By Geoffrey Manne and Berin Szoka

Back in September, the Senate Judiciary Committee’s Antitrust Subcommittee held a hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Given the harsh questioning from the Subcommittee’s Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it’s already doing.

So one must wonder about the real aim of the letter. Unfortunately, the goal does not appear to be to offer an objective appraisal of the complex issues intended to be addressed at the hearing. That’s disappointing (though hardly surprising) and underscores what we noted at the time of the hearing: There’s something backward about seeing a company hauled before a hostile congressional panel and asked to defend itself, rather than its self-appointed prosecutors being asked to defend their case.

Senators Kohl and Lee insist that they take no position on the legality of Google’s actions, but their lopsided characterization of the issues in the letter—and the fact that the FTC is already doing what they purport to desire as the sole outcome of the letter!—leaves little room for doubt about their aim: to put political pressure on the FTC not merely to investigate, but to reach a particular conclusion and bring a case in court (or simply to ratchet up public pressure from its bully pulpit).

The five page letter concludes with, literally, three sentences presenting Google’s case, one of which reads, in its entirety, “Google strongly denies the arguments of its critics.” The derision is palpable—as if only a craven monopolist would deign to actually deny the iron-clad arguments of Google’s competitors so painstakingly reproduced by Senators Kohl and Lee in the preceding four pages. This is neither rigorous analysis nor objective reporting on the contents of the Senate’s hearing.

While we worry about particularly successful companies being singled out for punishment, we hold no brief for Google in this debate. Instead, in all our writings, we’ve tried to present a consistently skeptical view about a worrisome trend in antitrust enforcement in high tech markets: error-prone and costly intervention in markets that are ill-understood and fast-moving, to the great detriment of consumers and progress generally. Although our institutions have received financial support from Google among a range of other companies, organizations and individuals, our work is focused on this broad mission; we have no obligation or intention to support any company simply because it finds value in supporting our mission.

We’ve defended (and one of us has even worked for) Microsoft in the past, and just yesterday, we lamented the fact that the Obama Justice Department and the FCC have effectively blocked Google’s arch-rival, AT&T, from buying T-Mobile. Rather than defend any particular company, our goal, to paraphrase Hayek, is to “demonstrate to [regulators] how little they really know about what they imagine they can design”—lest they undermine how competition actually works in the name of defending outdated models of how they think it should work. Unfortunately, the letter from Senators Kohl and Lee does nothing to assuage our concern and suggests instead that crass politics, rather than sensible economics, could determine the outcome of cases like this one—if not in a court of law, then in the court of public opinion and extra-legal intimidation.

To begin with, the letter asserts that “Google faces competition from only one general search engine, Bing,” suggesting that only Bing (and it, only ineffectively) could keep Google in check. In essence, the Senators are prejudging an essential question on which any case against Google would turn: market definition. But why would the market not include other tools for information retrieval? Is it not at least worth mentioning that more and more Internet users are finding information and spending time on social networks like Facebook and Twitter, while more and more advertisers are spending their money on these Google competitors? Isn’t it clear that search itself is evolving from “ten blue links” into something more social, multi-faceted and interactive?

In a remarkable leap, the senators then identify the specific alleged abuse that Google’s alleged market power leads to: search bias. That’s remarkable because, other than the breathless claims of disgruntled competitors (given plenty of air time at the September hearing), there is actually no evidence that search bias is, in fact, harmful to consumers—which is what antitrust is concerned with. (Read both sides of this debate in TechFreedom’s free ebook, The Next Digital Decade: Essays on the Future of the Internet.)

As our colleague, Josh Wright, has thoroughly demonstrated, this “own-content” bias is actually an infrequent phenomenon and is simply not consistent with an actionable claim of anticompetitive foreclosure. Moreover, among search engines, Google references its own content far less frequently than does Bing (which favors Microsoft content in the first search result when no other search engine does so more than twice as often as Google favors its own content).

