Wednesday, January 13, 2010 - The Progress & Freedom Foundation Blog

Chairman Leibowitz's Disconnect on Privacy Regulation & the Future of News

by Adam Thierer & Berin Szoka, Progress Snaphot 6.1

Stephanie Clifford of the New York Times posted a very interesting article this week summarizing a recent "on-the-record chat" the Times staff had with Federal Trade Commission (FTC) chairman Jon Leibowitz and FTC Bureau of Consumer Protection chief David Vladeck. The interview [discussed by Braden here] is profoundly important in that it reveals an alarming disconnect regarding the relationship between "privacy" regulation and the future of media, which were the subjects of their discussion with Times staff. Namely, Leibowitz and Vladeck apparently fail to appreciate how the delicate balance between commercial advertising and journalism is at risk precisely because of the sort of regulations they apparently are ready to adopt. Because the value of online advertising depends on data about its effectiveness and consumers' likely interests, and because advertising is indispensable to funding media, what's ultimately at stake here is nothing short of the future of press freedom.

The "Day of Reckoning" Is Upon Us


Leibowitz and Vladeck spend the first half of The Times interview wringing their hands about "privacy policies," the declarations made by websites and advertising networks about their data collection and use practices (for which the FTC can and must hold them accountable). But the two feel that privacy policies don't adequately inform consumers. Chairman Leibowitz claims that online companies "haven't given consumers effective notice, so they can make effective choices." And Mr. Vladeck states that advise-and-consent models "depended on the fiction that people were meaningfully giving consent." But he and the FTC seem ready to abandon the notice and choice model because the "literature is clear" that few people read privacy policies, Vladeck told the Times. He and Leibowitz continue:
"Philosophically, we wonder if we're moving to a post-disclosure era and what that would look like," Mr. Vladeck said. "What's the substitute for it?" He said the commission was still looking into the issue, but it hoped to have an answer by June or July, when it plans to publish a report on the subject. Mr. Leibowitz gave a hint as to what might be included: "I have a sense, and it's still amorphous, that we might head toward opt-in," Mr. Leibowitz said.

This clearly foreshadows the regulatory endgame we have long suspected was coming. When the FTC released its "Self-Regulatory Principles for Online Behavioral Advertising" eleven months ago, we asked: "What's the Harm & Where Are We Heading?" Their answers to both questions have become clearer with each new calculated comment--all apparently intended to slowly "turn up the heat" on the advertising industry so that the proverbial frog will stay in the pot until the water finally boils. Leibowitz's FTC has simply dodged the "harm" question with a four-part strategy:

  1. Cobble together a "record" full of sympathy-evoking anecdotes submitted by advocates of regulation in comments and the FTC's ongoing "Exploring Privacy" Roundtables;
  2. Let the most extreme Chicken Littles fulminate about the grand conspiracy of "neuromarketing manipulation" and the like (and sometimes even shout down FTC staff in panel discussions) in order to redefine the "reasonable center" of the debate;
  3. Define-down "harm" as purely a matter of "consumer expectations" or consumers' "dignity interests" (whatever that vague and infinitely elastic term means); and
  4. Attack the effectiveness of "consent" itself by suggesting that consumers cannot be trusted to understand privacy policies or be expected to make any effort to protect their own privacy.
Conveniently, this strategy leads right back to the "day of reckoning" Chairman Leibowitz threatened was coming last February: We are heading precisely where he told us we would be--to full-on, opt-in regulation. The writing on the wall becomes more apparent every day: Leibowitz set out to bring online advertising to heel even before becoming Chairman, and his Commission is reprising almost precisely the same approach that led to the passage of the Children's Online Privacy Protection Act (COPPA) of 1998: building a case for new authority, dismissing industry self-regulation as ineffective, and finally presenting a report to Congress intended to produce a rapid legislative response. After the FTC presented its report on the need for regulation in congressional testimony in June 1998, it took Congress just four months to pass COPPA--and much of that time was consumed by the summer recess. In short, Leibowitz is mounting a carefully choreographed campaign for increased regulation.

The only real question is whether Leibowitz will somehow try to use the FTC's existing authority over "unfair or deceptive" trade practices or wait for expanded authority from Congress. While most observers typically assume that such expanded authority would come in the form of a privacy-specific bill--be it a broad "baseline" privacy bill or one specifically focused on online data collection for advertising purposes--the authority Leibowitz yearns for could just as easily come in the form of increased rulemaking authority as part of a broader bill that allows the FTC to preemptively regulate practices that are not deceptive but merely deemed "unfair."

