Shortly after Tom Wheeler assumed the Chairmanship at the Federal Communications Commission (FCC), he summed up his regulatory philosophy as “competition, competition, competition.” Promoting competition has been the norm in communications policy since Congress adopted the Telecommunications Act of 1996 in order to “promote competition and reduce regulation.” The 1996 Act has largely succeeded in achieving competition in communications markets with one glaring exception: broadcast television. In stark contrast to the pro-competitive approach that is applied in other market segments, Congress and the FCC have consistently supported policies that artificially limit the ability of TV stations to compete or innovate in the communications marketplace.

Radio broadcasting was not subject to regulatory oversight initially. In the unregulated era, the business model for over-the-air broadcasting was “still very much an open question.” Various methods for financing radio stations were proposed or attempted, including taxes on the sale of devices, private endowments, municipal or state financing, public donations, and subscriptions. “We are today so accustomed to the dominant role of the advertiser in broadcasting that we tend to forget that, initially, the idea of advertising on the air was not even contemplated and met with widespread indignation when it was first tried.”

Section 303 of the Communications Act of 1934 thus provided the FCC with broad authority to authorize over-the-air subscription television service (STV). When the D.C. Circuit Court of Appeals addressed this provision, it held that “subscription television is entirely consistent with [the] goals” of the Act. Analog STV services did not become widespread in the marketplace, however, due in part to regulatory limitations imposed on such services by the FCC. As a result, advertising dominated television revenue in the analog era.

The digital television (DTV) transition offered a new opportunity for TV stations to provide STV services in competition with MVPDs. The FCC had initially hoped that “multicasting” and other new capabilities provided by digital technologies would “help ensure robust competition in the video market that will bring more choices at less cost to American consumers.”

Despite the agency’s initial optimism, regulatory restrictions once again crushed the potential for TV stations to compete in other segments of the communications marketplace. When broadcasters proposed offering digital STV services with multiple broadcast and cable channels in order to compete with MVPDs, Congress held a hearing to condemn the innovation. Chairmen from both House and Senate committees threatened retribution against broadcasters if they pursued subscription television services — “There will be a quid pro quo.” Broadcasters responded to these Congressional threats by abandoning their plans to compete with MVPDs.

It’s hard to miss the irony in the 1996 Act’s approach to the DTV transition. Though the Act’s stated purposes are to “promote competition and reduce regulation, it imposed additional regulatory requirements on television stations that have stymied their ability to innovate and compete. The 1996 Act broadcasting provision requires that the FCC impose limits on subscription television services “so as to avoid derogation of any advanced television services, including high definition television broadcasts, that the Commission may require using such frequencies,” and prohibits TV stations from being deemed an MVPD. The FCC’s rules require TV stations to “transmit at least one over-the-air video programming signal at no direct charge to viewers” because “free, over-the-air television is a public good, like a public park, and might not exist otherwise.

These and other draconian legislative and regulatory limitations have forced TV stations to follow the analog television business model into the 21st Century while the rest of the communications industry innovated at a furious pace. As a result of this government-mandated broadcast business model, TV stations must rely on advertising and retransmission consent revenue for their survival.

Though the “public interest” status of TV stations may once have been considered a government benefit, it is rapidly becoming a curse. Congress and the FCC have both relied on the broadcast public interest shibboleth to impose unique and highly burdensome regulatory obligations on TV stations that are inapplicable to their competitors in the advertising and other potential markets. This disparity in regulatory treatment has increased dramatically under the current administration — to the point that is threatening the viability of broadcast television.

Here are just three examples of the ways in which the current administration has widened the regulatory chasm between TV stations and their rivals:

• In 2012, the FCC required only TV stations to post “political file” documents online, including the rates charged by TV stations for political advertising; MVPDs are not required to post this information online. This regulatory disparity gives political ad buyers and incentive to advertise on cable rather than broadcast channels and forces TV stations to disclose sensitive pricing information more widely than their competitors.
• This year the FCC prohibited joint sales agreements for television stations only; MVPDs and online content distributors are not subject to any such limitations on their advertising sales. This prohibition gives MVPDs and online advertising platforms a substantial competitive advantage in the market for advertising sales.
• This year the FCC also prohibited bundled programming sales by broadcasters only; cable networks are not subject to any limitations on the sale of programming in bundles. This disparity gives broadcast networks an incentive to avoid limitations on their programming sales by selling exclusively to MVPDs (i.e., becoming cable networks).

The FCC has not made any attempt to justify the differential treatment — because there is no rational justification for arbitrary and capricious decision-making.

Sadly, the STELA process in the Senate is threatening to make things worse. Some legislative proposals would eliminate retransmission consent and other provisions that provide the regulatory ballast for broadcast television’s government mandated business model  without eliminating the mandate. This approach would put a quick end to the administration’s “death by a thousand cuts” strategy with one killing blow. The administration must be laughing itself silly. When TV channels in smaller and rural markets go dark, this administration will be gone — and it will be up to Congress to explain the final TV transition.

Today is a big day in Congress for the cable and satellite (MVPDs) war on broadcast television stations. The House Judiciary Committee is holding a hearing on the compulsory licenses for broadcast television programming in the Copyright Act, and the House Energy and Commerce Committee is voting on a bill to reauthorize “STELA” (the compulsory copyright license for the retransmission of distant broadcast signals by satellite operators). The STELA license is set to expire at the end of the year unless Congress reauthorizes it, and MVPDs see the potential for Congressional action as an opportunity for broadcast television to meet its Waterloo. They desire a decisive end to the compulsory copyright licenses, the retransmission consent provision in the Communications Act, and the FCC’s broadcast exclusivity rules — which would also be the end of local television stations.

The MVPD industry’s ostensible motivations for going to war are retransmission consent fees and television “blackouts”, but the  real motive is advertising revenue.

The compulsory copyright licenses prevent MVPDs from inserting their own ads into broadcast programming streams, and the retransmission consent provision and broadcast exclusivity agreements prevent them from negotiating directly with the broadcast networks for a portion of their available advertising time. If these provisions were eliminated, MVPDs could negotiate directly with broadcast networks for access to their television programming and appropriate TV station advertising revenue for themselves.

The real motivation is in the numbers. According to the FCC’s most recent media competition report, MVPDs paid a total of approximately $2.4 billion in retransmission consent fees in 2012. (See 15th Report, Table 19) In comparison, TV stations generated approximately $21.3 billion in advertising that year. Which is more believable: (1) That paying $2.4 billion in retransmission consent fees is “just not sustainable” for an MVPD industry that generated nearly $149 billion from video services in 2011 (See 15th Report, Table 9), or (2) That MVPDs want to appropriate $21.3 billion in additional advertising revenue by cutting out the “TV station middleman” and negotiating directly for television programming and advertising time with national broadcast networks? (Hint: The answer is behind door number 2.)

What do compulsory copyright licenses, retransmission consent, and broadcast exclusivity agreements have to do with video advertising revenue?

• The compulsory copyright licenses prohibit MVPDs substituting their own advertisements for TV station ads: Retransmission of a broadcast television signal by an MVPD is “actionable as an act of infringement” if the content of the signal, including “any commercial advertising,” is “in any way willfully altered by the cable system through changes, deletions, or additions” (see 17 U.S.C. § 111(c)(3), 119(a)(5), and 122(e));
• The retransmission consent provision prohibits MVPDs from negotiating directly with television broadcast networks for access to their programming or a share of their available advertising time: An MVPD cannot retransmit a local commercial broadcast television signal without the “express authority of the originating station” (see 47 U.S.C. § 325(b)(1)(A)); and
• Broadcast exclusivity agreements (also known as non-duplication and syndicated exclusivity agreements) prevent MVPDs from circumventing the retransmission consent provision by negotiating for nationwide retransmission consent with one network-affiliated own-and-operated TV station. (If an MVPD were able to retransmit the TV signals from only one television market nationwide, MVPDs could, in effect, negotiate with broadcast networks directly, because broadcast programming networks own and operate their own TV stations in some markets.)

The effect of the compulsory copyright licenses, retransmission consent provision, and broadcast exclusivity agreements is to prevent MVPDs from realizing any of the approximately $20 billion in advertising revenue generating by broadcast television programming every year.

Why did Congress want to prevent MVPDs from realizing any advertising revenue from broadcast television programming?

Congress protected the advertising revenue of local TV stations because TV stations are legally prohibited from realizing any subscription revenue for their primary programming signal. (See 47 U.S.C. § 336(b)) Congress chose to balance the burden of the broadcast business model mandate with the benefits of protecting their advertising revenue. The law forces TV stations to rely primarily on advertising revenue to generate profits, but the law also protects their ability to generate advertising revenue. Conversely, the law allows MVPDs to generate both subscription revenue and advertising revenue for their own programming, but prohibits them from poaching advertising revenue from broadcast programming.

MVPDs want to upset the balance by repealing the regulations that make free over-the-air television possible  without repealing the regulations that require TV stations to provide free over-the-air programming. Eliminating only the regulations that benefit broadcasters while retaining their regulatory burdens is not a free market approach — it is a video marketplace firing squad aimed squarely at the heart of TV stations.

Adopting the MVPD version of video regulation reform would not kill broadcast programming networks. They always have the options of becoming cable networks and selling their programming and advertising time directly to MVPDs or distributing their content themselves directly over the Internet.

The casualty of this so-called “reform” effort would be local TV stations, who are required by law to rely on advertising and retransmission consent fees for their survival. Policymakers should recognize that killing local TV stations for their advertising revenue is the ultimate goal of current video reform efforts before adopting piecemeal changes to the law. If policymakers intend to kill TV stations, they should not attribute the resulting execution to the “friendly fire” of unintended consequences. They should recognize the legitimate consumer and investment-backed expectations created by the current statutory framework and consider appropriate transition mechanisms after a comprehensive review.

Most conservatives and many prominent thinkers on the left agree that the Communications Act should be updated based on the insight provided by the wireless and Internet protocol revolutions. The fundamental problem with the current legislation is its disparate treatment of competitive communications services. A comprehensive legislative update offers an opportunity to adopt a technologically neutral, consumer focused approach to communications regulation that would maximize competition, investment and innovation.

Though the Federal Communications Commission (FCC) must continue implementing the existing Act while Congress deliberates legislative changes, the agency should avoid creating  new regulatory disparities on its own. Yet that is where the agency appears to be heading at its meeting next Monday.