Of course, none of this is even hinted at in the Senators’ letter, which seems intended to condemn Google for “preferencing” its own content (under the pretense of withholding judgment). It’s a little like condemning Target for deigning to use its trucks to supply inventory only to its own stores instead of Wal-Mart’s, or, say, condemning a congressman for targeting earmarks for his own state or district. Earmark bias!

In Google’s case, the fundamental basis for these claims, according to the letter, is that “Google’s business model has changed dramatically in recent years.” This is a remarkably candid admission: a company that successfully advances its organization, keeping up with rapidly-shifting technology and mercurial demand, can be condemned—and its business practices adjudged illegal—simply by virtue of the fact that it has, indeed, evolved to offer products it didn’t offer before. Never mind that those products didn’t previously exist and, in some cases, were in fact invented by that company! How would punishing this serve consumers?

To add insult to injury, the story is “corroborated” by the senators’ parroting, without caveats, claims by Google’s rivals that they are harmed by Google’s favoring its own content, and that “they would not attempt to launch their companies today given GoogIe’s current practices.” As a general matter, antitrust law treats such self-interested claims of competitors with the skepticism they deserve. You wouldn’t know it from reading the letter (nor from reading the transcript from the September hearing), but harm to competitors is not the same thing as harm to consumers or competition more generally (which is what antitrust law cares about). The reason is simple: nothing harms competitors more than effective, vigorous competition. Reasoning backward from harm to competitors to infer anticompetitive conduct is the height of irresponsible antitrust enforcement.

The letter also reports, again with no caveats, claims by the CEOs of Yelp! and Nextag that “75 percent of Yelp!’s web traffic consists of consumers who find its website as a result of Google searches, and . . . 65 percent of Nextag’s traffic originates from Google searches,” and that losing this much traffic to Google preferencing its own content would be catastrophic. But the letter fails to mention that most searches for brand names on Google are “navigational” rather than “informational.” As Google competitor Expedia’s CEO recently explained:

The majority of, at least Expedia’s, and I believe Hotel.com’s traffic that comes from search to our site actually come through people searching for Expedia, for example. So in typing in Expedia in Google or so on, typing in Hotels.com in Google. So of the 25% for Expedia, for example, the majority of that traffic is someone who’s already looking for Expedia, and that person is going to find Expedia one way or the other because they are searching for something very specific. (Expedia earnings call, 10/28/10, quoted here).

Indeed, a recently published independent academic study conducted across search engines concluded that 52% of “business queries” (and 72% of organizational queries) were navigational. In other words, most of the Google traffic going to these sites was likely from users who simply typed in “Yelp” or “NextTag” as a convenient way of getting to those sites. Such searches are not diverted (and not even claimed to be diverted) to Google’s own sites, and the first search result for the search term “Expedia” will always be expedia.com. Thus, the majority of these searches that are claimed to make up 75% and 65% of the complaining companies’ traffic is not in any way threatened by Google’s business model, and is completely irrelevant to assessing the effect of Google preferencing its own content.

Furthermore, the letter does not mention Yelp’s recent boast that over 40% (and growing) of its searches are now conducted on its mobile app—insulating it from whatever “power” Google might exercise over traditional searches. While generic search may be the default navigational tool for many desktop users, a great many users seem to prefer searching with apps like Yelp’s on their mobile devices, further underscoring the complexity of the markets at issue and the problem with the kind of facile market definition on display here.

Moreover, who really knows what anyone might have done in 1999 (Nextag) or 2004 (Yelp)? It is facile and meaningless for the companies to imply that Google’s conduct is stifling today the same business models that emerged 7 or 12 years ago, before the ensuing evolution of the market. It would be a shame, in fact, if those same companies were emerging only today, and one shouldn’t be surprised in a rapidly evolving marketplace to find that many once-brilliant ideas turn out to be bested by the vagaries of uncertain, innovative markets. Remember, it wasn’t so long ago that Yahoo! ruled the “portal market,” which morphed into the “search” market “controlled,” in turn, by AOL and AltaVista. A static snapshot of the market at any given moment might have inspired the sort of hand-wringing Google inspires today. But the market kept evolving—without government intervention—each time rendering today’s tech titans tomorrow’s has-beens. Nostalgia and a reflexive preference for the status quo are the worst vices of regulating any evolving market, especially high-tech ones. Estimates that Yelp’s upcoming IPO may put the company at a valuation of $1-2 billion should at least make us somewhat skeptical of such claims, anyway.

