Today, the U.S. Senate Commerce Committee held a hearing on “The State of Online Consumer Privacy.”

The push for online privacy regulation has real momentum, as proposed privacy legislation from numerous lawmakers, a Department of Commerce report proposing a compulsory Do Not Track mechanism to regulate business marketing practices, and the Obama Administration’s proposed “Privacy Bill of Rights” all indicate.

However, Congress should be very wary of such proposals. A politically defined Do Not Track regime risks undermining targeted advertising, impeding business transactions that occur between strangers, and stifling mobile ecosystems that are barely out of the cradle. Rattling consumers needlessly by encouraging them to opt-out of largely beneficial information collection is an especially unwise idea in our uncertain economic climate – especially when major industry participants are developing such mechanisms on their own.

The opportunity to undermine online marketing – wrongly called “surveillance” – appeals to some, but such privacy purists have no right to call the shots for anyone but themselves and those who agree with them. The right to use information acquired through voluntary transactions is no less important than the right to decide whether to disclose information in the first place.

Competitive pressures to secure our personal information include rivals who promise more security, capital markets and business partners (like upstream suppliers and downstream customers who demand information security as a condition of doing business). Like all other technologies, privacy-enhancing services – from consulting to liability insurance to network monitoring – benefit from competition. Contracts to surf anonymously while paying a nominal fee to an ISP, a notion noted recently in a Wall Street Journal piece, are merely one example of such market innovations.

In light of such pressures, the term “self-regulation”—heard often in hearings such as today’s—is a misnomer: no business has that luxury in free enterprise.

Market participants will make mistakes, but these pale in comparison to the mistakes made by government. Privacy regulation will grow so entrenched that it will preclude superior alternatives as it distorts the evolution of the digital marketplace. Attempts by politicians to define privacy are a dangerous business.

In this era of TSA body imaging, mass surveillance, the push for National ID, and ill-defined protections from governmental access to our mobile devices and cloud-stored data, what we really need isn’t for Washington to try and protect our privacy—we need Washington to allow it.

Rather than Do Not Track, a “Do Not Regulate” stance remains appropriate, for the sake of improved privacy.

Today the Mercatus Center has released a short new paper I have authored on “Unappreciated Benefits of Advertising and Commercial Speech.”  I begin the piece by noting that:

Federal policy makers, state legislators, and state attorneys general have recently shown interest in regulating commercial advertising and marketing. Several new regulatory initiatives are being proposed, or are already underway, that could severely curtail or restrict advertising or marketing on a variety of platforms. The consequences of these stepped-up regulatory efforts will be profound and will hurt consumer welfare both directly and indirectly.

I go on to note that “advertising can be an easy target for politicians or regulatory activist groups who make a variety of (typically unsubstantiated) claims about its negative impact on society,” but then continue on to explain how “the role of commercial speech in a free-market economy is often misunderstood or taken for granted.” I outline how, despite regulators’ concerns, consumers actually derive three important types of benefits from advertising and marketing: (1) Informational / Educational Benefits; (2) Market Choice / Pro-Competitive Benefits; and (3) Media Promotion / Cross-Subsidization.  After discussing each benefit, I conclude that:

For these reasons, a stepped-up regulatory crusade against advertising and marketing will hurt consumer welfare since it will raise prices, restrict choice, and diminish marketplace competition and innovation—both in ad-supported content and service markets, and throughout the economy at large.  Simply stated, there is no free lunch.

Read the entire 1,800-word essay here.  I have also embedded the document down below in a Scribd reader.

Unappreciated Benefits of Advertising and Commercial Speech (Adam Thierer – Mercatus Center) http://d1.scribdassets.com/ScribdViewer.swf

Yesterday, the Federal Trade Commission (FTC) hosted an all-day workshop on “Protecting Kids’ Privacy Online,” which looked into the Children’s Online Privacy Protection Act of 1998 (COPPA) and challenges posed to its enforcement by new technological developments. The FTC staff did a nice job bringing together and moderating 5 panels worth of participants, all of whom had plenty of interesting things to say about the future of COPPA.  But I was more struck by what was not said yesterday. Namely, there was:

• ZERO explanation of the supposed harms of advertising, marketing, and data collection. Advertising-bashing is an old sport here in Washington, so I guess I should not have been surprised to hear several panelists yesterday engaging in teeth-gnashing and hand-wringing about advertising, marketing, and the data collection methods that make it possible. But this grousing just went on and on without any explanation by the critics of the supposed harms that would result from it.
• ZERO appreciation of the benefits of advertising, marketing, and data collection. Not once yesterday — NOT ONCE — did anyone pause to ask what it is that makes all these wonderful online sites, services and content free (or dirt cheap) to consumers.  Everyone at this show was guilty of the “manna fallacy” (that all this stuff just falls magically to Earth from the Net Gods above). Well, back here in the real world, something has to pay for all those goodies, and that something is advertising and marketing, which are facilitated by data collection! Or would you like to pay $19.95 a month for each of those currently free sites and services? Yeah, I didn’t think so.

• Almost ZERO discussion of the excellent steps that so many websites are taking today above and beyond COPPA to make sure online communities are safe. What I found most amazing about the day’s discussion was the way many people seem to assume that COPPA is the most important approach to keeping kids safe online. In reality, as I have pointed out in my past work, COPPA is one the least important things that keeps kids safe online. It’s what sites do after kids get into their communities that is really important. And, until the last panel of the day, we heard very little about the important steps that countless online sites and communities take to make sure they offer more safe and secure environments for kids. In particular, beyond basic parental controls, moderation and intervention efforts by site operators are increasing within social networking sites, virtual worlds, and many other sites to ensure that they offer such “well lit” neighborhoods. Failure to integrate this into the discussion was the major failing of the day.

• Little discussion of the role of parents should play in mentoring their kids online. So, I’m a parent.  Two kids. Ages 8 and 5. Guess what? They love commercial messages! I let them see them. Online and off. We talk about them. I explain to them not to believe everything they see. I explain that sometimes people are just out to sell them silly stuff they don’t need or, worse yet, scam them out of their money. I explain that there’s a lot of crap out there. And I explain to them that they should always consult with mom and dad about purchasing decisions to get our advice and consent. Hey… there’s a word for this: mentoring (otherwise known as “good parenting.”) Yes, yes, I know COPPA is suppose to aid parents in this regard, but honestly, I only think of COPPA as a small speed bump.  It can slow people — either kids or marketers — down a bit, but it will never stop companies from wanting to sell products or people (including kids) from wanting to buy them.  This is life in a capitalistic society, folks. Unless you want to live in some Marxist “Worker’s Paradise” where we ban all commercial messages and tightly limit consumption and consumer choice (and “wasteful capitalist” competition!), you better get used to it. And, to go back to point #1, you have yet to show me how exposure to commercial messages “harms” kids.  I’m not saying I want to subject my kids to an endless bombardment-by-ads, but as with everything else in this world, there is a sensible way to educate them using a combination of good mentoring and media literacy.
• ZERO acknowledgment that COPPA expansion puts the law on a collision course with COPA, which has already been litigated and found unconstitutional. During the fourth panel yesterday on “Emerging Parental Verification Access and Methods,” there was some troubling talk of turning schools or mobile phone operators into online credentialing authorities. I’ve discussed the dangers of these approaches to online age verification here before (especially the insanely misguided suggestion that schools should become DMVs for our kids and be passing out digital credentials). Which brings up a broader concern not really discussed at all yesterday: At what point would an expansion of COPPA’s “verifiable parental consent” requirements converge with the unconstitutional mandatory age verification model found in the Children’s Online Protection Act (COPA)? We fought an epic, decade-long legal battle over COPA only to have the entire framework tossed out as a violation of the First Amendment. This issue was at the heart of the COPPA 2.0 paper Berin Szoka and I released last year, and a theme Berin recently explained in his Senate testimony and subsequent answers to questions for the Congressional Record.

