Adam Thierer and I will be participating in two separate panels at the FTC's December 7 "Exploring Privacy" workshop discussing, respectively, surveys & expectations and online behavioral advertising. Below is the cover letter I filed as part of my comments (PDF & Scribd), along with four past PFF publications and a working paper on the benefits of online advertising.
Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise Prices, Quash Digital Innovation & Curtail Free Speech
In general, we at PFF have argued that any discussion about regulating the collection, sharing, and use of consumer information online must begin by recognizing the following:
Privacy is "the subjective condition that people experience when they have power to control information about themselves and when they exercise that power consistent with their interests and values."[1]
As such, privacy is not a monolith but varies from user to user, from application to application and situation to situation.
There is no free lunch: We cannot escape the trade-off between locking down information and the many benefits for consumers of the free flow of information.
In particular, tailored advertising offers significant benefits to users, including potentially enormous increases in funding for the publishers of ad-supported content and services, improved information about products in general, and lower prices and increased innovation throughout the economy.
Tailored advertising increases the effectiveness of speech of all kinds, whether the advertiser is "selling" products, services, ideas, political candidates or communities.
With these considerations in mind, policymakers must ask four critical questions:
What exactly is the "harm" or market failure that requires government intervention?
Are there "less restrictive" alternatives to regulation?
Will regulation's costs outweigh its supposed benefits?
What is the appropriate legal standard for deciding whether further government intervention is required?
We have addressed these questions in the PFF publications attached below, which I respectfully submit for the Commission's consideration. This executive summary highlights their findings.
Benefits of Online Advertising, Berin Szoka, Mark Adams, Howard Beales, Thomas Lenard, Jules Polonetsky, PFF Capitol Briefing, July 2009.
I. A Principled Pro-Consumer Alternative to Further Regulation
The "Privacy Wars" that have waged over how government should regulate online collection and use of data might better be referred to as the "Privacy Proxy Wars" because the most clearly demonstrated "harm" at issue seems to be from government itself, not the private sector. The Fourth Amendment guarantees that "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated..." Americans have a legitimate expectation that this "security" extends to their digital "papers and effects," yet that expectation is not given effect by current restraints on government access to consumer data in American law. Thus, we have proposed the following layered approach to concerns about online privacy, focusing on restraining government access to data, rather than crippling the private sector uses of data that directly benefit consumers:
Erect a higher "Wall of Separation between Web and State" by increasing Americans' protection from government access to their personal data--thus bringing the Fourth Amendment into the Digital Age.
Educate users about privacy risks and data management in general as well as specific practices and policies for safer computing.
Empower users to implement their privacy preferences in specific contexts as easily as possible.
Enhance self-regulation by industry sectors and companies to integrate with user education and empowerment.
Enforce existing laws against unfair and deceptive trade practices as well as state privacy tort laws.
Such a layered approach would not only be a "less restrictive" alternative to increased government regulation, but also potentially more effective in key respects than government data use/collection mandates. In an ideal world, adults would be fully empowered to tailor privacy decisions, like speech decisions, to their own values and preferences ("household standards"). Specifically, in an ideal world, adults (and parents) would have (1) the information necessary to make informed decisions and (2) the tools and methods necessary to act upon that information. Importantly, those tools and methods would give them the ability to block the things they don't like--annoying ads or the collection of data about them, as well as objectionable content.
A wide variety of self-help tools and "technologies of evasion" are readily available to all users and can easily thwart traditional cookie-based tracking, as well as more sophisticated tracking technologies such as packet inspection. While cookie management tools that allow users to delete their cookies have been standard in browsers for some time, the latest generation of browsers incorporates far more advanced control over what kind of cookies browsers will accept from websites in the first place. Furthermore, the extensible nature of modern browsers allows any freelance software developer who sees a way to improve a browser to do so by writing an add-on that "plugs in" to the browser using standard programming interfaces designed by each browser developer. Many such add-ons are wildly popular, but even those users who never install a single one benefit from the acceleration of browser evolution made possible by add-ons. We have documented examples of these tools in an ongoing series of blog posts about "Privacy Solutions," available at www.pff.org/privacy-solutions/.
But a "layered approach" that relies on user empowerment and education need not be perfect to be "good enough," because "privacy" is not an absolute good that trumps all other consumer interests, nor can "community standards" accommodate a diverse citizenry. If we "make the best the enemy of the good" by insisting on perfection, consumers will be made worse off. Advertising is indispensable to the future of online media, but it is also currently inadequate to sustain "Free" culture. 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. Somethingmust give because there is no free lunch.[3]
II. Benefits to Users of Smarter Online Advertising
The attached working paper I co-authored with PFF Visiting Fellow Mark Adams identifies five broad categories of benefits to users from targeted advertising:
More relevant, and potentially less annoying/interruptive advertising for consumers;
Higher-quality content and services supported by advertising;
Better correlation between the production of content and services, and consumer preferences;
A more vibrant media and improved political discourse and communities; and
Lower prices for consumers and greater innovation throughout the economy.