It is for this reason—the disconnect between the interests of competitors and those of “competition” and the consumers it serves—that it’s particularly disingenuous for the letter to identify Tom Barnett only as “the Assistant Attorney General for Antitrust in the administration of President George W. Bush.” This is an ostentatious attempt to appeal to Republicans normally skeptical of government meddling, giving him the last word to claim that “the ultimate result of Google’s practices will be an Internet with fewer choices for consumers and business, higher prices, and less innovation.” (Sen. Lee himself seems to have fallen prey to claims by soi disant conservatives like Rick Rule (also, coincidentally, antitrust attorney to several of Google’s complainants) that antitrust meddling is a core part of capitalism—rather than another form of government regulation prone to capture by incumbents and politicization, precisely as Judge Bork warned in the Antitrust Paradox.)

A fairer letter would have noted the far more salient fact that Barnett is counsel for Expedia Inc., a member of the anti-Google Fairsearch coalition, for which he has served as spokesman. As Josh Wright has ably demonstrated, AAG Barnett and counsel-to-Expedia Barnett have wildly divergent views. While AAG Barnett is rightly celebrated as a thoughtful and restrained antitrust expert (indeed, he taught Berin antitrust law!), counsel-to-Expedia Barnett is a faithful and diligent advocate for his client (as well he should be). It is no disrespect to him to say that his client’s interests are not necessarily the same as those of the consumers Senators Kohl and Lee purport to represent; it is, however, questionable to hold out his views on this matter as representative of consumer interests.

The letter goes on to highlight mobile search as a particularly problematic arena. Why? Because “Google may, as a condition of access to the Android operating system, require phone manufacturers to install Google as the default search engine.” But . . . they haven’t actually done that! The mobile phone market is remarkably competitive and ever-shifting. (One can easily imagine this same letter being written to raise pressing, irreversible concerns about Apple’s iPhone a year or two ago—just before Google’s Android operating system managed to seize the 43% of smart phone operating system share about which this letter is so concerned). Nevertheless, the FTC is urged to “ensure robust competition” in a market marred only by the senators’ purely speculative story about what could conceivably happen some day in the future. Is this really a responsible use of antitrust law?

It certainly isn’t responsible analysis. The Senators’ professed concern for robust competition and protection of the free market is undermined by the letter’s uncritical repetition of attacks on Google made by its competitors. At best, this letter is a missed opportunity to fairly present both sides of this complex case. For this reason, as well as the inconvenient fact (oddly completely absent from the letter) that the FTC is, as we noted, already actually investigating Google, we urge Chairman Leibowitz to investigate nothing more pertaining to this letter than the shape of the arc it makes as it flies through the air into his office wastebasket.

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.

I’m listening to the audiobook of Telecosm, George Gilder’s prophetic book about how abundant broadband would revolutionize the planet—which I recommend to everyone. I came across this passage, which reminded me just how good we really have it:

Reported to catalog only 16 percent of web pages, the best Internet search engines are foundering under the load, taking as long as six months to add new content.

If that was Search 1.0, Search 2.0 is great! Today’s search engines will index this post in a matter of minutes and while there are still parts of the “Deep Web” that aren’t crawled, a number of Search 3.0 upstarts are working on solving that problem, too!

Cory Doctorow has called for a Wikipedia-style effort to build an open source, non-profit search engine. From his column in The Guardian:

What’s more, the way that search engines determine the ranking and relevance of any given website has become more critical than the editorial berth at the New York Times combined with the chief spots at the major TV networks. Good search engine placement is make-or-break advertising. It’s ideological mindshare. It’s relevance… It’s a terrible idea to vest this much power with one company, even one as fun, user-centered and technologically excellent as Google. It’s too much power for a handful of companies to wield. The question of what we can and can’t see when we go hunting for answers demands a transparent, participatory solution. There’s no dictator benevolent enough to entrust with the power to determine our political, commercial, social and ideological agenda. This is one for The People. Put that way, it’s obvious: if search engines set the public agenda, they should be public.