This would take the agency "Back to the Future"--to the late 1970s, when the agency reached the height of its efforts to regulate purely on "unfairness" grounds by trying to ban advertising to children. The agency's behavior earned it the moniker "National Nanny" from the Washington Post, hardly a bastion of regulatory skepticism.[1] That outpouring of popular resentment caused a heavily Democratic Congress to cut-off the Democratic-led agency's regular funding and prohibit it from regulating advertising merely on the grounds of "unfairness." In essence, they told the agency to "go back to its knitting" and focus on protecting consumers from demonstrated harms.[2] Duly chastened (and actually shut down for several days), the FTC formulated a meaningful legal standard for "unfairness," which Congress codified in 1994: for a practice to be unfair, the injury it causes must be (1) substantial, (2) without offsetting benefits, and (3) one that consumers cannot reasonably avoid.

Under this statutory standard, as FTC Commissioner Thomas Rosch has argued, the commission must carefully consider:

[the] legitimate pro-consumer and pro-competitive benefits that result from [targeted advertising]. Absent hard data weighing these benefits against the limited "invasion of privacy interests" involved, it would seem difficult to conclude that treating that practice as an actionable violation of the "unfairness" prong of Section 5 will pass muster.[3]

So Leibowitz and Vladeck either need to get serious about weighing the costs and benefits of targeted advertising--or, in the absence of such actually measuring these trade-offs, get Congress to give them the authority to regulate. But one thing is clear from their past statements: they are in a hurry to do something. As Vladeck told The Times last August, "There is a sense of urgency around here... Consumers, I don't think are sufficiently protected under the current regime." Apparently, the case is closed in their minds.
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"Left Hand, Meet Right Hand"


The second half of the Times interview concerns the future of news. Chairman Leibowitz is not optimistic:
"There are some areas where you clearly see positive creative destruction," Mr. Leibowitz said, giving the example of travel agents who were replaced by Orbitz and other online-booking systems. The news, he said, was not one of those. "When you're dealing with something as critical as news is to a democracy, you need to ensure, certainly, that it's independent, but also that it's vibrant going forward," he said. Areas like investigative reporting, foreign and domestic bureaus, and state-house reporting, he said, would likely falter under blog operations because of "economies of scale."

He said he wasn't sure what the solution was, but threw out a few ideas discussed at the conference: maybe special tax treatment for newspapers, a Corporation for Public Broadcasting-like fund, or for the newspaper industry to charge fees for the re-use of its content, similar to the model that the American Society of Composers, Authors and Publishers uses. [emphasis added]

Mr. Chairman, with all due respect, haven't you forgotten about the solution that has powered private media for a few centuries in this country? You know--advertising! Indeed, what's stunning about these comments is the complete disconnect with what Leibowitz and Vladeck said earlier in the interview. It certainly may be the case that they said more on the subject than what The Times has reported, but given their escalating rhetoric, it seems likely that significantly increased FTC regulation is on the horizon. And, yet, as Chairman Leibowitz marches us into this brave new world of regulating Internet media through their key funding source, he and Mr. Vladeck seem to have little appreciation of the vital role played by advertising in sustaining a truly free and vibrant press.
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An Attack on Advertising Is an Attack on Media Itself


Let's step back and revisit Media Economics 101. Almost every serious scholar in the field acknowledges this truism: Advertising cross-subsidizes media platforms and the creation of valuable information--especially news. "Advertising is the mother's milk of all the mass media," Wall Street Journal technology columnist Walt Mossberg has noted. Similarly, Harold L. Vogel, author of Entertainment Industry Economics, the leading text in the field, has noted, "Advertising is the key common ingredient in the tactics and strategies of all entertainment and media company business models. Indeed, it might further be said that advertising has substantively subsidized the production and delivery of news and entertainment throughout the last century."[4] Mossberg agrees and notes, "Without ads, most editorial products and other programming would be either unavailable or prohibitively expensive."

The reason for the indispensability of advertising is simple: Information (including news and other forms of "content") has "public good" characteristics that make it is very difficult (and occasionally impossible) for information-publishers to recoup their investments. Simply put, they quite literally lack pricing power: Whatever they charge, someone else will charge less for a close substitute, inevitably leading to "free" distribution of the content, even though the content is anything but free to produce. Advertising is the one business model that has traditionally saved the day by rewarding publishers for attracting the attention of an audience.

Which raises another under-appreciated point: Private advertising promotes press independence. "Newspapers, magazines, radio, television, and many websites all receive their primary income from advertising," notes William F. Arens, author of Contemporary Advertising, another leading textbook in the field. "This facilitates freedom of the press and promotes more complete information" he concludes.[5] Why? Because, contrary to what some critics claim, advertising and marketing help keep private media providers independent of the need for taxpayer subsidies or private patrons. This begs an even more profound question: If not advertising, then what else?

A "Public Option" for the Press?

What's most troubling about Chairman Leibowitz's comments to the Times is that he has apparently found his alternative to advertising: a "public option" for the press! He mentions special tax treatment for newspapers or a new CPB-like fund (don't we already have one?) as two possibilities. That certainly will be music to the ears of radical, pro-regulatory activist groups like the ironically-named "Free Press," which wants to see a massive "public works" program for the media sector.