The paper explains how better targeting of advertising delivers these benefits by:
Increasing the informational value of advertising to consumers;
Increasing advertising funding for content and services that might not be sustainable on an ad-supported basis with untargeted or less targeted advertising; and
Reducing the costs of buying and selling ("transaction costs").
In particular, we note that, with behavioral targeting, the value of a site's viewers depends less on the content associated with that site (keywords) and more on the viewers themselves. In this sense, behavioral advertising levels the playing field by allowing websites to sell access to viewers directly, rather than through the keywords associated with the website. Better targeting democratizes the ad-supported economy by empowering consumers to direct advertising revenues to the sites they spend time on. Targeting essentially increases the ability of Internet users to "vote with their clicks" for online content and services just as they "vote with their dollars" every time they make a purchase in the traditional economy.
Data on the precise "delta" between contextual and behavioral advertising is limited, but appears to indicate that behavioral advertising can produce significant increases in revenue for many publishers. In particular, we note the following increased measures of effectiveness
Increased Click-Through-Rates 94% to 225% and conversion rates up to 3,000% (2005);[4]
There are a wide range of predictions on the potential value created by behavioral targeting. As with previous innovations in online advertising, it seems likely that the performance of behavioral targeting will improve over time. Professor Tracy Tuten, author of Advertising 2.0, predicts that a twelvefold increase in the value of page views, from $10 to $120 per thousand views.[7] Rich Karpinski calculates that Blue Kai, an ad network, is currently selling behaviorally targeted ads a rate of $4-15 per thousand views[8]--a significantly lower rate than Ryan suggests but higher than the current performance of print advertising ($5.50)[9]and several times higher than the average price of non-premium display advertising ($0.60-$1.10).[10] One experiment with re-targeting (showing users ads on one site based on actions taken towards making a purchase on one site but not completed) produced significantly higher returns: "retargeted impressions represented only 7% of all the banner impressions delivered, [but] were responsible for over 50% of the revenue and 25% of the sales generated by the campaign as a whole."[11] Hallerman concludes that "Behavioral targeting is more than hype.... For publishers, it can mean making more money from undersold or unsold ad inventory."[12]
III. The Quid Pro Quo behind "Free"
Traditionally, users "paid" for content by devoting part of their attention to ads, which have long funded the costs of generating content for radio, television, and newspapers (with subscriptions paying only for distribution).[13] The basic reason is simple economics: In competitive markets, prices tend to fall to the marginal cost of production, which quickly converges on zero for information. The Internet has simply borne this theory out in full:
Producing the first unit of content (e.g., a news story or video) remains costly, so while the marginal cost of every additional unit is essentially zero, average cost is not.
The failure of micropayments online seems to confirm that, no matter how low the technological transaction costs are, the mental transaction costs involved combined with even tiny payments will exceed the perceived value of most content.
The world of media scarcity in which consumers could choose from only a few sources of content (e.g., news, entertainment) has given way to a world of staggering media abundance and the choices of users are no longer constrained by the tyranny of physical limitations like distance and printing costs.
Because pure information cannot be copyrighted (and fair use allows significant referencing and quotation), very little content is so unique that users cannot find a ready substitute elsewhere if a site (or even a group of sites) attempted to charge.
Thus, while policymakers should generally avoid preferring one business model over others, they must also recognize that the "economics of bits" will make advertising increasingly indispensable to the future of online content, services, media and culture. For that reason, they should take great care when tinkering with the economic engine that has made America the envy of the digital world as the fountainhead of online innovation and creativity.
IV. Consumer Attitudes & Expectations
While many consumers said, in a recent poll, that they don't want ads, content and news "tailored" to their interests,[14] their actions in the real world speak louder than words: The increased click through rates and conversion rates mentioned above are evidence that consumers do, in fact, value more relevant advertising.[15] Whatever Americans tell pollsters about "tailored" ads, they also complain about irrelevant ads: A previous poll found that 72% of consumers "find online advertising intrusive and annoying when the products and services being advertised are not relevant to [their] wants and needs" and 85% say that less than 25% of the ads they see while browsing online are relevant to their wants and needs.[16]
Until a proper experiment is conducted by trained behavioral economists that includes real-world trade-offs and makes users aware of privacy management tools, all we can say with confidence is the following:
Users don't understand exactly how ads are tailored;
Users seem to be concerned about "tailoring" or "following" in the abstract;
Users are generally unwilling to pay for online content and services; and
Better tailoring of ads means more funding for content and services.