Anyway, I could go on but I’ll just stop there and reference a few other things that we’ve been doing on COPPA and age verification issues more generally. But everyone should stay tuned to this debate because the prospect for COPPA expansion is quite real and it will have profound ramifications, as the subtitle to our first paper down below explains:

• COPPA 2.0: The New Battle over Privacy, Age Verification, Online Safety & Free Speech, by Berin Szoka & Adam Thierer
• Response of Berin Szoka to Questions from Sen. Mark Pryor Regarding Hearing on “An Examination of Children’s Privacy: New Technologies & the Children’s Online Privacy Protection Act”
• Written Testimony of Berin Szoka, Hearing on “An Examination of Children’s Privacy: New Technologies & the Children’s Online Privacy Protection Act” before the Subcommittee on Consumer Protection, Committee on Commerce, Science & Transportation, U.S. Senate, April 29, 2010
• Final Statement of Adam Thierer to the Internet Safety Technical Task Force
• “USA Today, Age Verification, and the Death of Online Anonymity,” by Adam Thierer, PFF Blog, Jan. 23, 2008
• Social Networking and Age Verification: Many Hard Questions; No Easy Solutions, by Adam Thierer, March 21, 2007.
• “Age Verification for Social Networking Sites: Is it Possible? Is it Desirable?” event transcript, May 11, 2007.

It’s intended as a cute line, but the opener of Stephanie Clifford’s New York Times story about custom coupons is packed with ideological assumptions: “For decades, shoppers have taken advantage of coupons. Now, the coupons are taking advantage of the shoppers.”

Meta-data in printed coupons can reveal much about the people using them.

Here’s a shocker, people: Free money might come with strings attached.

It would be wrong to dismiss the privacy problems that custom coupons might contain. They’re similar to the privacy problems that lots of other new technologies and business processes have. But the starting point if you worry about them is that you don’t have to use them.

I don’t—and it’s not even because of privacy worries. I just don’t.

But Clifford quotes two advocates of government regulation in her article—zero advocates of freedom, market experimentation, or innovation. Ed Mierzwinski, consumer program director for the United States Public Interest Research Group, says, “There really have been no rules set up for this ecosystem.”

Rules, rules. Anything new has to be draped in rules.

I would have opened the article saying, “For decades, shoppers have taken advantage of coupons. Now, the deal is going to be a little more fair.” Where does the story go from there?

By Adam Thierer & Berin Szoka Progress & Freedom Foundation Progress Snapshot No. 6.5, Feb 2010 [.pdf]

Advertising is increasingly under attack in Washington. In fact, we’re busy finishing up a paper with the working title: “The New Assault on Advertising: What it Means for the Future of Media & Culture.” Among other things, the paper inventories the many ways in which policymakers in Washington and elsewhere are stepping up regulation of commercial advertising and marketing efforts-and highlights the common themes that unite them. Unfortunately, the report is already over 50 pages long and we keep finding new threats to discuss!

This regulatory tsunami could not come at a worse time, of course, since an attack on advertising is tantamount to an attack on media itself, and media is at a critical point of technological change. As we have pointed out repeatedly, the vast majority of media and content in this country is supported by commercial advertising in one way or another-particularly in the era of “free” content and services.[1]

An Attack on Advertising Will Hurt Consumers

But there’s a more important reason to fear Washington’s new war on advertising: It will hurt consumer welfare. That’s because advertising provides important information and signals to consumers about goods and services that are competing for their attention and business—and that scarcest of all things in the modern world, consumers’ attention. Thus, advertising helps solve an otherwise intractable information problem that would otherwise go unsolved without advertising’s claims and counter-claims about competing goods and services. Indeed, truthful advertising is itself an important type of speech that communicates relevant information to the public. As Nobel laureate economist George Stigler pointed out in his now legendary 1961 article on the economics of information, advertising is “an immensely powerful instrument for the elimination of ignorance-comparable in force to the use of the book instead of the oral discourse to communicate knowledge.”[2] As leading advertising scholar John Calfee has argued, “advertising has an unsuspected power to improve consumer welfare” since it “is an efficient and sometimes irreplaceable mechanism for bringing consumers information that would otherwise languish on the sidelines.”[3] More importantly, Calfee argues:

Advertising’s promise of more and better information also generates ripple effects in the market. These include enhanced incentives to create new information and develop better products. Theoretical and empirical research has demonstrated what generations of astute observers had known intuitively, that markets with advertising are far superior to markets without advertising.[4]

In other words, advertising educates. It ensures consumers are better informed about the world around them, and not just for the good or service being advertised. Advertising also raises general awareness about new classes or categories of goods and services. It helps citizens in their capacity as consumers to become better aware of the options and their disposal and the relative merits of those choices. For example, a new survey by About.com found that “While one-third of the online buyers who were aided by ads said they helped them save money, the majority appreciated online ads for informing them about a product or service previously unknown.”[5]

If anything, these numbers understate the vital importance of advertising to consumers, since advertising is so ubiquitous in our capitalist world, it is like the air we all breathe: We rarely notice it except when it annoys or bothers us. Given how deeply ingrained our cultural bias against advertising, and how subtly advertising works to benefit consumers, it’s remarkable that so many consumers realize that advertising empowers them by increasing total awareness of the many choices available in the marketplace.