He goes on to claim that “Google’s algorithms are editorial decisions.”   For Doctorow, this is an outrage: “so much editorial power is better vested in big, transparent, public entities than a few giant private concerns.”

I wish Doctorow well in his effort to crowdsource a Google-killer, but I’m more than a little skeptical that anyone would actually want to use his search engine of The People.  My guess is that, like most things produced in the name of “The People” (Soviet toilet paper comes to mind), it will probably won’t be much fun to use, and will likely chafe noticeably. (For the record, I love and regularly use Wikipedia; I just don’t think that model is unlikely to produce a particularly useful search engine.  As Doctorow himself has noted of Google, “they make incredibly awesome search tools.”)

But I’m glad to see that Doctorow has conceded an important point of constitutional law: The First Amendment protects the editorial discretion of search engines, like all private companies, to decide what to content to communicate.  For a newspaper, that means deciding which articles or editorials to run.  For a library or bookstore, it means which books to carry.  For search engines, it means how to write their search algorithims.

Doctorow’s “We’ll build our own darn rocket ship in the backyard!” response  to his deep concerns about Google’s dominance of search does not, of course, impinge on Google’s editorial discretion—and for that, I commend him.  But others, most notably Frank Pasquale, have indeed proposed government action to address such concerns in ways that most surely would impinge on the First Amendment rights of all search engines.

Pasquale’s comlpaint about Google is essentially the same as Doctorow’s, but rather than proposing an innovative (if unrealistic) alternative (like Doctorow), he  has called (PDF) for the “creation of a Federal Search Commission to parallel the Federal Communications Commission” and declared that ” In order to reduce opportunities for clickfraud and unfair treatment of indexed entities, qualified transparency will be needed in order to open up the ‘black box’ of search engine operations to at least some third parties.”   He focuses on search algorithms because:

The heart of a search engine and the key to its success is its search algorithm. Effective algorithms are protected by a veil of secrecy and by various intellectual property rights. As a result, new entrants cannot easily appropriate existing algorithms. Moreover, many algorithms are trade secrets. Unlike patents, which the patent holder must disclose and which eventually expire, these trade secrets may never enter the public domain. Search algorithms may be analogous to the high-cost infrastructure required for entry into the utility or railroad markets.

He diagnoses the problem as follows:

given the emphasis on secrecy in the search engine business model, no one can verify that such rankings have not been manipulated or that subtler biases in favor of search engines’ partners are not being worked into the search algorithm… If search engines are to be accountable at all, if their interest is to be balanced against those of the various other claimants involved in search-related disputes, and if social values are to be given any weight, some governmental agent should be able to peer into the black box of search and determine whether or not illegitimate manipulation has occurred.

But what about editorial discretion?  Why should Google be forced to change its PageRank algorithms any more than The New York Times should be forced to change how it decides which stories to run?  Moreover, why should Google be forced to disclose how this process works?  Assigning a government monitor to sit in on meetings of the Times‘ editorial board “to detect bias” would clearly impinge on their editorial discretion.  Similarly, I don’t see why forcing a Yahoo!, Microsoft or any other search engine to disclose their equivalent processes for ranking search results should pass constitutional muster.

Editorial discretion means getting to make your own decisions, even if they might seem biased to those wise elites who “know better” because, well, it’s your decision and not the government’s!  Saying that speakers can make whatever decisions they want as long as they’re not biased means speakers don’t really have editorial discretion after all.

So, if recognizing that search algorithms are a form of editorial discretion is a problem (as Doctorow implies), it’s only insofar as this might frustrate the desires of those who would regulate search.

