What Happens When Privacy Regs Force Developers to Monetize via Paywalls?

by on December 18, 2010 · 5 comments

This week saw the release of another major government privacy report, this one from the Department of Commerce.  The report called for expanded oversight and a new Privacy Policy Office within the Commerce Department. [Good summary of the report is here, and make sure to see Braden's post about it here.]  The Commerce Dept. green paper follows a report from the Federal Trade Commission (FTC) just a few weeks ago. The FTC report also endorsed a new regulatory framework, including a so-called “Do Not Track” mechanism to allow easier consumer opt-outs of online data collection and advertising.

Commenting on the gradual move toward a mandatory opt-in world for online advertising / data collection, Corey Kronengold of Digiday makes an argument that Berin Szoka and I have tried to develop here in the past.  Namely, if government regulation “breaks” the implicit online quid pro quo currently governing online sites and services — i.e., that you get lots of free stuff in exchange for tolerating ads and data collection — then something must give.  In all likelihood, that means paywalls will go up and prices will increase from zero to something higher.  In his essay, “Taking Issue: The Value of Privacy,” Kronengold argues:

The value chain of online publishing is increasingly complex. And most consumers don’t have any interest in understanding the mechanics of targeting, data collection and re-selling, and ad revenue sharing. If continued access to free web content is what consumers are after, this has to change. Not participating in the value exchange is not an option. Yet we continue to struggle to explain. We need to do a better job of explaining the options and the consequences of those choices. When we can more clearly explain the benefits of allowing third party data to be bought and sold, users, and our government, are much more likely to allow us to continue to do so.

Providing users with the ability to “opt-out” of targeting, seems like a good idea on the surface, but doesn’t adequately address how web publishers and content owners should conduct business. Highlighting that disparity on Monday, one Digiday:Target attendee suggested that publishers simply not deliver content to users who had opted out or turned off their cookies. My applause in support of the idea was met by a deafening silence and confused looks.  The idea of a “cookie wall” that I proposed last week seems to be an easy solution. Tied in to a data exchange and with transparency, we could very easily explain the value proposition to users. With cookies on, you are worth $25. Without cookies, you are worth $1. How much content can you buy for $25 vs $1? There. Now you get it.

You have the right to protect your privacy. Content creators and distributors have the right to not give you content without getting something in return. Why is that so hard for users, the FTC and the Commerce Department to understand?

Kronengold is right; this trade-off should be relatively apparent to most of us and yet it isn’t. He’s probably on to something when he suggests that online developers “need to do a better job of explaining the options and the consequences of those choices.”  In a sense, web publishers have let users enjoy an ad-supported free ride for a long time now and failed to “more clearly explain the benefits of allowing third party data to be bought and sold,” as Kronengold notes.

This must change, and quick.  Greater transparency is an essential first step by web publishers and service developers to better inform their users of how the value proposition works. I’d love to see some site and service developers make this value proposition / trade-off more explicit by putting a theoretical price tag on their content or services if they were forced to curtail data collection / advertising.

If a new privacy regulatory regime is implemented, we may get our answer, anyway. When confronted with stark choices such as those Kronegold suggests — namely, “cookie walls” or paywalls demanding fee for service — the response of users could take one of two forms:

  1. Users (especially those who are highly privacy sensitive) might gladly accept the trade-off and pay something more for those sites and services instead of having data collected or ads served; or,
  2. Users might revolt against the resulting paywalls, subscriptions, micropayment schemes, tiered services, etc, and demand government intervention in the name of “fairness.”  We might even hear talk of “gouging” and calls for price regulation, even though developers would have no choice but to raise prices to cover costs in the absence of advertising support.

I think that latter scenario is more likely than the former and it troubles me greatly. I hope I’m wrong, however, and the former is the case.  Of course, some mix of the two could be the end result.  Who knows. But regulation will have consequences. Of that much we can be certain.

I want to make three things clear here.  First, I have no problem with online sites and application providers charging for what they offer us.  I’m merely suggesting here that many others will likely have a problem with it since they have grown accustomed to “free” online services.  Second, I have no idea how much sites and services might seek to charge for their services but I must assume that they will cost something more than the $0.00 they currently charge.  Third, as I noted in this exchange with Julian and Tim Lee, I’m not anti-choice in terms of the decisions consumers make in this regard. What I object to is the idea of the government artificially tilting markets in certain directions by facilitating ad blocking or regulatory limitations on data collection. It’s one thing for consumers to take advantage of tools that arise spontaneously in the marketplace, such as AdBlock Plus, the latest cookie controls, or even new tools like those Microsoft recently announced for IE9.  It’s an entirely different matter for the government to be mandating such things from above.  Thus, I’m not anti-choice, rather, I am anti-intervention as it pertains to government mandates made in the name of expanding privacy or choice since the government’s thumb on the scales would distort the organic, experimental evolution of these markets.  And I’m particular concerned about the dangers of intervention since regulation could unleash scenarios like those I described in #2 above. As we know from the study of economic history, regulatory interventions always beget additional interventions to correct for unforeseen circumstances or unintended consequences.

More than anything else, I just want the surreal ‘something-for-nothing’ quality of these debates to cease.  Those who criticize data collection or online advertising and call for expanded regulation should be required to provide a strict cost-benefit analysis of the restrictions they propose.  In particular, regulatory advocates should explain to us how the content and services supported currently by advertising and marketing will be possible if those techniques are choked off.  Importantly, the “harm” critics claim advertising or data collection efforts give rise to must be concrete, not merely conjectural.  Too much is at stake to allow otherwise.

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