Commercial Speech Is Speech and Deserving of First Amendment Protection

For these reasons, the Supreme Court has made it clear commercial speech is deserving of First Amendment protection like other forms of speech. In a series of key decisions over the past four decades, the Court has highlighted the important role that advertising and marketing plays in facilitating the flow of information that is beneficial to society. As Calfee notes:

Constitutional protection for advertising is explicitly based upon the idea that freedom to advertise brings benefits to markets generally, especially consumers. The central argument in Supreme Court decisions overturning restrictions on advertising is that consumers can benefit from a free exchange of information- the ‘marketplace of ideas’ celebrated by authors and jurists since at least the time of John Milton.[6]

“Both the individual consumer and society in general may have strong interests in the free flow of commercial information,” the Court noted in its landmark 1976 decision in Va. Pharmacy Bd. v. Va. Consumer Council.[7] “As to the particular consumer’s interest in the free flow of commercial information, that interest may be as keen, if not keener by far, than his interest in the day’s most urgent political debate,” Justice Blackmun stressed in that decision.[8] Thus, the Court concluded:

Advertising, however tasteless and excessive it sometimes may seem, is nonetheless dissemination of information as to who is producing and selling what product, for what reason, and at what price. So long as we preserve a predominantly free enterprise economy, the allocation of our resources in large measure will be made through numerous private economic decisions. It is a matter of public interest that those decisions, in the aggregate, be intelligent and well informed. To this end, the free flow of commercial information is indispensable.[9]

The Court’s reasoning in its recent commercial speech jurisprudence, notes Media Institute scholar Richard T. Kaplar, can be summarized with the following syllogism:

Economic concerns are as important to our society are as important as political concerns. By extension, economic information is as important as political information. Political information receives full First Amendment protection. Therefore, economic information should receive full First Amendment protection.[10]

Kaplar continued: “Truthful speech about lawful products and services deserve full First Amendment protection. This is a simple proposition, but its implications for freedom of speech extend far beyond advertising.”[11]

The Benefits of Advertising Reverberate Throughout the Economy

The beneficial effects of increasing commercial speech and information clearly reverberate throughout the economy—even though the big picture is “anything but obvious to consumers.”[12] Smarter consumers make smarter choices. They search for better deals. Products and prices become more competitive as a result—even for consumers who don’t bargain-hunt. And the cycle repeats endlessly. This is particularly true for new products and services, thus for promoting technological innovation, as Nobel Prize winning Economists Kenneth Arrow and George Stigler noted in their landmark 1990 study of the benefits of advertising.[13] They point to the example of the microwave oven, introduced in 1967:

Amana [Corporation]’s initial advertising of its pioneering microwave oven provided consumers with information on how such ovens work, what they can do, etc. This created consumer demand for the product, which benefited subsequent entrants, such as Litton and Panasonic. Advertising by these later entrants was used to explain the benefits of their particular brands rather than to explain to consumers the functions of a microwave oven: Amana’s advertising had already provided general product information and helped create consumer demand for the product.[14]

This process not only brings new products to market, but also helps upstart innovators dethrone the regnant giants of industry, ensuring that competition remains dynamic and fiercely rivalrous—all to the ongoing benefit of consumers.

Conclusion

These are the stakes for consumers in the “New Assault on Advertising,” as we’ll explain in our forthcoming report. Government already plays a vital role in ensuring that advertising is truthful and not misleading. But as advertising itself evolves to keep pace with technological change, raising new concerns about privacy and the supposed manipulativeness of tailored ads, further regulation will only serve to limit the provision of beneficial information to consumers, potentially retard new product offerings and innovation, dampen price competition, and indirectly punish media operations and content creators who rely on advertising as their lifeblood.

Related PFF Publications

• Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of News, Adam Thierer & Berin Szoka, Progress Snapshot 6.1, Jan. 13, 2010.
• Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise Prices, Quash Digital Innovation & Curtail Free Speech, Berin Szoka, Comments to the Federal Trade Commission at the Exploring Privacy Roundtable, Nov. 10, 2009.
• Regulating Online Advertising: What Will it Mean for Consumers, Culture & Journalism? Berin Szoka, Mark Adams, Howard Beales, Thomas Lenard & Jules Polonetsky, Progress on Point 16.22, Oct. 30, 2009.
• Privacy Polls v. Real-World Trade-Offs , Berin Szoka, Progress Snapshot 5.10, Oct. 8, 2009.
• Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Berin Szoka & Adam Thierer, Progress on Point 16.2, Feb. 13, 2009.
• Online Advertising & User Privacy: Principles to Guide the Debate, Berin Szoka & Adam Thierer, Progress Snapshot 4.19, Sept. 2008.
• Comments of The Progress & Freedom Foundation In the Matter of Sponsorship Identification Rules and Embedded Advertising, W. Kenneth Ferree & Adam Thierer, Sept. 19, 2008.
• Freedom of Speech and Information Privacy: The Troubling Implications of a Right to Stop People from Talking About You, Eugene Volokh, Progress on Point 7.15, Oct. 2000.
• A Taxonomy of Online Security and Privacy Threats, Eric Beach & Adam Marcus, Oct. 29, 2009.

Today I appeared on CNBC [video here and embedded down below] to discuss concerns about emerging “smart-sign” technology, which could give rise to a new generation of interactive retail advertising and marketing efforts. This is in the news because, as Don Clark and Nick Wingfield report today in The Wall Street Journal (“Intel, Microsoft Offer Smart-Sign Technology: Retailers, Product Marketers Could Discern Viewer, Make Choices on What to Display and Transfer Coupons Via Phone“), Intel and Microsoft have announced that:

they will collaborate to help companies create and use new forms of digital signs. By exploiting Intel chips and Microsoft software, the companies hope to bring more interactivity to such devices and help retailers customized marketing offers to consumers. Signs equipped with cameras and specialized software could recognize the age, gender and height of people in front of them, and tell what products and images received the most attention, the companies said. By gathering information about which messages are more effective, they add, traditional retailers could develop marketing approaches that better counter Web-based competitors. “Every year retailers lose more ground to online [sellers], and they have to do something about that,” said Joe Jensen, general manager of Intel’s embedded computing division.

Down below, I have jotted down a couple of thoughts about the rise of “digital signage” and more targeted forms of retail marketing, only a few of which I was able to get across in this short TV spot. I think it’s an exciting new development for both retailers and consumers for the reasons I explain down below:

http://plus.cnbc.com/rssvideosearch/action/player/id/1383744249/code/cnbcplayershare

One of the themes you come across again and again in public policy debates about privacy, advertising, marketing, or even free speech battles, is the notion that the public at large is made up of mindless sheep being duped at every turn.  And, as Berin Szoka and I noted in our paper “What Unites Advocates of Speech Controls & Privacy Regulation?” if you buy into the argument that consumers are basically that stupid then it logically follows that people cannot be trusted or left to their own devices. Thus, government must intervene and establish a baseline “community standard” on behalf of the entire citizenry to tell them what’s best for them.

But there are good reasons to question the premise that consumers are blind to efforts to persuade or influence them — regardless of what type of media content or communications efforts we are talking about.  I was recently reading Communication Power by Manuel Castells and liked what he had to say about how so many media critics make this false assumption. Castells rightly notes:

Interestingly enough, critical theorists of communication often espouse [a] one-sided view of the communications process. By assuming the notion of a helpless audience manipulated by corporate media, they place the source of social alienation in the realm of consumerist mass communication. And yet, a well-established stream of research, particularly in the psychology of communications, shows the capacity of people to modify the signified of the messages they receive by interpreting them according to their own cultural frames, and by mixing the messages from one particular source with their variegated range of communicative practices. (p. 127)

That’s exactly right, and it is even more true in an age of ubiquitous, interactive communications technologies. “The people formerly known as the audience” have the unprecedented ability to talk back, to compare notes, to collectively criticize and hold accountable those who previously held all the cards in the mass media age of the past.  Most consumers are perfectly capable of judging the merits of advertising, commercial messages, or other content on their own; they cast a skeptical eye toward most claims but process those claims alongside other counter-claims, independent judgments, informational inputs, and “cultural frames,” as Castells rightly argues.  We need to give the public some credit.