The Progress & Freedom Foundation has just launched the new Center for Internet Freedom.  CIF offers an alternative to the proliferation of advocacy groups calling for government intervention online by offering timely analyses and critiques of proposals that diminish the vital role of free markets, free speech and property rights.  We aim to drive the Internet policy debate in new directions by emphasizing a layered approach of technological innovation, user education, user self-help, industry self-regulation, and the enforcement of existing laws consistent with the First Amendment.  Such an approach is a less restrictive—and generally more effective—alternative to increased regulation.  

Here are some of the issues I’ll be working on as CIF’s Director in conjunction with my esteemed colleagues Adam Thierer, Adam Marcus, and adjunct fellows: 

• Defending online advertising as the lifeblood of online content & services, especially in the “Long Tail”;
• Emphasizing market solutions to problems of privacy protection, especially regarding the use of cookies and packet inspection data;
• Protecting online speech and expression both in the U.S. and abroad;
• Defending Section 230 immunity for Internet intermediaries;
• Opposing online taxation and legal barriers to e-commerce and digital payments, especially at the state and local levels; and
• Ensuring that Internet governance remains transparent and accountable without hampering the evolution of the Internet.

By Berin Szoka & Adam Thierer Progress Snapshot 4.19 (PDF)

Since the fall of 2008, a debate has raged in Washington over “targeted online advertising,” an ominous-sounding shorthand for the customization of Internet ads to match the interests of users.  Not only are these ads more relevant and therefore less annoying to Internet users than untargeted ads, they are more cost-effective to advertisers and more profitable to websites that sell ad space.  While such “smarter” online advertising scares some—prompting comparisons to a corporate “Big Brother” spying on Internet users—it is also expected to fuel the rapid growth of Internet advertising revenues from $21.7 billion in 2007 to $50.3 billion in 2011-an annual growth rate of more than 24%. Since this growing revenue stream ultimately funds the free content and services that Internet users increasingly take for granted, policymakers should think very carefully about what’s really best for consumers before rushing to regulate an industry that has thrived for over a decade under a layered approach that combines technological “self-help” by privacy-wary consumers, consumer education, industry self-regulation, existing state privacy tort laws, and Federal Trade Commission (FTC) enforcement of corporate privacy policies.

In an upcoming PFF Special Report, we will address the many technical, economic, and legal aspects of this complicated policy issue-especially the possibility that regulation may unintentionally thwart market responses to the growing phenomenon of users blocking online ads.

We will also issue a three-part challenge to those who call for regulation of online advertising practices:

1. Identify the harm or market failure that requires government intervention.
2. Prove that there is no less restrictive alternative to regulation.
3. Explain how the benefits of regulation outweigh its costs.

The Online Advertising Market

While there are other forms of targeted advertising based on who you are (“demographic”) or where you are (“locational”), the most important varieties are based on what you’re searching for, seeing or doing online at any particular moment (“contextual”) and the pattern of what you’re searching for, seeing or doing over time (“behavioral”). The bulk of Internet advertising falls into one or both of these last two categories, with behavioral advertising growing rapidly.

Search engines deliver contextual ads on search results pages based on the search keywords entered by a user, while third-party advertising networks (some of which also run search engines) deliver contextual ads on behalf of website operators who sell ad space to the network, with the ads displayed on each page chosen according to keywords on that page. Contextual advertising is far “smarter” than displaying the same “dumb” untargeted banner ads to every user, because the contextual ad uses keywords to “guess” what the user is interested in based on the context of each page. But the purely contextual ad network doesn’t “remember” what the user has looked at in the past, so its insights into what the user would find relevant are very limited, especially for some websites. Online behavioral advertising (OBA) solves this problem and increases the value of advertising space on all websites by targeting ads based on a “profile” of the user created by tracking websites the user has visited—as well as limiting the number of times a user is shown a particular ad.