Free Press recently filed comments with the FTC in the agency's recent workshop, "Can Journalism Survive the Internet Age?" and proposed a far-reaching industrial policy for "saving the news." They call for over $50 billion in subsidies for the Corporation for Public Broadcasting and other bureaucracies, a "journalism jobs program" for that would be part of AmeriCorps, a variety of new tax incentives for struggling media operations or individuals who support favored institutions, and an assortment of government incentives to encourage local ownership and media divestiture (by handing over control to smaller operators or minority-owned groups). Ironically, "Free Press" has also floated the concept of "a small tax on advertising" as one way to pay for a press bailout.

The organization's founder Robert W. McChesney, the prolific neo-Marxist media scholar, penned an essay with John Nichols of The Nation last year, claiming that saving journalism essentially requires that media become an appendage of the State. Although advertising has supported journalism as a "public good" for centuries, the only way they can conceive to provide a public good is to socialize its means of production. Thus, journalism, like education and national defense, requires constant government oversight and support: "A moment has arrived at which we must recognize the need to invest tax dollars to create and maintain news gathering, reporting and writing with the purpose of informing all our citizens." They ask us to consider the $60 billion in government spending they propose as a "free press 'infrastructure project,'" which would "keep the press system alive."

Some in Congress seem willing to listen. The Senate has already held hearings about the future of journalism. And Senator Benjamin L. Cardin (D-MD) recently introduced what he has called the "Newspaper Revitalization Act," which would allow newspapers to become nonprofit organizations in an effort to help them stay afloat. Importantly, however, the bill would also disallow political endorsements on newspaper editorial pages--which, like campaign finance restrictions, would be a boon for incumbent politicians. That bill should serve as fair warning to journalists about the sort of strings lawmakers will attach to press-welfare efforts going forward. What other "golden shackles" might come with media subsidies?

To be clear, Chairman Leibowitz hasn't called for a complete press takeover along the lines of the Free Press plan. Yet, he hasn't answered a key question in this debate: Who pays for news? He appears ready to endorse a bold new regulatory scheme for the Internet and online media that, in the name of "protecting privacy" would put at risk the one traditionally successful method of supporting private media operations--advertising. As the Pew Research Center's Project for Excellence in Journalism noted in its latest State of the News Media report, "The problem facing American journalism is not fundamentally an audience problem or a credibility problem. It is a revenue problem--the decoupling... of advertising from news." There's probably no way policymakers can stop this process, nor should they try. But they shouldn't be creating new obstacles to the survival of traditional media creators, either.

Unfortunately, that's exactly what Chairman Leibowitz's new regulatory scheme would do. The revenue "delta" between "smart" advertising (tailored to consumers' likely interests and measured for effectiveness in producing clicks, purchases, etc.) and "dumb advertising" (based purely on surrounding keywords or demographics of users presumed to visit the site) is difficult to measure but potentially enormous--even 10 times as great for some sites.[6] The difference between opt-in and opt-out could be nearly as dramatic, because it's difficult to get consumers to opt-in for anything, especially for small players--which means that opt-in regulation could, perversely, force consolidation in the online advertising and content markets. If the FTC cares about its statutory responsibility to safeguard competition, they should take this dynamic seriously and be hyper-cautious about heavy-handed mandates that could derail smarter advertising.

Finally, to be fair, in his interview, the Chairman also suggests the newspaper industry might want to find new way "to charge fees for the re-use of its content." We're certainly not opposed to the notion and think that, if it could somehow be made to work (especially by removing antitrust obstacles), it could part of a diverse revenue mix for digital journalism. But, there's the rub. Micropayments inevitably face the problem of "mental transaction costs" that likely swamp the perceived value of most content and, like pay-walls, have generally worked only in media environments characterized by a scarcity of providers and a uniqueness of a sufficiently valuable product. These cold, hard economic realities are why advertising remains indispensable.

The Principled Alternative to Regulation


Convinced that privacy policies simply don't work, Leibowitz and Vladeck are asking what a "post-disclosure era" would look like. We appreciate the continued sensitivities expressed by certain groups and individuals about online privacy and data use more generally. But there is another way forward. We have proposed the following "5-E" layered approach to concerns about online privacy, focusing on restraining government access to data as a clear harm, rather than crippling the private sector uses of data that directly benefit consumers:

  1. 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.

  2. Educate users about privacy risks and data management in general as well as specific practices and policies for safer computing.

  3. Empower users to implement their privacy preferences in specific contexts as easily as possible.

  4. Enhance self-regulation by industry sectors and companies to integrate with user education and empowerment.

  5. 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 top-down, one-size-fits-all 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"). Consumers 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--while also helping them find the information and content they desire.