Just read this AP article that reported on a Tuesday hearing of the Ohio Supreme Court about an Ohio “harmful to minors” law. According to the article, the statute makes it illegal to distribute harmful material to minors through “direct communications by people who know or have reason to believe the recipient is a minor.”

The case is in the 6th Circuit Court of Appeals, which has asked the Ohio Supreme Court to interpret “mass distribution” and “personally directed devices.” Per the law:

2) A person remotely transmitting information by means of a method of mass distribution does not directly sell, [etc.] … if either of the following applies: (a) The person has inadequate information to know or have reason to believe that a particular recipient of the information or offer is a juvenile. (b) The method of mass distribution does not provide the person the ability to prevent a particular recipient from receiving the information.

In the hearing (see the video) Justice Robert Cupp coins this beauty of a statement:  “It’s not really the statute that’s confusing here, it’s the technologies.” Judge say what?

Isn’t the whole point of a statute to be applied to factual situations? Anything can make sense in the abstract (even law!). But applied to everyday life, the simplistic becomes complex — and can have unintended consequences.

Such is especially true with laws that regulate Internet communications. The Ohio AG is attempting to narrow the statute by saying it applies only in situations where a speaker (1) directly communicates the harmful material, (2) knowing or has reason to know the recipient is a minor, and (3) the speaker has control over the medium — ie. not applicable to general broadcasting (forums or chat rooms) but applicable where publishers can exclude or limit the audience (direct email).

Are these limitations enough to not cover legitimate communications on the Internet? The Plaintiff, American Booksellers Foundation for Free Expression, wants an exemption for the Internet. I generally think that it is best to not bifurcate the Internet and non-Internet worlds, particularly when we think of child safety issues (digital natives see the Internet as an extension of everyday life much more than us old fogies).

Media Coalition has a page dedicated to the case here. Stay tuned.

Progress Snapshot 5.10 from The Progress & Freedom Foundation

A recent telephone poll conducted by professors at Berkeley and the University of Pennsylvania concluded, “Contrary to what many marketers claim, most adult Americans (66%) do not want marketers to tailor advertisements to their interest.” The study’s authors claim that their poll is the “the first nationally representative telephone (wireline and cell phone) survey to explore Americans’ opinions about behavioral targeting by marketers.” They also assert that the poll indicates that “if Americans could vote on behavioral targeting today, they would shut it down.” Advocates of regulating online data collection have trumpeted this poll as evidence consumers demand legislation to protect their privacy. “This research gives the F.T.C. and Congress a political green light to go ahead and enact effective, but reasonable, rules and policies,” declared Jeff Chester, a leading critic of online advertising.

But what is most surprising about this poll is not that 66% of users said they do not want tailored online ads, but that 34% of users said they did! The key, initial question of “whether or not you want the websites you visit to show you ads that are tailored to your interests,” presents no trade-off. The fact that anyusers said “yes” indicates that many users paused to do the rough mental math about the unarticulated trade-off between the benefits of receiving tailored ads and the costs of that tailoring.

The methodology of opinion polls necessarily affects respondents’ mental calculations, rendering polls not just easily manipulated, but inherently unreliable as indicators of real preferences. Every poll reflects the bias of its authors to some degree by the way questions are worded, the order in which they are asked, the sample surveyed, etc. The easiest way to bias the results of a poll is to omit any mention of the trade-offs at issue. This poll simply buried the issue of trade-offs in a heavily loaded follow-up question: After telling respondents that marketers “often use technologies to follow the websites you visit and the content you look at in order to better customize ads,” the interviewer asked whether the respondent would allow advertisers to “follow [them] online in an anonymous way in exchange for free content.” Only 10% of users said they would allow this voluntary exchange.

What does this tell us about whether, and how, government should further regulate online advertising? Precious little: Not only does this poll overstate the costs of targeted advertising, understate its benefits, and ignore the tools available to users to address their privacy concerns but, like any opinion poll, this one tells us more about the psychology of decision-making under the artificial uncertainty of polls than about the choices users would actually make in the real world.

User Uncertainty About Concepts Like “Tailoring” and “Following”

Even the word “tailoring”—though benign compared to other words the study’s authors could have used ( e.g., “track,” “monitor,” “record”)—is so vague as to leave respondents wondering what it really entails. One can only speculate as to what users thought the word meant (since the poll did not ask), but it seems likely that some of these scarier words probably flashed through the minds of respondents in the instant before they answered the question. Indeed, the word “tailoring” conflates both the costs and benefits of personalized advertising in a single, vague word. Given this ambiguity, it’s hardly surprising that most users would say “no”—not just to receiving tailored advertising (66%), but also to receiving tailored discounts (49%) and news (57%). If users had been asked about receiving “relevant” (rather than “tailored”) ads, the responses probably would have turned out somewhat differently—just as an additional 17% of users agreed to receiving tailored “discounts,” whose value to users is more readily apparent: saving money on potential purchases.

The second set of questions asked users whether it “Would be OK… if these ads [discounts/news] were tailored for you based on following what you do on the website you are visiting… [24% said yes] OTHER websites you have visited… [34% said yes] and OFFLINE—for example, in stores? [25% said yes].” Again, the term “follow” was not defined. A third set of questions explained to respondents that marketers “often use technologies to follow the websites you visit and the content you look at in order to better customize ads.” The interviewer then asked whether the respondent would “definitely allow, probably allow, probably NOT allow, or definitely not allow advertisers” to “follow you online in an anonymous way in exchange for free content”—and only 10% of users said yes. Thus, it appears that users are more, not less, hostile to tailored advertising when reminded of the trade-offs involved (35% yes in the first set of questions, 10% yes in the third). What explains this paradox?

The most obvious explanation is that, by the time the respondent got to the critical question about “allowing” tailored advertising, they had heard the word “follow” at least five times: once in each of the three questions about whether tailoring was OK, once in the introduction about how marketers customize ads and once in the question itself—each time increasing uncertainty as to how “tailoring” really works and more than negating any suggestion of “anonymity.” Furthermore, asking users whether something should be “allowed” implies that there are undisclosed reasons why it should not be. This much is simple psychology—obvious to anyone who wanted to craft a poll that would support a particular regulatory agenda.

But behavioral economics research tells us something even more profound about the way our brains work: human beings hate making choices, and loathe uncertainty even more. Indeed, such “mental accounting” or “mental transaction” costs appear to be the primary reason why, after a decade of efforts to develop a micropayments system that can fund online content and services, no such system has emerged—and thus why Internet publishers instead rely primarily on advertising revenues ($23.5 billion in 2008) to fund “free” offerings for consumers. In this case, merely forcing consumers to consider the costs of “tailoring” and being “followed,” and decide whether these things are “OK” or should even be “allowed” strongly tips the scales in favor of the outcome desired by the study’s authors because these considerations and decisions are significant psychological costs in themselves, which likely outweigh the diffuse benefits of tailored advertising, which users simply do not appreciate.