A recent ex parte filing indicates that the FCC is proposing to deem joint retransmission consent negotiations by two of the top four Free-TV stations in a market a per se violation of the FCC’s good-faith negotiation standard and adopt a rebuttable presumption that joint negotiations by non-top four station combinations constitute a failure to negotiate in good faith.” The intent of this proposal is to prohibit broadcasters from using a single negotiator during retransmission consent negotiations with Pay-TV distributors.

This prohibition would apply in  all TV markets, no matter how small, including markets that lack effective competition in the Pay-TV segment. In small markets without effective competition, this rule would result in the absurd requirement that marginal TV stations with no economies of scale negotiate alone with a cable operator who possesses market power.

In contrast, cable operators in these markets would remain free to engage in joint negotiations to purchase their programming. The Department of Justice has issued a press release “clear[ing] the way for cable television joint purchasing” of national cable network programming through a single entity. The Department of Justice (DOJ) concluded that allowing nearly 1,000 cable operators to jointly negotiate programming prices would not facilitate retail price collusion because cable operators typically do not compete with each other in the sale of programming to consumers.

Joint retransmission consent negotiations don’t facilitate retail price collusion either. Free-TV distributors don’t compete with each other for the sale of their programming to consumers — they provide their broadcast signals to consumers for  free over the air. Pay-TV operators complain that joint agreements among TV stations are nevertheless responsible for retail price increases in the Pay-TV segment, but have not presented evidence supporting that assertion. Pay-TV’s retail prices have increased at a steady clip for years irrespective of retransmission consent prices.

To the extent Pay-TV distributors complain that joint agreements increase TV station leverage in retransmission consent negotiations, there is no evidence of harm to competition. The retransmission consent rules  prohibit TV stations from entering into exclusive retransmission consent agreements with any Pay-TV distributor — even though Pay-TV distributors are allowed to enter into such agreements for cable programming — and the FCC has determined that Pay- and Free-TV distributors do not compete directly for viewers. The absence of any potential for competitive harm is especially compelling in markets that lack effective competition in the Pay-TV segment, because the monopoly cable operator in such markets is the de facto single negotiator for Pay-TV distributors.

It is even more surprising that the FCC is proposing to prohibit joint sales agreements among Free-TV distributors. This recent development apparently stems from a DOJ Filing in the FCC’s incomplete media ownership proceeding.

A fundamental flaw exists in the DOJ Filing’s analysis: It failed to consider whether the relevant product market for video advertising includes other forms of video distribution, e.g., cable and online video programming distribution. Instead, the DOJ relied on precedent that considers the sale of advertising in  non-video media only.

Similarly, the Department has repeatedly concluded that the purchase of broadcast television spot advertising constitutes a relevant antitrust product market because advertisers view spot advertising on broadcast television stations as sufficiently distinct from advertising on other media (such as radio and newspaper). (DOJ Filing at p.8)

The DOJ’s conclusions regarding joint sales agreements are clearly based on its incomplete analysis of the relevant product market.

Therefore, vigorous rivalry between multiple independently controlled broadcast stations in each local radio and television market ensures that businesses, charities, and advocacy groups can reach their desired audiences at competitive rates. (Id. at pp. 8-9, emphasis added)

The DOJ’s failure to consider the availability of advertising opportunities provided by cable and online video programming renders its analysis unreliable.

Moreover, the FCC’s proposed rules would result in another video market double standard. Cable, satellite, and telco video programming distributors, including DIRECTV, AT&T U-verse, and Verizon FIOS, have entered into a joint agreement to sell advertising through a  single entity, NCC Media (owned by Comcast, Time Warner Cable, and Cox Media). NCC Media’s Essential Guide to planning and buying video advertising says that cable programming has surpassed 70% of all viewing to ad-supported television homes in Prime and Total Day, and 80% of Weekend daytime viewing. According to NCC, “This viewer migration to cable [programming] is one of the best reasons to shift your brand’s media allocation from local broadcast to Spot Cable,” especially with the advent of NCC’s new consolidated advertising platform. (Essential Guide at p. 8) The Essential Guide also states:

• “It’s harder than ever to buy the GRP’s [gross rating points] you need in local broadcast in prime and local news.” (Id. at p. 16)
• “[There is] declining viewership on broadcast with limited inventory creating a shortage of rating points in prime, local news and other dayparts.” (Id. at p. 17)
• “The erosion of local broadcast news is accelerating.” (Id. at p. 18)
• “Thus, actual local broadcast TV reach is at or below the cume figures for wired cable in most markets.” (Id. at p. 19)

This Essential Guide clearly indicates that cable programming is part of the relevant video advertising product market and that there is intense competition between Pay- and Free-TV distributors for advertising dollars.  So why is the FCC proposing to restrict joint marketing agreements among Free-TV distributors in local markets when virtually the entire Pay-TV industry is jointly marketing all of their advertising spots nationwide?

The FCC should refrain from adopting new restrictions on local broadcasters until it can answer questions like this one. Though it is appropriate for the FCC to prevent anticompetitive practices, adopting disparate regulatory obligations that distort competition in the same product market is not good for competition  or consumers. Consumer interests would be better served if the FCC decided to address video competition issues more broadly — or there might not be any Free-TV competition to worry about.

Adam Thierer, Senior Research Fellow at the Mercatus Center discusses his recent working paper with coauthor Brent Skorup, A History of Cronyism and Capture in the Information Technology Sector. Thierer takes a look at how cronyism has manifested itself in technology and media markets — whether it be in the form of regulatory favoritism or tax privileges. Which tech companies are the worst offenders? What are the consequences for consumers? And, how does cronyism affect entrepreneurship over the long term?

Download

Related Links

• A History of Cronyism and Capture in the Information Technology Sector, Thierer
• Video: A History of Cronysim and Capture in the Information Technology Sector, Thierer
• Adam Thierer Biography, Mercatus Center
• Adam Thierer on Anti-Tech Grump Evgeny Morozov, Thierer

Gina Keating, author of Netflixed: The Epic Battle for America’s Eyeballs, discusses the startup of Netflix and their competition with Blockbuster.

Keating begins with the history of the company and their innovative improvements to the movie rental experience. She discusses their use of new technology and marketing strategies in DVD rental, which inspired Blockbuster to adapt to the changing market.

Keating goes on to describe Netflix’s transition to internet streaming and Blockbuster’s attempts to retain their market share.

Download

Related Links

• Netflixed: The Epic Battle for America’s Eyeballs, Keating
• Gina Keating’s New Book about the Rise of Netflix, Babayan
• ‘Netflixed,’ Book by Gina Keating, Describes CEO Reed Hastings As a Nasty Boss’ Liedtke

Today I’ll be testifying at a Senate Commerce Committee hearing on online privacy and commercial data collection issues. In my remarks, I make three primary points:

1. First, no matter how well-intentioned, restrictions on data collection could negatively impact the competitiveness of America’s digital economy, as well as consumer choice.
2. Second, it is unwise to place too much faith in any single, silver-bullet solution to privacy, including “Do Not Track,” because such schemes are easily evaded or defeated and often fail to live up to their billing.
3. Finally, with those two points in mind, we should look to alternative and less costly approaches to protecting privacy that rely on education, empowerment, and targeted enforcement of existing laws. Serious and lasting long-term privacy protection requires a layered, multifaceted approach incorporating many solutions.

The testimony also contains 4 appendices elaborating on some of these themes.

Down below, I’ve embedded my testimony, a list of 10 recent essays I’ve penned on these topics, and a video in which I explain “How I Think about Privacy” (which was taped last summer at an event up at the University of Maine’s Center for Law and Innovation). Finally, the best summary of my work on these issues can be found in this recent Harvard Journal of Law & Public Policy article, “The Pursuit of Privacy in a World Where Information Control is Failing.” (This is the first of two complimentary law review articles I will be releasing this year dealing with privacy policy. The second, which will be published early this summer by the George Mason University Law Review, is entitled, “A Framework for Benefit-Cost Analysis in Digital Privacy Debates.”)

Testimony of Adam D. Thierer before the Senate Committee on Commerce, Science & Transportation hearing…

Some of My Recent Essays on Privacy & Data Collection

1. A Better, Simpler Narrative for U.S. Privacy Policy – March 19, 2013
2. On the Pursuit of Happiness… and Privacy – March 31, 2013 (condensed from Harvard Journal of Law & Public Policy article, “The Pursuit of Privacy in a World Where Information Control is Failing”)
3. Isn’t “Do Not Track” Just a “Broadcast Flag” Mandate for Privacy? – Feb. 20, 2011
4. Two Paradoxes of Privacy Regulation – Aug. 25, 2010
5. Privacy as an Information Control Regime: The Challenges Ahead – Nov. 13, 2010
6. When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed – Apr. 29, 2011
7. Lessons from the Gmail Privacy Scare of 2004 – March 25, 2011
8. Who Really Believes in “Permissionless Innovation”? – March 4, 2013 (condensed from Minnesota Journal of Law, Science & Technology law review article, “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle”)
9. The Problem of Proportionality in Debates about Online Privacy and Child Safety – Nov. 28, 2009
10. Obama Admin’s “Let’s-Be-Europe” Approach to Privacy Will Undermine U.S. Competitiveness– Jan. 5, 2011

My most recent Forbes column is entitled, “We All Hate Advertising, But We Can’t Live Without It.” It’s my attempt to briefly (a) defend the role advertising has traditionally played in sustaining news, entertainment, and online service, and (b) discuss some possible alternatives to advertising that could be tapped if advertising starts failing us a media cross-subsidy.

What got me thinking about this issue again was the controversy over satellite video operator DISH Network offering its customers a new “Auto Hop” capability for its Hopper whole-home HD DVR system. Auto Hop will give viewers the ability to automatically skip over commercials for most recorded prime time programs shown on ABC, CBS, FOX and NBC when viewed the day after airing. It makes the viewing experience feel like the ultimate free lunch. Alas, something still must pay the bills. As innovative as that technology is, we can be certain that it will not make content consumption cost-free. We’ll just pay the price in some other way. The same is true for online services since it’s never been easier to use technology to block ads.