But of course, the devil's in the details. Leibowitz and Vladeck would set the bar so high as to what constitutes "effective" consumer choice that current privacy policies necessarily fail their test--if only because most users don't care enough to make the "right" privacy choices. Privacy policies, even if read by relatively few consumers, nonetheless allow privacy advocates, journalists and watchdog-bloggers to scrutinize what companies say they're doing--promises to which the FTC should hold companies stringently. That's clearly not good enough for Leibowitz and Vladeck, who want to give up on "notice and choice" and move on to "opt-in" mandates. But why not first try to make "notice" more effective? The advertising industry is currently developing standardized interfaces that could communicate key information about privacy practices in a single icon, label or other easily-digested "consumer touch point."

More radically, why focus on tinkering with consumer interfaces, when standardized data disclosure formats like the Protocol for Privacy Preferences (P3P) could distill legalistic privacy policies into "machine-readable" code? Such disclosures could provide a powerful form of "notice" that the ordinary consumer could "use": simply setting their own privacy preferences in a browser tool that automatically implements those preferences by blocking tracking that users object to. Such a privacy disclosure format could also allow the FTC to automate enforcement of its existing authority to punish unfair or deceptive trade practices.

Conclusion


And so we return to the question the FTC asked in its recent workshop, "Can Journalism Survive the Internet Age?" Answer: Not if the FTC kills the golden goose that lays the golden eggs through onerous advertising regulations and data controls in the name of "privacy." Chairman Leibowitz and Bureau Chief Vladeck shouldn't foreclose the possibility that advertising can play a central role in the future of a free press in the Digital Age--just as it has done historically in the United States. Indeed, they would be wise to remember that advertising has always been with us. As the Supreme Court noted in its 1996 decision, 44 Liquormart, Inc. v. Rhode Island.
Advertising has been a part of our culture throughout our history. Even in colonial days, the public relied on "commercial speech" for vital information about the market. Early newspapers displayed advertisements for goods and services on their front pages, and town criers called out prices in public squares. Indeed, commercial messages played such a central role in public life prior to the founding that Benjamin Franklin authored his early defense of a free press in support of his decision to print, of all things, an advertisement for voyages to Barbados.[7]

Of course, for advertising to continue to play the role as sustainer of the press, it must be allowed to evolve. Media operators--large and small alike--must be allowed to craft new strategies, some of which may require data collection and marketing practices that will make some privacy-sensitive users uncomfortable, but will also ensure that the goose keeps on laying golden eggs for them and everyone else.

While Chairman Leibowitz may decry the creative destruction at work in the news sector and information industries today, that shakeup will continue and, no doubt, be painful for incumbent players. Advertising alone may not "save the day" for media as it has in the past, but it will likely remain essential to sustaining private media platforms and providers going forward--if federal policymakers allow it. The alternative--massive government intervention into the news and media sectors--is too horrifying to think about.

Adam Thierer is President of The Progress & Freedom Foundation and Director of PFF's Center for Digital Media Freedom. Berin Szoka is a PFF Senior Fellow and Director of PFF's Center for Internet Freedom. The views expressed herein are their own, and are not necessarily the views of the PFF board, fellows or staff.

[1] Washington Post, March 1, 1978.

[2] Congress terminated the FTC's efforts to prohibit advertising to children, and barred the agency from issuing any advertising regulation predicated solely on unfairness for three years. FTC Improvements Act, Pub. L. No. 96-252, ยง 11 (May 1980). See generally J. Howard Beales, Director of the Bureau of Consumer Protection, Federal Trade Commission, The FTC's Use of Unfairness Authority: Its Rise, Fall, and Resurrection, www.ftc.gov/speeches/beales/unfair0603.shtm.

[3] Thomas Rosch, Some Reflections on the Future of the Internet: Net Neutrality, Online Behavioral Advertising, and Health Information Technology, Remarks at U.S. Chamber of Commerce Telecommunications & E-Commerce Committee Fall Meeting, October 26, 2009, 13, www.ftc.gov/speeches/rosch/091026chamber.pdf.

[4] Harold L. Vogel, Entertainment Industry Economics (Cambridge, MA: Cambridge University Press, 7th Edition, 2007), at 46.

[5] William F. Arens, Contemporary Advertising (McGraw-Hill Irwin, 10th Ed., 2006) at 50.

[6] See Berin Szoka & Mark Adams, The Benefits of Online Advertising & Costs of Privacy Regulation, PFF Working Paper, Nov. 8, 2009, www.scribd.com/doc/22445754/Benefits-of-Online-Advertising-Paper.

[7] 517 U.S. 484, 495 (1996), http://www.law.cornell.edu/supct/html/94-1140.ZO.html

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posted by Adam Thierer @ 7:28 PM | Advertising & Marketing , Mass Media , Media Regulation , Privacy