Indeed, the scale tips so strongly that the study suggests that 73% of Americans object to having ads tailored based on “what you do on the website you are visiting.” Would not this objection apply to purely contextual advertising “tailored” to the keywords entered by a user in a search engine or to the keywords that appear on a particular page to which a user has navigated within a site? If so, this study isn’t just about the bogeyman of “behavioral” advertising, but about essentially all online advertising, which is to some degree “tailored.” Indeed, must lawmakers protect us from the tailoring of news (71%) and discounts (62%) within websites? Or, if data collection is the real harm to consumers, what about the fact that hundreds of millions of people happily share far more personal information every day on social networks or using grocery discount cards? Opinion polls simply cannot answer these questions.

The Direct Benefit of Tailored Ads: Relevance

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. Real-world experiments confirm that users reveal a clear preference for more relevant advertising. In a 2004 experiment, click-through rates (CTR) for behaviorally targeted ads were between 94% and 225% higher than for contextually targeted ads. A 2009 study found that the difference could be between 670% and 1000% percent, depending on how well-tailored the ads were. In other words, users in the real world were two to eleven times more likely to click on highly-tailored ads. Truly, actions speak louder than words: Users clearly “vote with their clicks” for ads they find relevant—i.e., they vote for “tailoring.”

Further reinforcing this conclusion is the fact that better tailoring increases not only click-through rates but also “conversion rates”—the percentage of users who actually complete the action desired by the advertiser, whether that be making a purchase or signing up for a list. A 2008 experiment found increased conversion rates of 400-900% (2008). This indicates that relevant ads really do help consumers find things they like—and that they like the fruits of tailoring, however they respond when asked about “tailoring” as an abstract concept that conflates costs (“How are they following me?”) and benefits (“What’s in it for me?”).

The Indirect Benefit of Tailored Ads: Free Content & Services

Even less apparent to poll respondents than the direct benefit of tailoring (increased relevance) are the indirect benefits: In particular, greater relevance to the user means more effective communication for the advertiser, and increased ad revenue for most online publishers per ad on their sites. Thus, there exists a clear quid pro quo: in effect, users “pay” for content and services by sharing information about their interests. Even more fundamentally, users “pay” for content by seeing ads. But both quid pro quos are implicit: Users can simply choose not to “pay” by using readily available tools in their browser to blocking ads and/or tracking. In essence, today’s system allows users who don’t like ads—tailored or otherwise—to opt out at little or no cost, much as if they simply decided not to pay for a product they bought at their local grocery store.

This creates a serious dilemma, given that advertising increasingly stands alone as the lifeblood of online content and services. Indeed, ads have long funded the costs of generating content for radio, television, and newspapers (with subscriptions paying only for distribution). The basic reason is simple economics: In competitive markets, prices tend to fall to the marginal cost of production. The Internet has simply borne this theory out in full:

1. 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.
2. 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.
3. 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.
4. 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 cartel of sites) attempted to charge.

These forces have given birth to the world of “Free,” where few (if any) users will pay for something they can get for nothing. While there are a number of ways to fund content and services, advertising is far and away the leading business model for the new economy: Indeed, overall advertising market is expected nearly to double its share of total U.S. ad spending from 8.7% in 2008 ($23.4 billion) to 15.2% ($37.2 billion). But with 44% of advertising revenue going to search engines (which show highly “tailored” ads simply based on search terms), hundreds of thousands of publishers—from the mightiest to the tiniest—rely on $7.6 billion (33% of the total) in “display” ad revenue. Yet this base is tiny: Most websites earn a fraction of the revenue generated by offline ads: roughly $0.60 to $1.10 per thousand impressions (CPM) online versus average CPMs of $4.54 (radio) to $10.25 (broadcast). This unprofitability of online advertising, and the fact that certain kinds of online content (e.g., video and online services) does not provide the textual keywords necessary for basic contextual targeting is driving publishers to ad networks that offer behavioral targeting, which is expected to grow from $525 million in 2007 to $4.4 billion in 2012—when it will represent 25% of all display ad spending.

In short, advertising is indispensable to the future of online media, but it is also currently inadequate to sustain “Free” culture. As Adam Thierer and I warnedearlier this year: “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… Something must give because there is no free lunch.” In 2001, long before Google mattered and before he worked for them, Kent Walker (now Google’s general counsel) put it best in a seminal law review article:

Privacy is both an individual and a social good. Still, the no-free-lunch principle holds true. Legislating privacy comes at a cost: more notices and forms, higher prices, fewer free services, less convenience, and, often, less security. More broadly, if less tangibly, laws regulating privacy chill the creation of beneficial collective goods and erode social values… Such regulation would likely increase both direct and indirect costs to the individual consumer, reduce consumer choice, and inhibit the growing trend of personalization and tailoring of goods and services.

Thus, as Jim Harper and Solveig Singleton concluded in their 2001 paper With a Grain of Salt: What Privacy Surveys Don’t Tell Us:

privacy surveys in particular… suffer from the “talk is cheap” problem. It costs a consumer nothing to express a desire for federal law to protect privacy. But if such law became a reality, it will cost the economy as a whole, and consumers in particular, significant amounts that surveys do not and cannot reveal.

We Need a Behavioral Economics Experiment, Not Just Another Poll

The Berkeley-Penn poll could certainly have done more to present these trade-offs to respondents and less to color their responses by inflating mental transaction costs. But even the most “fair” poll cannot meaningfully simulate the trade-offs inherent in the real world. If we really want to know how muchsubjective value consumers place on a particular aspect of their privacy, we must look to the preferences they reveal in the process of making real choices.

Of course, the best experiment is the one being conducted in the real world every day. No laboratory experiment can ever fully replicate all of the conditions of the real world, but a behavioral economics experiment could tell us more about the revealed preferences of Internet users than any poll. Unlike the real world, an economist could vary certain conditions in a lab experiment to tell us how various changes to current industry practice, user empowerment, or user education might actually affect real consumer choices. At a minimum, any experiment would require the following to inform policymaking about online advertising and privacy.

First, the experiment should vary the mechanisms by which notice is provided to users as to how tailoring works ( e.g., placement, interface, wording) and what those notices actually say.

Second, test subjects must make real choices in real use of the Internet with trade-offs in real money and their own time between either paying for access to a particular site or getting access for free in exchange for receiving tailored ads based on at least the three variables presented as questions in the Berkeley-Penn study: (i) users’ browsing activity on that site; (ii) their browsing activity on other sites; and (iii) offline activity or demographic information.

The second variable is critical because it addresses the value created by behaviorally tailored ads, which could be wiped out by regulation. Search engines are able to sell highly effective advertising based solely on information provided directly to the site (search keywords, which are highly indicative of user interest), and some sites can sell lucrative advertising based on purely contextual targeting because their content contains keywords that advertisers value highly ( e.g., a site for digital camera enthusiasts). But the vast majority of websites, and especially non-commercial websites, would produce little ad revenue if advertisers could only guess at the likely interests of visitors based on the keywords on that site. This, in a nutshell, is why so many sites stand to gain so much from behavioral targeting—particularly in the Internet’s “Long Tail.” To be useful, an experiment must reflect this dynamic.