So, what is going to pay the bills for content as ad-skipping becomes increasingly automated and effortless? Stated differently, what are the other possible methods of picking up the tab for content creation? Here’s a rough taxonomy:

I.     CHARGES

A.     Direct Fees (Periodic billing / Pay-per-view)

B.    Indirect Charges (Tiers / Bundles / Package pricing)

II.     ADVERTISING

A.    General / Mass market ads (Billboards / Banner ads / Pop-up online ads)

B.     Targeted ads (Directed pitch)

C.     Integrated (Product placement / Payola)

D.     Sponsorship / Underwriting

III.     PHILANTHROPIC

A.     Individual  (ex: Arts & opera funding)

B.     Foundational (ex: Knight Foundation)

C.     Governmental  (ex: CPB / BBC model)

IV.     INTERNAL CROSS-SUBSIDY  (Profitable division subsidizes unprofitable / “loss leader” strategies)

There are probably other ways of subsidizing content creation, but those are the primary methods. I have no idea what combination of strategies will sustain content going forward, but I think advertising is likely to play a diminished role in the mix as it becomes increasingly easy for us to filter it out of the mix. But the content creators will just shift costs elsewhere and raise the prices for programming through direct and indirect pricing techniques. Do you like HBO’s pricing model? Pay-per-view? Paywalls? Well, it doesn’t make a difference whether you do or not because you’ll likely be seeing a lot more of those models in your life in coming years if advertising fades as a subsidization method.

Alternatively, as I also note in my Forbes piece, “we could see a lot more Texaco Star Theaters in our future, with major companies essentially owning specific shows or networks.” Such program sponsorship and content underwriting has always been with it, but it could really explode as a cross-subsidy method if traditional advertising starts failing. “But it will be challenging for every show or website to find its own corporate benefactor, and it will also raise issues about undue influence and bias,” I note in my essay.

I hope no one seriously believes that philanthropic models can fill the gaps. Even if we saw a significant uptick in voluntary charitable giving or even taxpayer support for the arts and media, there’s no way in hell it will possibly begin to cover the the bill for what advertising support covers today.

In the end, I can’t help but think how great we’ve had it when it comes to advertising. As I also noted in my essay, advertising has been “the great subsidizer of the press, entertainment, and online services” historically and benefited us tremendously even if we haven’t appreciated that fact. “It’s possible that no single industry — not newspapers nor search engines nor anything else — has done as much to advance the storehouse of accessible human knowledge in the 20th century as advertisers,” argues Washington Post columnist Ezra Klein. Klein is exactly right, yet it doesn’t really make a difference how important advertising has been to us if we fail to appreciate that fact and increasingly take steps to exclude it from our lives.

As that becomes easier and easier to accomplish, we shouldn’t bitch and whine when the bills (literally) come due for the content we all desire. As always, there is no free lunch. We’ll pay the price one way or another.

Additional Reading:

• my recent Charleston Law Review article on “Advertising, Commercial Speech & First Amendment Parity”
• Ezra Klein on the Importance of Advertising to Media
• The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers
• There is No Free Lunch! No Advertising, No Media
• PFF’s Mega-Filing in the FCC’s “Future of Media” Proceeding

I was astounded to see the misstatements and misapplication of math in a recent Atlantic blog post called “How Much Is Your Data Worth? Mmm, Somewhere Between Half a Cent and $1,200.”

For his back-of-envelope calculations about the value of personal data, Alexis Madrigal writes, “User profiles — slices of our digital selves — are sold in large chunks, i .e. at least 10,000 in a batch. On the high end, they go for $0.005 per profile, according to advertising-industry sources.”

The dollar value isn’t crazy—a CPM rate of about five cents is on the low end—but he has got the nature of the transaction precisely wrong. Advertisers place ads with content providers like Facebook, Google, and ad networks. The latter direct those ads to their visitors, trying to get ads to the people the advertiser wants to reach. They do not sell the information they use to guess at what interests consumers—consumers’ profiles, to whatever extent they exist.

If content providers sold data about their visitors to advertisers, this would undercut their own role in the advertising business. There wouldn’t be a second sale to make. And doing so would require a radical re-engineering of targeted advertising, which is largely cookie-based. The purchaser of the profile wouldn’t know how to find the subject of the profile in order to deliver an ad.

Madrigal repeats several times that “profiles” are “sold.” It’s a highly misleading characterization, creating the impression that dossiers of information about people are circulating the Internet on a strange black market. On the contrary, profiles are held—not sold—by content providers and advertising networks. There are privacy concerns enough with that business model. We don’t need it mis-described.

I probably would have let this pass. Madrigal isn’t the first to get the advertising business model wrong. (And he hasn’t repeated the error that I know of.) But then comes the bad math.

Writes Madrigal:

[L]et’s not forget the rest of the Internet advertising ecosystem either, which the Internet Advertising Bureau says supported $300 billion in economic activity last year. That’s more than $1,200 per Internet user and much of the online advertising industry’s success is predicated on the use of this kind of targeting data.

Personal information is one input into part of the online advertising. It makes no sense to assign all the value from the entire ecosystem to that one input. The auto industry is about a $400 billion industry, and there are about 250 million car tires sold in the U.S. each year. This does not mean that tires are worth over $2,000 each.

The idea, evidently, is to make the case that consumers are losing a lot in the advertising ecosystem today. That may or may not be true. I’d like to see it shown in the success of a company like Personal or others in the Personal Data Ecosystem, which could re-jigger the personal-data > free-content bargain. But I don’t think that misstating how advertising works and exploding the value of personal data is a good way to make the case for change.

On Forbes today, I look at the phenomenon of memes in the legal and economic context, using my now notorious “Best Buy” post as an example. Along the way, I talk antitrust, copyright, trademark, network effects, Robert Metcalfe and Ronald Coase.

It’s now been a month and a half since I wrote that electronics retailer Best Buy was going out of business…gradually.  The post, a preview of an article and future book that I’ve been researching on-and-off for the last year, continues to have a life of its own.

Commentary about the post has appeared in online and offline publications, including The Financial Times, The Wall Street Journal, The New York Times, TechCrunch, Slashdot, MetaFilter, Reddit, The Huffington Post, The Motley Fool, and CNN. Some of these articles generated hundreds of user comments, in addition to those that appeared here at Forbes.

(I was also interviewed by a variety of news sources, including TechCrunch’s Andrew Keen.)

Today, the original post hit another milestone, passing 2.9 million page views.

Watching the article move through the Internet, I’ve gotten a first-hand lesson in how network effects can generate real value.

Network effects are an economic principle that suggests certain goods and services experience increasing returns to scale.  That means the more users a particular product or service has, the more valuable the product becomes and the more rapidly its overall value increases.  A barrel of oil, like many commodity goods, does not experience network effects – only one person can own it at a time, and once it’s been burned, it’s gone.

In sharp contrast, the value of networked goods increase in value as they are consumed.  Indeed, the more they are used, the faster the increase–generating a kind of momentum or gravitational pull.  As Robert Metcalfe, founder of 3Com and co-inventor of Ethernet explained it, the value of a network can be plotted as the square of the number of connected users or devices—a curve that approaches infinity until most everything that can be connected already is.  George Gilder called that formula “Metcalfe’s Law.”

Since information can be used simultaneously by everyone and never gets used up, nearly all information products can be the beneficiaries of network effects.  Standards are the obvious example.  TCP/IP, the basic protocol that governs interactions between computers connected to the Internet, started out humbly as an information exchange standard for government and research university users.  But in part because it was non-proprietary and therefore free for anyone to use without permission or licensing fees, it spread from public to private sector users, slowly at first but over time at accelerating rates.

Gradually, then suddenly, TCP/IP became, in effect, a least common denominator standard by which otherwise incompatible systems could share information.  As momentum grew, TCP/IP and related protocols overtook and replaced better-marketed and more robust standards, including IBM’s SNA and DEC’s DECnet.  These proprietary standards, artificially limited to the devices of a particular manufacturer, couldn’t spread as quickly or as smoothly as TCP/IP.

From computing applications, Internet standards spread even faster, taking over switched telephone networks (Voice over IP), television (over-the-top services such as YouTube and Hulu), radio (Pandora, Spotify)—you name it.

Today the TCP/IP family of protocols, still free-of-charge, is the de facto global standard for information exchange, the lynchpin of the Internet revolution.  The standards continue to improve, thanks to the largely-voluntary efforts of The Internet Society and its virtual engineering task forces.  They’re the best example I know of network effects in action, and they’ve created both a platform and a blueprint for other networked goods that make use of the standards.

Beyond standards, network effects are natural features of other information products including software.  Since the marginal cost of a copy is low (essentially free in the post-media days of Web-based distribution and cloud services), establishing market share can happen at relatively low cost.  Once a piece of software—Microsoft Windows, AOL instant messenger in the old days, Facebook and Twitter more recently—starts ramping up the curve, it gains considerable momentum, which may be all it takes to beat out a rival or displace an older leader.  At saturation, a software product becomes, in essence, the standard.

From a legal standpoint, unfortunately, market saturation begins to resemble an illegal monopoly, especially when viewed through the lens of industrial age ideas about markets and competition.  (That, of course, is the lens that even 21 ^st century regulators still use.)  But what legal academics, notably Columbia’s Tim Wu, misunderstand about this phenomenon is that such products have a relatively short life-cycle of dominating.  These “information empires,” as Wu calls them, are short-lived, but not, as Wu argues, because regulators cut them down.

Even without government intervention, information products are replaced at accelerating speeds by new disruptors relying on new (or greatly improved) technologies, themselves the beneficiaries of network effects.  The actual need for legal intervention is rare.  Panicked interference with the natural cycle, on the other hand, results in unintended consequences that damage emerging markets rather than correcting them.  Distracted by lingering antitrust battles at home and abroad, Microsoft lost momentum in the last decade.  No consumer benefited from that “remedy.”

For more, see “What Makes an Idea a Meme?” on Forbes.

I thought Todd Zywicki, a senior scholar with the Mercatus Center at George Mason University, did a nice job on Judge Napolitano’s “Freedom Watch” show addressing the contentious question of whether government should be regulating food advertising in order to somehow make American kids healthier. Todd pointed out how the advertising guidelines currently being developed are anything but “voluntary” and noted that there are many causes of childhood obesity. Watch the clip here:

Importantly, Todd also notes that there are First Amendment issues in play here. Commercial free speech is not completely without constitutional protection, as I noted in my recent Charleston Law Review article on “Advertising, Commercial Speech & First Amendment Parity.”

