony in 1997, as follows: "It is unimaginable that the Chinese would kill such a goose." To this, Patten responded, "Yet we wouldn't need the metaphor of golden eggs and geese if history weren't full of dead geese." The dangers of regulation to the health of the Internet are real, but the ease with which government could disrupt the economic motor of the Internet (advertising) is not widely understood-and therein lies the true danger in this debate.

I think Mr. Yogato would understand this. Let's hope Chairman Boucher and the folks on the Hill who seem to be so adamant about regulation do, too.

posted by Berin Szoka @ 10:07 PM | Advertising & Marketing , Privacy