In the real world, of course, it might be possible for the user to opt-out of tracking without losing access to content because today’s quid pro quo is implicit and most sites operate on a “No Cost Opt-Out” basis for tracking and even seeing ads. But in order to tell us how much consumers really care about tracking, the experiment must place some value on access to content that is supported by free content and services.

Third, the experiment must examine the extent to which user empowerment affects user choice: If some users are uncomfortable with having their browsing activity tracked, is it because they are concerned about all tracking or only tracking of certain sensitive activities, such as researching medical issues or—everyone’s favorite—viewing pornography? How does the availability of privacy management tools change user choices about ad-tailoring? Do Americans really want tailoring banned, or do they just want the ability to exercise easy choice about when they want to participate? How would those choices change when they come at a cost (e.g., seeing more ads) and privacy-sensitive users cannot simply free-ride off the value created by users whodon’t opt-out of targeted advertising (and also don’t block ads)?

Such an experiment would, by its very nature, be imperfect—but far less imperfect than any poll about opinions on privacy. Until a proper experiment is conducted by trained behavioral economists, all we can say with confidence is the following:

1. Users don’t understand exactly how ads are tailored;
2. Users seem to be concerned about “tailoring” or “following” in the abstract;
3. Users are generally unwilling to pay for online content and services; and
4. Better tailoring of ads means more funding for content and services.

There is only one approach that 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.

Sometimes the most revealing conversations about policy issues happen with our loved ones at the breakfast table. Although loyal TLF readers may remember my partner Michael as my “Posterboy for Advertising’s Pro-Consumer Quid Pro Quo,” he doesn’t usually get into the policy issues I cover.  But this morning, we fell into a conversation about the bitterly contentious issue of marketing to kids:

Michael: Growing up in South Korea, on a military base, we didn’t have any commercials on television. We had three channels and all they showed was public service announcements.

Sounds like paradise for anti-advertising zealots like Jeff Chester and the media reformistas who want to re-create the old media scarcity in the name of “media democracy“! Anyway:

We moved back to the U.S. when I was nine, and suddenly, during all my favorite cartoons, there were ads for toys. It was exciting—and more than a little bit overwhelming! It wasn’t just that I wanted these toys; it was that felt this incredible sense of urgency: I thought we had to go get the toys right now or they’d be gone! What did Rousseau call his innocent man, the Noble Savage? That’s what we were: The noble savage, coming into this world of sophisticated toy advertisements. But it didn’t take long for me to get over this initial bewilderment. My parents explained to me that we didn’t really have to go to the store  right away. (They also explained to me that I couldn’t haggle with the staff at Toys ‘R Us the same way I’d haggled with street vendors back in Korea—something that utterly mystified the staff.) After one trip to Toys Toys ‘R Us, I got the toys I wanted most and, over the next few months, realized that they weren’t anywhere near as exciting as I had imagined. After that, I enjoyed the toy ads on TV, but I lost interest in many of the toys I already had, preferring to create my own toys or play outside.

I explained that advertising of toys to kids has long been the cause celebre of anti-advertising crusaders:

Michael: But kids are acquisitive, too! How are they supposed to know about the latest toys if you can’t advertise to them? And what’s the big deal, anyway? I got used to toy ads and I think most kids would, too. The thing that’s different is incentive programs at stores.

My sister was really into the Limited Too‘s incentive program from the ages of about 7 to 11. She knew all the saleswomen by name at the Limited Too in our mall. It was like our mothers at Bloomingdale’s! She had a huge wardrobe for an elementary school kid.  I don’t think it was unhealthy, but it’s not exactly a fair game. Me: So why did your parents let her do it? Michael: Because they were indulgent! Her friends didn’t have wardrobes like she did—it was just my mom. My dad just wasn’t around much, so we spent a lot of time shopping. It shouldn’t really have been that way. Me: Do you think it was bad for your sister? Michael: No, but it’s a good thing she’s so sensible and practical now, because otherwise her acquisitiveness about clothes might get out of hand. I think she learned that at the Limited Too.

So maybe shopping incentive programs could really teach some kids bad habits and maybe those habits are hard (but certainly not impossible) to kick later on in life. Those are good reasons for parents not to let their kids sign up for such rewards programs! We certainly don’t need a law to fix this problem: We just need parents to exercise their power of the purse and learn to say “No!”—as the parents of Michael’s sister’s friends apparently did. Relying on parental responsibility instead of banning such programs means that parents would have the opportunity to teach their kids to shop responsibly—and still benefit from the discounts such programs offer on clothes they’d buy anyway.

In the meantime, let’s stop pretending kids are helpless drones just waiting to be programmed by evil marketers who get them “hooked on capitalism” by showing them ads for GI Joe, Barbie, digital penguins, Hannah Montanna or whatever it is kids these days care about. Oh, and lest anyone insist that kids don’t really “need” toys or clothes from Limited Too, let me simply point to this brilliant 1959 magazine ad by the ad firm Young & Rubicam:

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.

I’d much rather have parents deciding what their kids “need” than some paternalist bureaucrat!

Microsoft is making a major push to integrate social networking tools like Facebook and Twitter into its Bing search engine: users will soon be able to “Ping” search results they like to their friends directly from Bing. Back in January, in “Google, the Innovator’s Dilemma and the Future of Search & Web Ads,” I talked about the implications of this history of search from the WSJ):

Microsoft missed its opportunities to get into paid search not because it was “dumb,” “uninnovative” or a “bad” company, but for the same sorts of reasons that big, highly successful and even particularly innovative companies fail.  The reasons companies generally succeed in mastering “adaptive” innovation of the technologies behind their established business models are the very reasons why such great companies struggle to encourage or channel the “disruptive” innovation that renders their core technologies and business models obsolete.  This dynamic was described brilliantly in Harvard Business School professor Clayton Christensen’s classic 1997 book The Innovator’s Dilemma:  When New Technologies Cause Great Firms to Fail… Let’s hope that Microsoft—as well as Yahoo!—have carefully studied the vast literature produced by business schools in the wake of Christensen’s book about how big companies can avoid the Innovator’s Dilemma by promoting—and capitalizing on—radical innovation from within.  Indeed, this seems to be precisely what has guided Google’s own strategy as it has grown from “disruptive innovator” to become the very sort of behemoth that cannot easily escape the Dilemma, even if corporate managers are fully aware of the problem on a theoretical level.  If Google can do it, Microsoft should be able to, too.  But let’s also not discount the possibility that, no matter how hard Google’s management might try to retain the innovative culture of a start-up, the giant  can’t do that well enough to prevent its own apparent market dominance from being disrupted by new upstart innovators in search and advertising technologies.

My prediction seems to be coming true: Microsoft, with less to lose and without a huge installed user base to worry about annoying by violating Google’s “Prime Directive” of elegant simplicity, may have an easier time introducing “disruptive” innovations to search than Google. Of course, it’s unlikely that any one feature will prove the “killer app” that suddenly causes Bing’s market share to explode—and Google’s to plummet—but a steady stream of such nifty features could convince many users to switch to Bing.