Finally, as we always note here about regulation generally — especially restrictions on advertising — there is no free lunch (excuse the pun in this case!). Advertising has traditionally been the great subsidizer of media and information in America. It has also kept competitors on their toes and kept prices in check.  These benefits are lost when we regulate advertising. So, while some nanny state-ers would like to convince us that they simply have the best interests of our kids in mind, the reality is that the regulations they favor will likely drive up costs for families and limit their choices of both products and media platforms, both of which are subsidized by advertising.

For CNET today, I have a long analysis and commentary on the “Stop Online Piracy Act,” introduced last week in the House. The bill is advertised as the House’s version of the Senate’s Protect-IP Act, which was voted out of Committee in May.

It’s very hard to find much positive to say about the House version. While there’s considerable evidence its drafters heard the criticisms of engineers, legal academics, entrepreneurs and venture capitalists, their response was unfortunate.

Engineers pointed out, for example, that court orders requiring individual ISPs to remove or redirect domain name requests was a futile and dangerous way to block access to “rogue” websites. Truly rogue sites can easily relocate to another domain, or simply have users access them with their IP address and bypass DNS altogether.

There are millions of DNS servers, according to Verisign, so getting all of them to make the change would be impossible, splintering the system. And redirecting DNS requests is some sense introducing a bug in the system, one that is inconsistent with upcoming security measures aimed at protecting users from being hijacked.

But all the drafters of SOPA seemed to have heard was the part about “futile.” Their response has been to make the DNS provisions vaguer and more open-ended, in hopes that whatever mechanisms the rogue sites come up with to evade the law will also be illegal.  Blocking is now extended not just to “parasite” sites but to a “portion thereof,” for example.

And the Attorney General can now apply for injunctive relief against any “entity” that provides “a product or service designed or marketed for the circumvention or bypassing of measures” taken in response to an earlier court order.

Similar efforts are found throughout SOPA, particularly in the felony streaming provision, and the private right of action (or what the bill calls the “market-based system”) for private enforcement of copyright and trademark abuses.  Where clarity isn’t possible, the drafters have opted for vagueness, open-ended definitions, and hedges.  Even the term “including” is defined, to be clear that it means “including but not limited to.”

The point to criticism of Protect-IP was instead that it was impossible to regulate technology that is changing so quickly, and that any effort to do so would only prove obsolete on arrival.  As previous efforts from CAN-SPAM to ECPA and back make clear, you cannot future-proof legislation aimed at specfiic features of emerging technologies.

That, unfortunately, is exactly what SOPA tries to do.  And beyond making the legislation clumsy and imprecise, the intentional vagueness greatly increases the potential for unintended consequences.  I describe several unintentionally dangerous examples from SOPA in the CNET piece; other analysts have done the same in pieces listed at the end of this post.

Two good things I found in the 79-page draft:

1.  The failure of Protect-IP to define “nonauthoritative domain name server” has been addressed.  That term is now defined, and the definition looks correct to me.

2.  SOPA recognizes, at least, the better approach to solving the problem of foreign websites that blatantly violate copyright and trademark.  Near the back, Section 205 calls on the State and Commerce Departments to make enforcement of existing international law and treaties regarding information products and services a priority.  This includes the assignment of new attaches dedicated to information products.

Would that SOPA started and ended with this provision, there would be little basis to fault its drafters.  If the problem SOPA is attempting to solve, after all, is the scourge or foreign websites that distribute movies, music, and counterfeit goods without a license (often pretending to be legitimate), then surely the solution is one of foreign and trade policy and not micromanaging Internet protocols.

Instead, we have a bill that treats all U.S. consumers as guilty until proven innocent, and hands Hollywood the keys to the inner workings of the Internet.  Just what they’ve always wanted.

Worth reading:

• Ryan Radia, “Preliminary thoughts on SOPA “  (TLF)
• David Sohn, “House Copyright Bill Casts Dangerously Wide Net”  (CDT)
• Corynne McSherry, “Disastrous IP Legislation Back–and it’s Worse than Ever “  (EFF)
• Sherwin Siy, “House Version of Rogue Websites Bill Adds DMCA Bypass, Penalties for DNS Workarounds” (Public Knowledge)
• Mike Masnick, “E-Parasites Bill Ends Internet as we Know it”  (TechDirt)

For CNET this morning, I offer five crucial corrections to the Protect IP Act, which was passed out of committee in the Senate back in May.

Yesterday, Rep. Bob Goodlatte, co-chair of the Congressional Internet Caucus, told a Silicon Valley audience that the House was working on its own version and would introduce it in the next few weeks.

Protect IP would extend efforts to combat copyright infringement and trademark abuse online, especially by websites registered outside the U.S.

Since Goodlatte promised the new bill would be “quite different” from the Senate version, I thought it a good time to get out my red pen and start crossing off the worst mistakes in policy and in drafting in Protect IP.

The full details are in the article, but in brief, here’s what I hope the House does in its version:

1. Drop provisions that tamper with the DNS system in an effort to block U.S. access to banned sites.
2. Drop provisions that tamper with search engines, indices, and any other linkage to banned sites.
3. Remove a private right of action that would allow copyright and trademark holders to obtain court orders banning ad networks and financial transaction processors from doing business with banned sites.
4. Scale back current enforcement abuses by the Department of Homeland Security under the existing PRO-IP Act of 2008.
5. Focus the vague and overinclusive definition of the kind of websites that can be banned, limiting it to truly criminal enterprises.

As I’ve written elsewhere, the Senate version was in some ways even worse than last year’s COICA bill.  It imposes significant costs on innocent Internet users, and would do so with no corresponding benefits to anyone, including rightsholders.

The best thing the House could do would be to ignore this dud and work instead on reforming the broken copyright system.  That would do the most to correct the imbalance in endless copyrights and a shrinking public domain, eliminating much of the incentive for infringement that exists today.

But short of that, I hope at least that the most dangerous provisions are removed.

I’ve written two articles on the Protect IP Act of 2011, introduced last week by Sen. Leahy (D-Vt.).

For CNET, I look at some of the key differences, better and worse, between Protect IP and its predecessor last year, known as COICA.

On Forbes this morning, I have a long meditation on what Protect IP says about the current state of the Internet content wars.  Copyright, patent, and trademark are under siege from digital technology, and for now at least are clearly losing the arms race.

The new bill isn’t exactly the nuclear option in the fight between the media industries and everyone else, but it does signal increased desperation.

I’m not exactly a non-combatant here.  Increasingly, everyone is being dragged into this fight, including search engines, ISPs, advertisers, financial transaction processors, and, in Protect IP is passed, anyone who uses a hyperlink.

But as someone who earns his living from information exchanges–what the law anachronistically calls “intellectual property”–I’m not exactly an anarchist either (or as one recent commenter on CNET called me, a complete anarchist!).

The development of an information economy will stabilize and mature at some point, and, I believe, the new supply chain will be richer, more profitable, and give a greater share of the value than the current one does to those who actually create new content.  (Most of the cost of information products and services today is eaten up by middlemen, media, and distribution.)

But it’s not an especially smooth or predictable trajectory.  Joseph Schumpeter didn’t call it creative destruction for nothing.

I’ve written a long article this morning for CNET (See “Privacy panic debate:  Whose data is it?”) on the discovery of the iPhone location tracking file and the utterly predictable panic response that followed.  Its life-cycle follows precisely the crisis model Adam Thierer has so frequently and eloquently traced, most recently here on TLF.

In particular, the CNET article takes a close and serious look at Richard Thaler’s column in Saturday’s New York Times, “Show us the data.  (It’s ours, after all.)” Thaler uses the iPhone scare as occassion to propose a regulatory fix to the “problem” of users being unable to access in “computer-friendly form” copies of the information “collected on” them by merchants. 

That information, Thaler assumes, is a discreet kind of property and must, since it refers to customer behavior, be the sole property of the customer, “lent” to the merchant and reclaimable at any time.

Information can certainly be treated as if it were property, and often is under law.  Personally, I don’t find the property metaphor to be the most useful in dealing with intangibles, but if you’re going to go there you need to understand the economics of how information behaves in ways very different to physical property.  (See my chapter on the subject in “The Next Digital Decade.”)

Thaler’s “proposed rule” is wrong on the facts (he doesn’t seem to know how cell phone bills really look, and he certainly doesn’t understand how supermarket club cards operate–and these are his leading examples of the “problem”), wrong on the law, and even wrong on the business and economics.  (Other than that, it’s a pretty good article!)

This kind of intellectual frivolity is par for the course with many academic economists.  Thaler is at the University of Chicago’s business school, and describes himself as an economist and behavioral scientist.  That means instead of throwing around calculus all day, he devises toy experiments with a few subjects–or reads the findings of other behavioral scientists who have done the same.

Not only is the article bad privacy policy, it’s bad economics.  The latter is certainly the more serious concern.  Nearly 70 years after Ronald Coase called on economists to put down the pencil and paper methods and do actual empirical research in how markets actually work, the profession has if anything become more insular.  There are exceptions, of course, but they stand out in a field of mediocrity.

Which is too bad.  We need good economists now, more than ever.

On this week’s John Stossel show on Fox Business Network, I debated Internet privacy, advertising, and data collection issues with Michael Fertik of Reputation.com. In the few minutes we had for the segment, I tried to reiterate a couple of keep points that we’ve hammered repeatedly here in the past:

• There’s no free lunch. All the free sites and service we enjoy online today are powered by advertising and data collection. [see this op-ed]
• There is no clear harm in most cases, or what some argue is harm also can have many benefits that are rarely discussed. [see this paper.]
• There’s little acknowledgement of the trade-offs involved in having government create an information control regime for the Internet. [see this filing and these three essays: 1, 2, 3.]
• The ultimate code of “fair information practices” is the First Amendment, which favors free speech, openness, and transparency over secrecy and information control. [see this piece.]
• “Hands Off the Net” is a policy that has served us well. There are dangerous ramifications for our economy and long-term Internet freedoms if we continue down the road of “European-izing” privacy law here in the States. [see this essay and this filing.]
• At some point, personal responsibility needs to come into the equation. With so many privacy enhancing empowerment tools already on the market, it begs the question: If consumers don’t take steps to use those tools, why should government intervene and take action for them?