The Perceived Harm Driving Calls for Regulation

For a decade, the basic technology behind OBA has changed little: When a user visits the typical webpage, they download not only the webpage contents but also a small piece of code that allows the website to distinguish that user’s browser from other browsers (a “cookie”)—without personally identifying the user. Some cookies are required to make sites work properly (“site cookies”) while others (“tracking cookies”) are used by the third party ad network in which that site participates to recognize that browser across multiple sites participating in the ad network, and thus create a “profile” of what the user might be interested in. Even though such profiles themselves are anonymous, many privacy advocates have pointed to four reasons why online profiling is becoming “too invasive:” (i) It is sometimes possible to infer the actual identity of the user; (ii) though all browsers allow users to opt-out of tracking by “cleaning out” their tracking cookies, a website may be able to restore deleted tracking cookies through the use of cookie alternatives such as “Flash cookies”; (iii) certain vulnerabilities in current browser design make it theoretically possible to “sniff” a user’s browsing history, cache or bookmarks; and (iv) the use of “packet inspection” by Internet Service Providers (ISPs) (instead of the use of cookies) to track online browsing amounts to illegal wiretapping.

The other concerns expressed by the advocates of regulation vary significantly. Some fear that browsing profiles could be captured by hackers, somehow associated with personally identifying information, and used for identity theft. These advocates demand limits on data retention as well as data security mandates. Others demand that users have access to their own profiles—a goal inherently in tension with data security. Most share a vague queasiness about “being tracked” and about advertising in general, while downplaying the effectiveness of self-regulation or user self-help.

Perhaps most legitimately, others fear that the real “Big Brother”—the government—will gain access to a “honeypot” of surveillance data that might be associated with individual users. A variety of other solutions have been proposed to what is, for the most part, a poorly defined problem, including a government-run “Do Not Track” registry to make it easier for users to block tracking cookies; mandating opt-in for some or all forms of profiling; and banning completely the collection of tracking data about sensitive subjects, cross-referencing of data sets, and use of packet inspection data for OBA.

The Less Restrictive Means: A Layered Approach

But how should policymakers decide which, if any, of these interventions are really necessary–or would even be effective? Ironically, those who demand immediate OBA regulation to protect user privacy are often the first to insist on less burdensome approaches whenever a policy “problem” involves purely non-commercial speech. For example, emphasizing personal and parental responsibility is often favored as the more sensible approach to dealing with free speech and child protection concerns. But, as Chapman University Law Professor Tom Bell has asked, why not apply the same standard across the board? Why not expect those especially privacy-sensitive users who object to OBA to do something about it? To the extent effective self-help privacy tools exist, they provide a means of solving policy problems that is not only “less restrictive” than government regulation but generally more effective and customizable as well. Why settle for one-size-fits-all solutions of incomplete effectiveness when users can quite easily and effectively manage their own privacy? Indeed, those who advocate personal responsibility and industry self-regulatory approaches to free speech and child protection issues should be advancing the same position with regards to privacy.

Fortunately, a wide variety of self-help tools and “technologies of evasion” are readily available to all users and can easily thwart traditional cookie-based tracking, as well as more sophisticated tracking technologies such as packet inspection. While cookie management tools that allow users to delete their cookies have been standard in browsers for some time, the latest generation of browsers incorporates far more advanced control over what kind of cookies browsers will accept from websites in the first place. Furthermore,  the extensible nature of modern browsers allows any freelance software developer who sees a way to improve a browser to do so by writing an add-on that “plugs in” to the browser using standard programming interfaces designed by each browser developer.  Many such add-ons are wildly popular, but even those users who never install a single one benefit from the acceleration of browser evolution made possible by add-ons.  We will be documenting examples of these tools in our upcoming Special Report and in an ongoing  series of blog essays.

The Benefits of Smarter Advertising

The “free” Internet economy is based on a simple value exchange: Users get access to an ever-expanding collection of content and services at no cost from websites that are able to generate revenue from “eyeballs” on their pages by selling space on their sites to advertisers, usually through ad networks. The smarter that advertising, the more free content and services it can support. This is the same value exchange that has supported free, over-the-air television and radio content for decades. The only difference is technological: Because websites can connect directly with the user, they need not rely on crude profiling tools such as Nielsen ratings.