At 29, I’m old enough to remember when Microsoft seemed as cool as Google does today. Hell, I remember being thrilled as a sophomore in high school by Bill Gates’ 1995 book The Road Ahead and the accompanying CD-ROM (which included, as I recall, a tour of Gates’s ultra-futuristic home).  If Microsoft can “get its mojo back,” the company could truly become a web services provider to rival Google.  We’d all benefit from having more choices in search engines, advertising platforms and related tools. And, driving each other to “build a better mousetrap,” the two companies could lead us down the “Road Ahead” from Search 2.0 to Search 3.0 and beyond. So here’s to hoping that Redmond can solve the “Innovator’s Dilemma” with tools like Google’s “20 percent” time that free engineers to innovate!

We’ve written a lot lately about Microsoft’s efforts to reinvent itself, first rebranding its Live search engine as the Bing, and then partnering with Yahoo! to make Bing the search engine on Yahoo!’s still-impressive empire of content and services. But if Microsoft is going to beat Google in Search 3.0 and master shifts in the driving paradigms of the Internet from search and browsers to ubiquitous integration of social networking and other paradigms as yet unforeseen, Microsoft will need more than just brilliant engineering: They’ll need clever marketing.

So it seems that the software titan is turning to user-generated advertising, such as this gem:

WARNING: Battlestar Galactica spoiler: Google may well be in danger of losing its monopoly on cool to Microsoft if Bing can get at least four of the Final Five Cylons to volunteer as back-up singers in a promo video contest.

Google clearly considers Microsoft a threat, having recently launched an ad campaign of its own for its Apps services, which compete directly with Microsoft Office.

The new Maine law I blogged about on Sunday is much worse than I thought based on my initial reading. If allowed to stand, it would constitute a sweeping age verification mandate introduced through the back door of “child protection.”

The law, which goes into effect in September, would extend the approach of the Children’s Online Privacy Protection Act (COPPA) of 1998 by requiring “verifiable parental consent” before the collection of kids “personal information” about kids, not just those under 13, but also adolescents age 13-17.  Unlike other state-level proposals in New Jersey, Illinois, Georgia and North Carolina, Maine’s “COPPA 2.0” law would also cover health information, but would only govern the collection and use of  data for marketing purposes (while the FTC has interpreted COPPA to cover to essentially any capability for communicating personal information among users).

But the Maine law would go much further than these proposals or COPPA itself by banning transfer or use of such data in anything other than de-identified, aggregate form. Still I took some comfort in the fact that the Maine law, unlike COPPA or these other proposals, lacked the second of COPPA’s two prongs: (i) collection from kids and (ii) collection on sites that are directed at kids. It’s because of the second prong that COPPA applies not only when a site operator knows that it’s collecting information from kids (or merely allowing them to share information with other users), but also when the operator’s site is (like, say, Club Penguin) targeted to kids in terms of its subject matter, branding, interface, etc. Because I initially concluded that the Maine law would apply only to knowing collection, I supposed that it would be less likely to require age verification of all users, as other COPPA 2.0 proposals would—something that would be unlikely to survive a First Amendment challenge based on the harm to online anonymity.

But I was quite wrong. During the PFF Capitol Hill briefing Adam and I held on Monday, Jim Halpert, one of our panelists, noted that the bill imposed “strict liability.” When I re-read the law, two small provisions with enormous consequences jumped out at me.  First, this section:

Unlawful collection. It is unlawful for a person to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.

The knowledge requirement above pertains to whether the collection is done “knowingly,” not whether the operator “has actual knowledge that it is collecting personal information from a child” (COPPA’s language). It’s possible that the Maine legislature meant to require that operators know that they’re collecting information from kids, not merely that the collection is intentional and not inadvertent, but if so, they either didn’t read COPPA or don’t understand statutory drafting.

But even if operators could be held liable if they had actual knowledge that they were collecting personal or health information without parental consent, the other operative language of the bill has no knowledge requirement at all. Thus, if an operator truly had no idea it was collecting information from a kid—kids commonly lie about their age to gain access to age-restricted sites—the operator would still be strictly liable for transferring or using that data under the other operative provisions of the law:

Unlawful use. A person may not sell, offer for sale or otherwise transfer to another person health-related information or personal information about a minor if that information: A. Was unlawfully collected pursuant to subsection 1; B. Individually identifies the minor; or C. Will be used… for the purpose of marketing a product or service to that minor or promoting any course of action for the minor relating to a product.

Thus, the only way affected site operators ( e.g., anyone who asks for user’s names as part of a profile and also uses personal information in marketing) could protect themselves under the law would be to age verify all users. Thus, the Maine law is, like other COPPA 2.0 proposals, simply an age verification mandate imposed on all adult users of sites with increasingly prevalent social networking functionality dressed up as a child protection measure. Again, unlike other COPPA 2.0 proposals, the Maine law would not apply to all sites that collect personal information for marketing purposes, but for those that do, it would have the same consequence as other COPPA 2.0 proposals.  As we argue in our paper (p.24), COPPA 2.0 proposals in general are very likely to be struck down on the same grounds as the Child Online Protection Act (COPA), COPPA’s evil twin sister, which would have required age verification for all content deemed “harmful to minors” and which the courts have struck down as blatantly unconstitutional.

Although one might argue that the Maine law does less harm to speech because it applies only to sites that collect and use/transfer data for marketing purposes, while COPPA’s reach is far broader, the Dormant Commerce Clause argument against the law would also probably succeed: the law unduly burdens interstate commerce by imposing Maine’s standards on the rest of the country. Under the law’s strict liability regime, efforts to geo-target users in Maine (themselves a significant burden on website operators) would not protect out-of-state site operators from liability for collecting data from some users in Maine because geo-targeting is necessarily imperfect.

But wait; there’s more! Other COPPA 2.0 proposals would have this consequence because they would apply either to all social networking sites with a certain functionality (Illinois) or to collection of information through sites “directed at” adolescents (New Jersey), which could apply to sites used by large numbers of adults. But for most sites, such laws would only apply where the operator had “actual knowledge” that the user was a kid, thus recognizing (for those sites) that perfect age verification is impossible and that some kids will inevitably circumvent any age verification system imposed. By contrast, the Maine law would hold sites liable for “predatory marketing” for every collection, use, or transfer of a kid’s personal information whether or not the operator knew (or even had reason to know) that they were collecting information from kids at a rate of $10-20k for the first offense and $20k+ (with no upper bound at all) for each subsequent offense. Since offense here could mean each individual act of collection, and since large social networking websites have tens of millions of users, operators might theoretically be subject to fines in the hundreds of billions of dollars!

If this law survives constitutional challenge, I’ll eat the HTML in which this post is written! More likely, the legislature will back down at the first whiff of a legal challenge and go back to finding other, less obviously unconstitutional ways to impress their constituents with how much they care about “Protecting the Children” (or how little they care about free speech or know about how the Internet works).