Anyway, here’s the 7-min video of the debate between Fertik and me:

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.

We’ve said it here before too may times to count: When it comes to the future of content and services — especially online or digitally-delivered content and services — there is no free lunch. Something has to pay for all that stuff and increasingly that something is advertising.  But not just any type of advertising — targeted advertising is the future. We see that again today with Skype’s announcement that it is rolling out an advertising scheme as well as in this Wall Street Journal story (“TV’s Next Wave: Tuning In to You“) about how cable and satellite TV providers are ramping up their targeted advertising efforts.

No doubt, we’ll soon hear the same old complaints and fears trotted out about these developments.  We’ll hear about how “annoying” such ads are or how “creepy” they are.  Yet, few will bother detailing what the actual harm is in being delivered more tailored or targeted commercial messages.  After all, there’s actually a benefit to receiving ads that may be of more interest to us. Much traditional advertising was quite “spammy” in that it was sent to the mass market without a care in the world about who might see or hear it. But in a diverse society, it would be optimal if the ads you saw better reflected your actual interests / tastes. And that’s a primary motivation for why so many content and service providers are turning to ad targeting techniques. As Skype noted in its announcement today: “We may use non-personally identifiable demographic data (e.g. location, gender and age) to target ads, which helps ensure that you see relevant ads. For example, if you’re in the US, we don’t want to show you ads for a product that is only available in the UK.”  Similarly, the Journal article highlights a variety of approaches that television providers are using to better tailor ads to their viewers.

Some will still claim it’s too “creepy.” But, as I noted in my recent filing to the Federal Trade Commission on its new privacy green paper:

If harm is reduced to “creepiness” or even “annoyance” and “unwanted solicitations” as some advocate, it raises the question whether the commercial Internet as we know it can continue to exist.  Such an amorphous standard leaves much to the imagination and opens the door to creative theories of harm that are sure to be exploited.  In such a regime, harm becomes highly conjectural instead of concrete. This makes credible cost-benefit analysis virtually impossible since the debate becomes purely about emotion instead of anything empirical. … Importantly, nothing in the Commission’s proceeding has thus far demonstrated that online data collection and “tracking” represent a clear harm to consumers per se, or that any “market failure” exists here. Such a showing would be difficult since using data to deliver more tailored advertising to consumers can provide important benefits to the public..

I’ve already noted one possible benefit to consumers: ads that are more relevant to them and, therefore, potentially less “annoying.” But the far more important benefits would be (1) keeping costs for content and services reasonable, and/or (2) just keeping that content flowing or those services in business. I go into more detail about both of these potential benefits in my FTC filing, but the reasoning here is pretty straightforward.  Again, advertising is the great subsidizer of the press, media, content, and online services. The reason we already have access to some much great content and so many great (and often free) online services is because of advertising.

But the market for content and services is becoming more cut-throat competitive every day. There’s simply so much stuff to choose from that both the content/service providers and the advertisers are being forced to evolve and change their business models. Locking them into to yesterday’s (or even today’s) advertising and marketing methods limits their ability to respond to competitive pressures and concoct more innovate models going forward.  Targeting will clearly be part of the mix, and if it can help companies continue to provide their content and services to the public — or, better yet, provide them at a more competitive price — then policymakers must take those potential benefits into account when considering privacy regulations, even if some feel such ads are “creepy.”  Again, it’s unclear how “creepiness” is a harm and, even if it is, it has to be stacked against the many potential benefits or more targeted forms of advertising.  There’s no guarantee those methods will succeed, of course, but they should at least be given a chance.

Again, read my FTC comments for more detail.  And let’s say it once more, with feeling: There is no free lunch!

___

Addendum: I just noticed this follow-up Wall Street Journal blog post by Jessica E. Vascellaro on “Calculating the Benefit of a Targeted TV Ads,” which concludes by noting that: “A test of targeted TV ads by Comcast in 2009 found that homes receiving targeted advertising tuned away from the commercials 32% less of the time than homes that received non-targeted ads.” Stated differently, those consumers seeing targeted ads found them 32% less “annoying”! And, again, more effective advertising means more dollars for content and services.

That also reminded me of this eMarketer article I saw last month on how “Targeting Boosts Low Facebook Click Rates.” It noted that:

Just as not all advertisers are created equal, neither are all ads. Facebook’s self-serve ad targeting platform provides marketers with a wide variety of options for narrowing down the audience for their campaigns and targeting them appropriately. And according to data from BLiNQ Media, targeting can provide a dramatic increase in ad effectiveness. Clickthrough rates for campaigns run through the company’s platform were 7.5 times higher for ads targeted with demographic characteristics or interest information gleaned from profiles than for ads that were not targeted.

Indeed, not all advertising is created equal, and more targeted forms of advertising could create more value for content creators, services providers, and consumers. If it’s given a chance, that is.

[UPDATE Feb. 2012: This little essay eventually led to an 80-page working paper, “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle.”]

In this essay, I will suggest that (1) while “moral panics” and “techno-panics” are nothing new, their cycles seem to be accelerating as new communications and information networks and platforms proliferate; (2) new panics often “crowd-out” or displace old ones; and (3) the current scare over online privacy and “tracking” is just the latest episode in this ongoing cycle.

What Counts as a “Techno-Panic”?

First, let’s step back and define our terms. Christopher Ferguson, a professor at Texas A&M’s Department of Behavioral, Applied Sciences and Criminal Justice, offers the following definition: “A moral panic occurs when a segment of society believes that the behavior or moral choices of others within that society poses a significant risk to the society as a whole.” By extension, a “techno-panic” is simply a moral panic that centers around societal fears about a specific contemporary technology (or technological activity) instead of merely the content flowing over that technology or medium. In her brilliant 2008 essay on “The MySpace Moral Panic,” Alice Marwick noted:

Technopanics have the following characteristics. First, they focus on new media forms, which currently take the form of computer–mediated technologies. Second, technopanics generally pathologize young people’s use of this media, like hacking, file-sharing, or playing violent video games. Third, this cultural anxiety manifests itself in an attempt to modify or regulate young people’s behavior, either by controlling young people or the creators or producers of media products.

While protection of youth is typically a motivating factor, some techno-panics transcend the old “It’s For the Children” rationales for information control. What all panics share in common, however, is a general desire by the public, media pundits, and policymakers to “do something” to rid ourselves of the apparent menace. Thus, an effort to control the particular content or technology in question is what really defines a true “panic.”

It’s impossible to be scientific about this but there seems to be a cycle of such moral panics or techno-panics at work in our society.  Indeed, looking back over the past few decades, it seems that we experience a new panic roughly every 3 to 5 years. Consider this chronological breakdown of some notable techno-panics since the 1980s on:

• mid-1980s: music lyrics and music videos
• early to mid-1990s: violent video games
• mid- to late 1990s: Internet porn
• late 1990s to early 2000s: browser cookies + kids privacy
• mid-2000: TV & movie violence
• mid- to late 2000: online predators / “stranger danger”
• late 2000s to present: cyberwar
• late 2000s to present: online privacy / web “tracking”

Of course, there were other “mini-panics” that occurred during this stretch and, again, some of them did not involve child safety rationales. There was a brief panic over RFID chips and even the Y2K scare in the late 1990s, for example. Some might argue we also had a bit of panic with copyright and file-sharing back in the early 2000s, and perhaps even one back in the early 1980s when the VCR came on the scene, although that seemed to be more industry-driven. Wireless geo-location and geo-tagging has also been getting more attention recently and still may blossom into a full-blown techno-panic.   And you could make the case that we experienced a different type of techno-panic last year over the supposed “Death of the Web,” although few took that one all that seriously.

Why Do Techno-Panics Pass?

To be clear, there are no clear boundaries with techno-panics.  They do not just suddenly begin and end, and it is impossible to gauge their relative severity since no metric or yardstick exists to measure them against.  Nonetheless, these techno-panics certainly seem to have peaks and valleys in terms of public / political / media attention.

Just a few years ago, for example, the online predator panic reached a fever pitch and “stranger danger” reports were all over the media. As a result, legislation banning social networking sites in publicly funded schools and libraries was introduced, and state attorneys general proposed mandatory online age verification schemes for the Internet to segregate adults and children online. And then, it seems, the fever passed. I couldn’t tell you exactly what week or month it happened — and in many ways some of those fears still exist out there — but it’s clear that the panic about online predation has subsided greatly. I’d like to think that education and awareness helped debunk some of the myths that were fueling that particular panic, just as I’d like to believe that education and awareness helped deflate the fear bubbles that surrounded previous panics.

While I don’t want to entirely discount that possibility, I’m convinced another more cynical explanation may exist: New techno-panics simply crowd-out old techno-panics. There may be several explanations for this:

• Perhaps there is only so much fear-mongering our minds can handle at any given time.
• Perhaps it is becuase the media gets myopically focused on one panic and then hammers it till all the fear has been squeezed out of it such that they have to move on.
• Perhaps it is because a new technology comes along that spooks politicians and the media even more than the previous one they were demonizing.
• Or perhaps all of those factors combine to limit the duration of panics.

Regardless, it seems evident that moral panics and techno-panics have always been with us and will always be with us. From the waltz to rock and roll to rap music, from movies to comic books to video games, from radio and television to the Internet and social networking websites — every new media format or technology spawns a fresh debate about the potential negative effects it might have on society or our kids in particular. An excellent recent report by the U.K. government entitled Safer Children in a Digital World noted that “New media are often met by public concern about their impact on society and anxiety and polarisation of the debate can lead to emotive calls for action.” Indeed, each of the media technologies or communications platforms mentioned above was either regulated or threatened with regulation at some point in its history.

The Cycle is Accelerating but is the Severity of Each Panic Diminished as a Result?

However, it seems like these cycles are now accelerating somewhat.  They peak and fizzle out faster, that is. Perhaps that is a natural outgrowth of the technological explosion we have witnessed in recent years.  Digital innovation is unfolding at a breakneck pace and each new development gives rise to a new set of concerns. Going forward, this could mean we experience more “mini-panics” and fewer of those sweeping “the-world-is-going-to-hell” type panics.