There are larger economic benefits of smarter online advertising. First, it makes the overall economy more open and competitive by allowing small market entrants to reach consumers with messages about their products. Second, those who attack the use of packet inspection by ISPs for OBA fail to see that it is precisely the kind of “game-changer” that could disrupt Google’s currently dominant market position. Third, the involvement of ISPs in OBA could help defer broadband costs: Even if OBA revenue does not completely subsidize monthly service costs, smarter advertising could at least keep prices in check and potentially lower them significantly going forward.

But smarter advertising isn’t just about selling products or services. It is ultimately about making all kinds of speech more cost-effective. The ability to “target” listeners more narrowly also increases the ability of political and other not-for-profit speakers to communicate their messages. In short, smarter advertising means more voices, more choices, and more speech. The line between “advertising” and “content” is already blurring rapidly, as the technologies used to customize advertising are also used to customize webpages and ad networks themselves are used to deliver content.

The Larger Implications of Potential Regulation

As if reducing the advertising revenue generated by each web ad didn’t do enough to reduce the total amount of funding for free web content and services, government regulation of targeted online advertising could reduce advertising revenues even further by aggravating the problem of adblocking in two ways. First, the less relevant ads are, the more annoying users will find them, and the more likely users are to try to block them. Increased relevance is perhaps the most important remedy for adblocking and the best way to maintain the implicit value exchange that currently supports free Internet content and services

Second, regulation could short-circuit the eternal battle of technological one-upmanship between online advertisers and those users who rely on the technologies of evasion to “opt-out” of seeing ads or being tracked. Such privacy-conscious users are “free-riding” off of those users who don’t opt-out, since (at present) they generally don’t lose access to the free content and services supported by the targeted advertisements that other users do see. The user who blocks tracking, but not ads, is still free-riding off those users who don’t opt-out of tracking. On a large enough scale, such self-help has the potential to disrupt the value exchange of the Internet, just as automatic commercial-skipping has already disrupted the value exchange of television. As with all “Spy v. Spy” battles, this long-term trend is inevitable: As more sophisticated technologies of evasion are incorporated seamlessly into browsers and can be used without significantly degrading the browsing experience, their use will become increasingly mainstream. But ultimately, just as with television commercial-skipping, market forces can and will, if permitted, respond through technological means and the development of new business models. Today’s implicit quid pro quo may become, of necessity, explicit: Websites and ad networks will have to find increasingly creative ways to grant access to certain content and services for users who do not block ads or the tracking that makes ad space more valuable. Policymakers should take care not to ban such technologies or cripple such business models (e.g., through requiring opt-in), which may rely on more sophisticated forms of targeting such as the use of packet inspection data.

As users face an increasingly clear choice between (i) getting content and services for free supported by behavioral advertising and (ii) paying to receive those same services and content without tracking or even without ads altogether, policymakers will finally see whether users are really as bothered by profiling as the advocates of OBA regulation insist. Given the ongoing and widespread replacement of fee- or subscription-supported web business models with ad-supported models, it seems likely that the vast majority of consumers will continue to choose ad-supported models, including profiling.

Conclusion

The questions raised above—about the harm that supposedly requires intervention, the availability of less restrictive means, and the cost/benefit analysis of regulation—are vital considerations for the future of the Internet. Indeed, if smarter online advertising will not fund the Internet’s future, what will? As both the desire for “free” services and content and the need for bandwidth expand, OBA has the potential to offer important new revenue sources that can help support the entire ecosystem of online content creation and service innovation, while also providing a new source of funding for Internet infrastructure and making ads less annoying and more informative. That would certainly seem preferable to increased user fees or other “pay-per-view” pricing models for Internet content and services.

But looming legislative and regulatory action could stop all of that by replacing the current regime—in which the FTC merely enforces industry self-regulatory policies—with one in which the government preemptively dictates how data may be collected and used. The more enlightened approach is a “layered” approach to privacy protection that combines industry self-regulation, enforcement of industry-established privacy policies, consumer education, and user “self-help” solutions. These and other issues will be addressed in greater detail in our upcoming PFF Special Report.