Only the layered approach outlined above can address all these concerns: educate users about how online advertising works and how they can implement their own privacy preferences, while constantly striving to further empower users to make privacy management easier.
Policymakers should avoid presuming they can divine the true preferences of users regarding the complex and multi-faceted trade-offs of the real world. Instead of guessing what consumers might choose, the FTC and other law enforcement agencies should focus on holding companies to the "expectations" they set in their official privacy policies and other statements about their any use and collection practices. In a sense, this is to approach the problem from the "supply" side rather than the "demand" side: If a browser manufacturer, for example, overstates the privacy protection offered by privacy management tools in the browser (e.g., cookie settings or a private browsing mode), this might well be considered an unfair and deceptive trade practice subject to FTC enforcement. The advantage of this approach is that the FTC can, using its existing authority, play a valuable role in ensuring consistency between theory and practice in what industry actually does-- without sending into the intractable morass of subjective user preferences. In other words, the FTC can help give effect to "household standards" without imposing "community standards" for everyone.
V. Underlying Fear of Advertising
On some level, this debate isn't about user privacy at all, but about the common (though baseless) fear of advertising as inherently manipulative and wasteful--essentially: "Since people are stupid, ignorant and/or lazy, they're easy to control and trick with shiny objects, pretty faces, memorable slogans, and catchy jingles." No better response to this sentiment has ever been made than was offered by the ad firm Young & Rubicam in this 1959 magazine ad:
There is no chestnut more overworked than the critical whinny:
"Advertising sells people things they don't need."
We, as one agency, plead guilty. Advertising does sell people things they don't need. Things like television sets, automobiles, catsup, mattresses, cosmetics, ranges, refrigerators, and so on and on.
People don't really need these things. People don't really need art, music, literature, newspapers, historians, wheels, calendars, philosophy, or, for that matter, critics of advertising, either.
All people really need is a cave, a piece of meat and, possibly, a fire.
The complex thing we call civilization is made up of luxuries. An eminent philosopher of our time has written that great art is superior to lesser art in the degree that it is "life-enhancing." Perhaps something of the same thing can be claimed for the products that are sold through advertising: They enhance life, to whatever degree they can.
VI. Conclusion
If misguided government regulation chokes off the Internet's growth or evolution by starving content and service providers of much-needed advertising revenue, we would be killing the goose that laid the golden eggs. 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."[17] 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.
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: Welive in a world of trade-offs, and regulation is not costless. Indeed, regulation might best be understood as 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 the context of "free" (i.e., ad supported) content and services 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.
These observations are even more relevant to the online marketplace, where advertising has been shown to be the only business model with any real staying power. Walled gardens, pay-per-view, micropayments, and subscription-based business models are all languishing. Consequently, the overall health of the Internet economy and the aggregate amount of information and speech that can be supported online are fundamentally tied up with the question of whether we allow the online advertising marketplace to evolve in an efficient, dynamic fashion. Heavy-handed privacy regulation (or European-style "co-regulation," where the government steers and industry simply rows) could, therefore, become the equivalent of a disastrous industrial policy for the Internet that chokes off the resources needed to fuel e-commerce and online free speech going forward.
[1]. "Properly defined, privacy is the subjective condition people experience when they have power to control information about themselves." Jim Harper, Cato Institute, Understanding Privacy - and the Real Threats to It, Cato Institute Policy Analysis No. 520, Aug. 4, 2004, http://www.cato.org/pub_display.php?pub_id=1652.
[2]. Currently in draft form, pending further research quantifying the benefits of personalized advertising.
[3]. Berin Szoka & Adam Thierer, The Progress & Freedom Foundation, Targeted Online Advertising: What's the Harm & Where Are We Heading?, Berin Szoka & Adam Thierer, Progress on Point 16.2, April 2009, www.pff.org/issues-pubs/pops/2009/pop16.2targetonlinead.pdf.
[5]. Jun Yan, Ning Liu, Gang Wang, Wen Zhang, Yun Jiang & Zheng Chen, How Much Can Behavioral Targeting Help Online Advertising?, presented at World Wide Web Conference, Madrid, Spain, April 20-24, 2009, p. 262.
[9]. Howard Beales, Public Goods, Private Information & Anonymous Transactions: Providing a Safe & Interesting Internet, presentation given at the Law & Economics of Innovation Symposium at George Mason University School of Law, May 7, 2009 (copy on file with authors) at 17 (citing Media Dynamics data from 2008).
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