Maine has just enacted a law severely restricting marketing to kids: the Act To Prevent Predatory Marketing Practices against Minors, summarized by Covington & Burling. Adam and I released a major paper in June about such laws: COPPA 2.0: The New Battle over Privacy, Age Verification, Online Safety & Free Speech. Maine is following the lead of several other states that have tried to expand the Children’s Online Privacy Protection Act (COPPA) of 1998 to cover nost just kids under 13 but adolescents as well and potentially all social networking sites. We discussed at length the problems such laws create, particularly the possibility that large numbers of adults would, for the first time, be subject to age verification mandates before accessing (or participating in) the growing range of sites with social networking capabilities.  This, in turn, would significantly “chill” free speech online by undermining anonymity.

Like COPPA 2.0 proposals in New Jersey (simply extending COPPA to cover adolescents) and Illinois (applying COPPA to most social networking sites), the Maine law tries to build on COPPA’s “verifiable parental consent” requirement for the 13-17 audience as well as those under 13.

On the one hand, the Maine law goes much further than these other COPPA 2.0 proposals. While the original bill was limited to the Internet and wireless communications, the final bill’s scope applies to all communications.  The bill also covers “health-related” information (HRI) as well as “personal information” (PI). On the other hand, the Maine law is thus somewhat narrower than other COPPA 2.0 proposals and COPPA itself in that it applies only to “marketing or advertising products, goods or services.” While COPPA is commonly misunderstood to cover only marketing, it actually covers essentially any “collection” (broadly defined) of personal information from kids for any purpose—including merely giving kids access to communications functionality that might let them share personal information with other users (even if the site itself is not “collecting” that information in the commonly understood sense).

Verifiable parental consent is required for collection of HRI or PI (§ 9552(1)). So far, the Maine law is clearly trying to stick to the basic COPPA model while expanding its application to adolescents, health information and the offline world. (Indeed, the law concludes by authorizing the state AG to bring enforcement actions for violations of COPPA, as COPPA itself allows.) But the Maine law goes much further by banning:

• The transfer of HRI/PI to third parties if it “individually identifies the minor” (§ 9552(2)); and
• The use of HRI/PI “for the purpose of marketing a product or service to that minor or promoting any course of action for the minor relating to a product” (§ 9553).

It’s unclear what either prohibition will mean in practice. Obviously, if the law imposed a complete ban on the use of HRI/PI, there would be no point to obtaining verifiable parental consent in the first place! Thus, the law seems to contemplate that the prohibition on transferring individually identifying information would leave data-collectors free to transfer de-identified data once they’ve obtained verifiable parental consent for the initial collection. I’m no marketing expert but I imagine that Maine legislators were trying to ban the sale of lists that identify individual kids, while allowing the use of de-identified data for, say, analyzing patterns of interests among kids.

It’s less clear what the use-prohibition (§ 9553) actually means. Would it allow kids-oriented marketing based on aggregated de-identified information? If so, what would that actually mean in the real world? Would that be a distinction without a difference by effectively shutting down legitimate marketing most people would find unobjectionable, harmless, or even very helpful? If the law wouldn’t even allow such use of aggregate data, why, again, would any company ever bother obtaining parental consent?

Indeed, the Association of National Advertisers has interpreted this provision as amounting to an outright ban, regardless of parental permission, and points out that the bill:

would seemingly cut off “minors”‘… from being marketed to about colleges and universities, testing services such as the SAT and ACT, test prep services, class rings, among many other potential categories.

ANA vows to “have the law abrogated or modified so that it will not continue to place such extraordinarily broad restrictions on marketers, when the legislature reconvenes” in January—even though the law goes into effect in mid-September. They could challenge the law on a number of grounds in the courts.

While the First Amendment analysis of commercial free speech rights doubtless be complicated, a simpler argument could be brought on Dormant Commerce Clause grounds: Under the Supreme Court’s 1970 decision in  Pike v. Bruce Church, if “the burden imposed . . . is clearly excessive in relation to the putative local benefit, and if the local interest can be promoted by other regulations that have a lesser impact on interstate activities,” the court may strike down a state law that burdens interstate commerce. Indeed, the courts have struck down a number of Internet-related state laws on such grounds.

Insofar as Maine’s law affects online communications, it could be struck down on Dormant Commerce Clause grounds by forcing out-of-state websites to treat users in Maine differently—or to treat all users as if they were in Maine. To some extent, this will depend on how the statute is actually construed. COPPA applies both to knowing collection and to collection through child-oriented sites like Club Penguin (because the operator should know that they are collecting information from a child), but the Maine law applies only to knowing collection. If the statute is narrowly construed, this would mean that only websites that ask user for their age (say, in setting up a social networking profile) would generally be affected. A broader reading might affect websites that are oriented towards, or simply popular among, minors, in which case sites would essentially be forced to age verify all users (as with other COPPA 2.0 proposals). While this seems unlikely given the meaning generally attached to the word “knowing” in American law, even the narrow reading would affect many social networking sites.

The other major unanswered question lies in how broadly the term “individually identifiable information” would be construed. Like COPPA, the Maine law covers all such information, but rather than define this term exhaustively, the laws simply provide a few more specific categories of examples. Maine’s list differs from COPPA’s in that it does not include e-mail addresses, telephone numbers, screen names, or other contact information. But the list does include names, and this is enough to implicate profile-basedsocial networks like Facebook. If construed more broadly, the Maine law could affect other website operators.

In any event, if websites have to try to accomodate Maine’s law, they might have to track user location to ensure that they comply with Maine law.  As we noted in our paper:

If a site relied only on location information provided by the user, adolescents would quickly learn to lie about what state they live in just as children have learned to lie about how old they are to avoid triggering COPPA’s “actual knowledge” requirement.  Alternatively, websites could attempt to determine a user’s location automatically based on their IP address, but such “IP geocoding” is not always accurate and can be subverted by use of a proxy.

Finally, in case you were wondering where this bill came from, here’s the purpose statement for the original bill:

This bill addresses the current practices of persons using the Internet and other wireless communications devices, with or without promotional incentives, to acquire health-related information about minors and then using that information unscrupulously. Under this bill, it is unlawful to solicit or collect health-related information about a minor who is not emancipated without the express written consent of the minor’s parent or guardian, to transfer any health-related information that identifies a minor or to use any of that information to market a product or service to a minor regardless of whether or not the information was lawfully obtained. Unlawful marketing includes promoting a course of action relating to a product.

If a challenge is brought in court, the state will have to be a lot more specific about defining the harm at issue than merely asserting that information is being collected and might be unsed “unscrupulously.” As the Supreme Court declared in the 1993 case of Edenfield v. Fane, the government’s burden in justifying a restrictions on even commercial speech (which is accorded less protection than non-commercial speech):

is not satisfied by mere speculation or conjecture; rather a governmental body seeking to sustain a restriction on commercial speech must demonstrate that the harms it recites are real and that its restriction will in fact alleviate them to a material degree.

In short, this new law raises many legal and practical questions. I’ll be watching closely to see how any effort have the law amended or challenged in court plays out.  I suspect we’ll see more states following Maine’s lead if this law stands in its current form.