This brings me to the current debate over online advertising, web “tracking,” and personal privacy. What’s interesting about this debate is that, unlike many of the other moral or techno-panics mentioned above, this debate is not being driven by the mantra that “It’s For the Children.”  Today’s privacy panic reflects a more widespread unease with the notion that our digital footprints are somehow being “tracked” for nefarious purposes.  In reality, there isn’t anything nefarious going on here at all. Online sites and service providers are simply using data collection to improve our web experience and better target ads to us in an attempt to cross-subsidize all that wonderful free stuff we enjoy online today. This is truly one of the great pro-innovation, pro-consumer success stories of modern times.  Yet, irrational fears about data collection and targeted marketing have given rise to the second major privacy techno-panic of the past dozen years. (Again, the first privacy-related panic was the “cookie craze” that took place back in the late-90s but then subsided). It is also somewhat ironic that many of the same people and groups who have done yeoman’s work debunking techno-panics in other contexts are driving this modern privacy panic.

I want to make it clear that I am not oblivious to the fact that there are occasionally some legitimate concerns behind some of these moral panics or techno-panics.  For example, I certainly don’t want my young children (ages 9 & 6) viewing hard-core porn, playing extremely violent video games, or even reading graphic comics. And I understand that some forms of personal information are quite sensitive and a legitimate topic for policy discussions.  But, again, these concerns are typically greatly over-hyped, and to the extent that they represent more legitimate concerns, I would argue that education and empowerment-based solutions typically represent a more sensible approach than regulation. Although I sometimes question whether the “harm” that people fear is legitimate, I would hope we could work together to find more sensible ways to address people’s concerns without calling for comprehensive control of the media, content, technology, or the Internet more generally.

Resiliency, Responsibility & Common Sense

Finally, in these discussion, I believe many people overlook the importance of human adaptability and resiliency.  The amazing thing about humans is that we adapt so much better than other creatures. When it comes to technological change, resiliency is hard-wired into our genes.  “The techno-apocalypse never comes,” notes Slate’s Jack Shafer, because “cultures tend to assimilate and normalize new technology in ways the fretful never anticipate.” We learn how to use the new tools given to us and make them part of our lives and culture.  Indeed, we have lived through revolutions more radical than the Information Revolution.  We can adapt and learn to live with some of the legitimate difficulties and downsides of the Information Age. [See my recent book chapter on, “The Case for Internet Optimism, Part 1: Saving the Net From Its Detractors.”]

A healthy does of humility, patience, personal responsibility, and good ‘ol common sense will usually get us through these things. Quite literally, there is no need to panic!

Related Reading

• Techno-Panic Cycles (and How the Latest Privacy Scare Fits In)
• Against Techno-Panics
• Collier on “Why Technopanics are Bad”
• Kids, Media, Commercialism & Moral Panic
• The Next Great Technopanic: Wireless Geo-Location / Social Mapping
• Technopanics and the Great Social Networking Scare
• Sen. Klobuchar Stirs Up Facebook Child Safety Technopanic
• A Rarity: Newspaper Argues Against Techno-panic, Cites Constitution
• Google Street View/Wi-Fi Privacy Technopanic Continues
• Digital Sensors, Darknets, Hyper-Transparency & the Future of Privacy

Today I filed roughly 30 pages worth of comments with the Federal Trade Commission (FTC) in its proceeding on “Protecting Consumer Privacy in an Era of Rapid Change: a Proposed Framework for Businesses and Policy Makers.” [Other comments filed in the proceeding can be found here.] Down below, I’ve attached the Table of Contents from my filing so you can see the major themes I’ve addressed, and I’ve also attached the entire document in a Scribd reader. In coming days and weeks, I’ll be expanding upon some of these themes in follow-up essays.

In my filing, I argue that while it remains impossible to predict with precision the impact a new privacy regulatory regime will have the Internet economy and digital consumers, regulation will have consequences; of that much we can be certain.  As the FTC  and other policy makers move forward with proposals to expand regulation in this regard, it is vital that the surreal “something-for-nothing” quality of current privacy debate cease. Those who criticize data collection or online advertising and call for expanded regulation should be required to provide a strict cost-benefit analysis of the restrictions they would impose upon America’s vibrant digital marketplace.

In particular, it should be clear that the debate over Do Not Track and online advertising regulation is fundamentally tied up with the future of online content, culture, and services. Thus, regulatory advocates must explain how the content and services supported currently by advertising and marketing will be sustained if current online data collection and ad targeting techniques are restricted.

The possibility of regulation also retarding vigorous marketplace competition—especially new innovations and entry—is also very real. Consequently, the Commission bears the heavy burden of explaining how such results would be consistent with its long-standing mission to protect consumer welfare and promote competition. Importantly, the “harm” that critics claim online advertising or data collection efforts gives rise to must be shown to be concrete, not merely conjectural. Too much is at stake to allow otherwise.

Finally, as it pertains to solutions for those who remain sensitive about their privacy online, education and empowerment should trump regulation. Regulation would potentially destroy innovation in this space by substituting a government-approved, “one-size-fits-all” standard for the “let-a-thousand-flowers-bloom” approach, which offers diverse tools for a diverse citizenry. Consumers can and will adapt to changing privacy norms and expectations, but the Commission should not seek to plan that evolutionary process from above.

Download my comments here or just scroll down and read them below.

Contents

I.       Introduction

II.      No Showing of Harm or Market Failure Has Been Made

1. How Do We Conduct Cost-Benefit Analysis When “Creepiness” Is the Alleged Harm?
2. Privacy Regulation & the Precautionary Principle.
3. On “Informed Consent” & Information as Currency
4. On “Commonly Accepted Practices”
5. The Mythical Harm of Consumer “Walk Aways”

III.    Privacy Regulation Is an Information Control Regime That Faces Formidable Enforcement Challenges

1. Media & Technological Convergence
2. Decentralized, Distributed Networking
3. Unprecedented Scale of Networked Communications
4. Explosion of the Overall Volume of Information
5. Unprecedented Individual Information Sharing Through User-Generation of Content and Self-Revelation of Data

IV.    The Commission’s Proposed “Do Not Track” Regime Creates Potential Risks to Consumers, Culture, Competition, and Global Competitiveness

1. Potential Direct Cost to Consumers
2. Potential Indirect Costs / Impact on Content & Culture
3. Competition & Market Structure
4. International Competitiveness
5. “Silver-Bullet” Solutions Rarely Adapt or Scale Well
6. Implications of This New Regime in Other Contexts

V.     Privacy Regulation Raises Serious Free Speech & Press Freedom Issues

VI.    Better, Less-Restrictive Solutions Exist to Privacy-Related Concerns

1. Education, Empowerment & Self-Regulation
2. Simplified” Privacy Policies, Enhanced Notice & “Privacy by Design”
3. Increased Sec. 5 Enforcement, Targeted Statutes & the Common Law

VII.  Conclusion

Comment in FTC Do Not Track Proceeding (Adam Thierer – Mercatus Center) http://d1.scribdassets.com/ScribdViewer.swf

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

[Here’s an oped of mine that recently ran on Reuters.  Readers will recognize many of these themes and arguments since I have developed them here on the TLF many times before.]

Privacy Regulation and the “Free” Internet

by Adam Thierer, Mercatus Center at George Mason University

Would you like to pay $20 a month for Facebook, or a dime every time you did a search on Google or Bing?  That’s potentially what is at stake if the Obama administration and advocates of stepped-up regulation of online advertising get their way.

The Internet feels like the ultimate free lunch.  Once we pay for basic access, a cornucopia of seemingly free services and content is at our fingertips.  But those services don’t just fall to Earth like manna from heaven.  What powers the “free” Internet are data collection and advertising. In essence, the relationship between consumers and online content and service providers isn’t governed by any formal contract, but rather by an unwritten  quid pro quo: tolerate some ads or we’ll be forced to charge you for service.  Most consumers gladly take that deal—even if many of them gripe about annoying or intrusive ads, at times.

Nonetheless, calls for regulation persist, especially as advertising grows more sophisticated.  More targeted forms of online advertising hold the promise of better ads more closely tailored to consumers’ interests.  But that also raises anxieties among some Web surfers who fear their privacy might be undermined by increased data collection or “tracking.”

To address those concerns, the Federal Trade Commission (FTC) and the Department of Commerce have stepped-up activity in this arena and has suggested that new rules may be needed. Earlier this month, the FTC released a report endorsing a new regulatory framework, including a so-called “Do Not Track” mechanism to allow easier consumer opt-outs of online data collection and advertising.  Last Thursday, the Commerce Department followed suit with a new report calling for expanded oversight and a new Privacy Policy Office within Commerce.  Meanwhile, discussion continues in Congress about a new “baseline” privacy law.

The stakes in the debate are significant since regulation could fundamentally alter the nature of online commerce and the future of how digital content and services are provided.  Curtailing data collection and online advertising could be killing the goose that lays the Internet’s golden eggs.  Such regulation will likely have a particularly deleterious impact on small publishers and service providers, who depend almost entirely upon online advertising.  In turn, this could curtail new entry and innovation—and new forms of speech and culture.

Some regulatory advocates don’t hide their desire to move the U.S. in the direction the European Union has charted with its “data directives” and more stringent forms of privacy regulation.  But America’s refusal thus far to walk down that more regulatory path offers scholars the chance to evaluate Europe’s more restrictive approach and study whether America’s lead in the global digital marketplace might be tied to its more “hands-off” approach to online regulation. A recent study by Avi Goldfarb and Catherine Tucker found that “after the [European Union’s] Privacy Directive was passed [in 2002], advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world.” They argue that because regulation decreases ad effectiveness, “this may change the number and types of businesses sustained by the advertising-supporting Internet.” Regulation of advertising and data collection for privacy purposes, it seems, can affect the global competitiveness of online firms.

Regulatory efforts will be complicated by the fact that privacy is a highly subjective condition and definitions of consumer “harm” vary widely.  Many of us don’t much worry about data collection or advertising online; we merrily go along our way surfing free sites, services, and content.  But a handful of vocal pro-regulatory privacy advocates and organizations have successfully convinced many policymakers that the hyper-sensitive concerns of a small minority should trump all other considerations.

Ironically, many of those privacy advocates bash copyright law and claim it is an information control regime, yet privacy regulation would constitute a stronger information control regime by creating the equivalent of copyright for personal information (which would, in turn, conflict mightily with the First Amendment).  In essence, privacy regulations limit the right of people to talk about other people, or communicate facts about them.  This raises serious free speech concerns and has particularly troubling ramifications for press freedoms.  Restrictions on advertising could also have an effect on non-commercial speech, such as political ads or non-profit communication.

Some proposed privacy regulations, such as a “Do Not Track” mandate, would also require a re-architecting of the Internet and the potential regulation of every Web browser to ensure compliance.  If our experience with attempting to eradicate email spam through regulation proves anything, it’s that such schemes are unlikely to work given the Net’s borderless nature.

There is a better path to balancing privacy interests and economic growth than through an onerous privacy regulatory regime. Educating and empowering consumers with more, and better, privacy-enhancing tools can help alleviate much of the concern about data collection or advertising intrusiveness.  The most-downloaded add-on for both the Firefox and Chrome web browsers is AdBlock Plus, which blocks advertising on most sites. A host of other tools are available to block or limit various types of data collection, and every major browser has privacy control tools and anonymous surfing modes to help users limit data collection.

Again, because privacy is a subjective condition, not everyone takes advantage of these empowerment tools.  The crucial point, however, is that the tools exist and they need not be perfect to be preferable to government regulation, which, in this case, could decimate the “free” Internet as we know it.

Adam Thierer is a senior research fellow at the Mercatus Center at George Mason University where he works with the Technology Policy Program. Thierer covers technology, media, Internet, and free speech policy issues with a particular focus in online child safety and digital privacy policy issues. The views expressed are his own.

This is a response to Nick Carr’s recent piece, “The Attack on Do Not Track,” in which he goes after me for some comments I made in this essay about the trade-offs at work in the privacy and online advertising debates.  In his critique of my essay, he argues:

What the FTC is suggesting is that the unwritten quid pro quo be written, and that the general agreement be made specific. Does Thierer really believe that invisible tradeoffs are somehow better than visible ones? Shouldn’t people know the cost of “free” services, and then be allowed to make decisions based on their own cost-benefit analysis? Isn’t that the essence of the free market that Thierer so eloquently celebrates?

My response to Nick follows.

Nick…  Did I anywhere suggest that “invisible tradeoffs are somehow better than visible ones?” I can’t remember saying that anywhere, so perhaps you can point to where I did.  I don’t think you’ll find anything when you conduct your search since I know for a fact that I have never suggested such a thing.

That being said, strict contracting and consent models are not always possible in a free market economy, even if they are ideal.  In essence, much of the history of advertising and marketing is built on the sort of “unwritten quid pro quos” you deride in your essay.  Are you against radio or television advertising on similar grounds? Print ads? Direct mail?  Billboards?  There are steps you can take to avoid advertising and marketing in those contexts, but few of us would expect any sort of formal contact and consent form to be delivered to our attention beforehand.  And opt-ing out of them entirely is very difficult.  So, while I agree that, generally speaking, “people [should] know the cost of ‘free’ services, and then be allowed to make decisions based on their own cost-benefit analysis,” let’s understand that such ideal textbook models of perfect information and informed consent aren’t always possible.

I will admit, however, that the difference with online advertising is that personal information may be collected about the consumer of the advertising in question.  That did not always occur as part of those previous advertising “quid pro quos.”  Understandably, this raises the blood pressure of those who want to “property-tize” personal information and, in essence, apply a copyright-like permissions-based regime to any collection or reproduction of such information.  Such an information control regime will be challenging to enforce, especially in light of the significant amounts of personal information that we voluntarily place online about ourselves.  [See my earlier essay, “Privacy as an Information Control Regime: The Challenges Ahead” for further discussion.]

Nonetheless, an ideal world would be one in which trade-offs were more visible and consent / contracting was easier, whether we are talking about privacy, copyrighted material, or anything else.  For example, in the context of online child safety and potentially objectionable media content, I have long argued that:

The ideal state of affairs, therefore, would be a nation of fully empowered parents who have the ability to perfectly tailor their family’s media consumption habits to their specific values and preferences. Specifically, parents or guardians would have (1) the information necessary to make informed decisions and (2) the tools and methods necessary to act upon that information. Importantly, those tools and methods would give them the ability to not only block objectionable materials, but also to more easily find content they feel is appropriate for their families.

My former colleague Berin Szoka has applied this same ‘ideal world’ model to privacy in this filing to the Federal Trade Commission:

In an ideal world, adults would be fully empowered to tailor privacy decisions, like speech decisions, to their own values and preferences (“household standards”).  Specifically, in an ideal world, adults (and parents) would have (1) the information necessary to make informed decisions and (2) the tools and methods necessary to act upon that information.  Importantly, those tools and methods would give them the ability to block the things they don’t like—annoying ads or the collection of data about them, as well as objectionable content.

Again, this would move us close to an explicit contracting / consent regime for the media content in question in both cases.  Is it desirable? You bet.  Is it possible?  Likely not.  Can we strive to get closer to the ideal state?  Yes, but not without costs. And that’s the key point I was trying to get across in my earlier essay on Do Not Track.  The trade-offs here are real and could be quite profound for online content and culture.   If we move toward a more rigorous information control regime to restrict personal information flows in the name of protecting privacy, we should not be surprised when that trade-off becomes more explicit–and expensive.

One final point.  You argue that “the suggestion that people shouldn’t be allowed to make informed choices about their privacy because some businesses may suffer as a result of those choices is ludicrous and even offensive.”  Again, I’ve already said that we can strive for more and better informed consent models, but you are pretending here it’s far simpler than it is in reality.  And I’ve already noted that the important point here is not protecting businesses, per se, but rather understanding that online content and culture is currently primarily subsidized by advertising business models that will be forcibly broken by regulation, and that we should consider the trade-offs that entails.  Finally, is there any role for personal responsibility in your view?  After all, there are steps that websurfers can take to address unwanted advertising and data collection techniques. Here’s a short list of privacy solutions that my former PFF colleagues put together.  If we expect consumers to exercise some personal responsibility to avoid unwanted content or communications in the free speech / online child safety context, why not here in the privacy context as well?

This morning, the Federal Trade Commission (FTC) released its eagerly-awaited Preliminary FTC Staff Report on Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers. As expected, the agency has generally endorsed an expanded regulatory regime to govern online data collection and advertising efforts in the name of protecting consumer privacy.  More specifically, the agency endorsed a so-called “Do Not Track” mechanism that would supposedly help consumers block unwanted data collection or advertising.  Here’s how the agency describes it:

Such a universal mechanism could be accomplished by legislation or potentially through robust, enforceable self-regulation.  The most practical method of providing uniform choice for online behavioral advertising would likely involve placing a setting similar to a persistent cookie on a consumer’s browser and conveying that setting to sites that the browser visits, to signal whether or not the consumer wants to be tracked or receive targeted advertisements.  To be effective, there must be an enforceable requirement that sites honor those choices. (p. 66)

I’m sure we’ll have plenty more to say here about the issue in coming weeks and months (comments on the FTC report are due by Jan. 31), but we’ve already commented on this proposal here before. See 1, 2, 3.  To briefly summarize a few of those concerns:

• Ironically, depending on how it’s implemented, a “Do Not Track” mechanism could potentially require individuals to surrender more personal information about themselves to companies or the government for purposes of authentication and enforcement of the rule.
• It would also require a re-architecting of the Internet and the potential regulation of every web browser to ensure compliance.  This will give the FTC and other lawmakers far greater control over the Internet’s architecture.
• For that reason, one can easily imagine would-be Net censors using the “Do Not Track” mechanism being used as a blueprint to regulate other types of online speech.
• One also wonders if mandatory browser controls opens up a potential new back-door for government surveillance snoops to exploit.
• Most importantly, if “Do Not Track” really did work as billed, it could fundamentally upend the unwritten quid pro quo that governs online content and services:  Consumers get lots of “free” sites, services, and content, but only if we generally agree to trade some data about ourselves and have ads served up.  After all, as we’ve noted many times before here, there is no free lunch. The cornucopia of seemingly free services and content at our fingertips didn’t just fall to Earth like manna from heaven.  Data collection and advertising made that all happen.  If we undercut this goose that lays the Internet’s golden eggs, consumers could see charges on many services that they currently pay little to nothing for.  Do you want to pay $20 a month for your favorite social networking site?  A dime per search on your preferred search engine?  Well, that’s the future that could await us if we continue down this regulatory road.

Again, more analysis to come.

One of the old saws we hear from those who wish to impose more stringent regulations on advertising or product placement is that “it’s for the children.”  That is, critics such at the Campaign for a Commercial-Free Childhood and other organzations fear that, because children’s brains are less developed or they have not yet learned to differentiate commercial appeals from other types of information flows, kids may be more susceptible to persuasive commercial messaging. I think there’s some truth to that, but I also believe that (a) kids aren’t quite the sheep we make them out to be, (b) the potential “harm” here is not as great as the critics make it out to be and (c) parental supervision should be the primary the solution to the problem.

But let’s ask a different question entirely: Are we willing to forgo additional, and potentially more diverse, forms of children’s programming simply because we want to keep commercial messaging or product placement away from kids?   Consider the case study of The Hub, recently featured in The New York Times:

With imports of European cartoons, a smattering of Hasbro ads and a rerun of the movie “Garfield,” Hasbro and Discovery Communications unveiled a new television brand for children on Sunday, called The Hub. Over time, the two companies hope to prove that there is room for a fourth player alongside Nickelodeon, the Disney Channel and the Cartoon Network, the three heavyweights of children’s TV, said David M. Zaslav, the chief executive of Discovery Communications.  […]

The Hub is a significant retooling of Discovery Kids, a channel available in about 60 million homes that had withered within the portfolio of Discovery Communications… . Discovery Kids came onto television after Nickelodeon and the Disney Channel, and it never found a competitive footing. It earned less than 10 cents per subscriber from cable and satellite companies, and most of its ads were of the low-rent direct-response variety. “We were really lying in wait,” said Mr. Zaslav, who determined that he needed a business partner in the children’s market, and last year found an eager one in Hasbro, which paid $300 million for a 50 percent stake in the channel.

As with most media programming decisions, a trade-off is at work here: To ensure diverse new shows or channels can be sustained, programmers must find revenue streams to sustain them.  When direct subscription fees or other advertising methods prove unsustainable, the only remaining option is product sponsorship or some form of underwriting (unless we assume government funding for all children’s programming is an option, which is neither likely nor desirable).

Thus, the cost-benefit calculus comes down to the choice between a new kids’ channel that  includes product promotion, or no programming at all. For some of us, this is an easy call: Diversity and choice should trump concerns about the supposed evils of “commercialism.”  Restricting advertising in the name of “protecting children,” while well-intentioned, would limit cultural diversity and viewer choice and should, therefore, be rejected.

Of course, I feel passionately about that because I do not find the counter-argument convincing. Namely, I don’t think the critics make a good case that a serious “harm” exists from exposure to commercial messages or product placement.  Hell, I can’t even count how many G.I. Joe-related product placement things I grew up consuming; I was obsessed with the stuff.  But so what?  Was I somehow irreparably harmed by it?  And how about those endless Star Wars-related product placements? How were kids harmed by that?  Because they begged Mom and Dad to buy more Star Wars toys?  I could go on with countless examples, but you get the point.

Regardless, the point I am making above is a very different one:  As a parent, would you rather have an additional option like The Hub, even if it includes some product placement / promotion, or would you rather not have an additional choice at all?  Seems like a simple choice to me.  And we should all be free to make it for ourselves and our families.

(Second in a series.)

The Register quotes security guru Bruce Schneier saying: “Facebook is the worst [privacy] offender – not because it’s evil but because its market is selling user data to its commercial partners.”

Facebook’s business model is to guide advertisements on its site toward users based on their interests as revealed by data about them. It is not to sell data about users. Selling data about users would undercut its advertising business.

It’s easy to misspeak in extemporaneous comments, and The Register is not your most careful media outlet. But we’ve almost got enough data points to show a consistent practice of misrepresentation on Bruce Schneier’s part. Perhaps that should be actionable as an unfair or deceptive practice under section five of the FTC Act.

I’m in front of a non-TiVo-enabled television this evening, which has permitted me to see ads for a search site called YP.com. It’s a rebranded YellowPages.com, affiliated with AT&T, and it’s organized to be a search engine for the things in your life—dining, travel nightlife—distinguished from Google’s utilitarian-tech web search. Meanwhile Microsoft’s Bing has overtaken Yahoo! as the number two search engine. I was surprised to learn that “undisputed search king” Google has only 65 percent of the search market. Google is doing well, of course, but it can’t be comfortable with all these well-funded rivals circling it.

This is good news for consumers. These competitors are driving Google to improve, and they can pull consumers away from Google by serving search niches such as lifestyle search (as YP does), more privacy protective search, and so on. Competitors will threaten and cut into Google’s advertising profits, too.

Television ads also remind us that HughesNet is offering broadband Internet via satellite. It’s mostly aimed at moving rural Internet users off of dial-up, but it’s an outlet for consumers anywhere who are unsatisfied with cable or DSL service. Critics will point out that it’s not very fast, kind of expensive, and includes daily usage caps. But this doesn’t deny HughesNet’s role as competition for cable and DSL.

Internet service provided badly enough by the major ISPs would make satellite broadband a viable competitor. If HughesNet’s investors were confident that they could sign up enough customers, they would make the investments that bring satellite broadband to the economy of scale it needs to be price-, speed-, and usage-competitive.

The spur of competition does not have to pierce the horse’s belly to have its effect.

Emotions ran high at this week’s Privacy Identity and Innovation conference in Seattle.  They usually do when the topic of privacy and technology is raised, and to me that was the real take-away from the event.

As expected, the organizers did an excellent job providing attendees with provocative panels, presentations and keynotes talks—in particular an excellent presentation from my former UC Berkeley colleague Marc Davis, who has just joined Microsoft.

There were smart ideas from several entrepreneurs working on privacy-related startups, and deep thinking from academics, lawyers and policy analysts.

There were deep dives into new products from Intel, European history and the metaphysics of identity.

But what interested me most was just how emotional everyone gets at the mere  mention of private information, or what is known in the legal trade as  “personally-identifiable” information.  People get enervated just thinking about how it is being generated, collected, distributed and monetized as part of the evolution of digital life.  And pointing out that someone is having an emotional reaction often generates one that is even more primal.

Privacy, like the related problems of copyright, security, and net neutrality, is often seen as a binary issue.  Either you believe governments and corporations are evil entities determined to strip citizens and consumers of all human dignity or you think, as leading tech CEOs have the unfortunate habit of repeating, that privacy is long gone, get over it.

But many of the individual problems that come up are much more subtle that that.  Think of Google Street View, which has generated investigations and litigation around the world, particularly in Germany where, as Jeff Jarvis pointed out, Germans think nothing of naked co-ed saunas.

Or how about targeted or personalized or, depending on your conclusion about it, “behavioral” advertising?  Without it, whether on broadcast TV or the web, we don’t get great free content.  And besides, the more targeted advertising is, the less we have to look at ads for stuff we aren’t the least bit interested in and the more likely that an ad isn’t just an annoyance but is actually helpful.

On the other hand, ads that suggest products and services I am specifically interested in are “creepy.”  (I find them creepy, but I expect I’ll get used to it, especially when they work.)

And what about governments?  Governments shouldn’t be spying on their citizens, but at the same time we’re furious when bad guys aren’t immediately caught using every ounce of surveillance technology in the arsenal.

Search engines, mobile phone carriers and others are berated for retaining data (most of it not even linked to individuals, or at least not directly) and at the same time are required to retain it for law enforcement purposes.  The only difference is the proposed use of the information (spying vs. public safety), which can only be known after data collection.

As comments from Jeff Jarvis and Andrew Keen in particular got the audience riled up, I found myself having an increasingly familiar but strange response.  The more contentious and emotional the discussion became, the more I found myself agreeing with everything everyone was saying, including those who appeared to be violently disagreeing.

We should divulge absolutely everything about ourselves!  No one should have any information about us without our permission, which governments should oversee because we’re too stupid to know when not to give it!  We need regulators to protect us from corporations; we need civil rights to protect us from regulators.

Logical Systems and Non-Rational Responses

I can think of at least two important explanations for this paradox.  The first is a mismatch of thought systems.  Conferences, panel discussions, essays and regulation are all premised on rational thinking, logic, and reason.  But the more the subject of these conversations turns to information that describes our behavior, our thoughts, and our preferences, the more the natural response is not rational but emotional.

Try having a logical conversation with an infant—or a dog, or a significant other who is upset–about its immediate needs.  Try convincing someone that their religion is wrong.  Try reasoning your way out of or into a sexual preference.  It just doesn’t work.

Which raises at least one interesting problem.  Privacy is not only an emotional subject, it’s also increasingly a profitable one.  According to a recent Wall Street Journal article, venture capitalists are now pouring millions into privacy-related startups.  Intel just offered $8 billion for security service provider McAfee.  Every time Facebook blinks, the blogosphere lights up.

So the mismatch of thought systems will lead to more, not fewer, collisions all the time.

Given that, how does a company develop a strategic plan in the face of unpredictable and emotional response from potential users, the media, and regulators?  Strategic planning, to the extent anyone really does it seriously, is based on cold, hard facts—as far from emotion as its practitioners can possibly get.  The patron saint of management science, after all, is Frederick Winslow Taylor who, among other things, invented time-and-motion studies to achieve maximum efficiency of human “machines.”

But the rational vehicle of planning simply crumples against the brick wall of emotion.

As I wrote in an early chapter of “The Laws of Disruption,” for example, companies experimenting with early prototypes of radio frequency ID tags (still not ready for mass deployment ten years later) could never have predicted the violent protests that accompanied tests of the tags in warehouses and factories.

Much of that protest was led by a woman who believes that RFID tags are literally the technology prophesied by the Book of Revelations as the sign of the Antichrist.  Assuming one is not an agent of the devil, or in any case isn’t aware that one is, how do you plan for that response?

The more that intimacy becomes a feature of products and services, including products and services aimed at managing intimate information, the more the logical religion of management science will need to incorporate non-rational approaches to management, scenario planning and economics.

It won’t be easy—the science of management science isn’t very scientific in the first place and, as I just said, changing someone’s religion doesn’t happen through rational arguments—the kind I’m making right now.

The Bankruptcy of the Property Metaphor for Information

The second problem that kept hitting me over the head during PII 2010 was one of linguistics.  Which is:  the language everyone uses to talk about (or around) privacy.  We speak of ownership, stealing, tracking, hijacking, and controlling.  This is the language of personal property, and it’s an even worse fit for the privacy conversation than is the mental discipline of logic.

In discussions about information of any kind, including creative works as well as privacy and security, the prevailing metaphor is to talk about information as a kind of possession.  What kind?  That’s part of the problem.  Given the youth of digital life and the early evolution of our information economy, most of us really only understand one kind of property, and that is where our minds inevitably and often unintentionally go.

We think of property as the moveable, tangible variety—cattle, collectibles, commodities–that in legal terminology goes by the name “chattels.”

Only now has that metaphor become a serious obstacle.  While there has been a market for information for centuries, the revolutionary feature of digital life is that is has, for the first time in human history, separated information from the physical containers in which it has traditionally been encapsulated, packaged, transported, retailed, and consumed.

A book is not the ideas in the book, but a book can be bought, sold, controlled, and destroyed.  A computer tape containing credit card transactions is not the decision-making process of the buyers and sellers of those transactions, but a tape can be lost, stolen, or sold.

When information could only be used by first reducing it to physical artifacts, the property metaphor more-or-less worked.  Control the means of production, and you controlled the flow of information.  When Gutenberg perfected movable type, the first thing he published was the Bible—but in German, not Latin.  Hand-made manuscripts and a dead language gave the medieval Catholic Church a monopoly on the mystical.  Turn the means of production over to the people and you have the Protestant Reformation and the beginning of censorship–a legal control on information.

The digital revolution makes the liberation of information all the more potent.  Yet in all conversations about information value, most of us move seamlessly and dangerously between the medium—the artifact—and the message—the information.

But now that information can be used in a variety of productive and destructive ways without ever taking a tangible form, the property metaphor has become bankrupt.  Information is not property the way a barrel of oil is property.   The barrel of oil can only be possessed by one person at a time.  It can be converted, but only once, to lubricants, gasoline, or remain in crude form.  Once the oil is burned, the property is gone.  In the meantime, the barrel of oil can be stolen, tracked, and moved from one jurisdiction to another.

Digital information isn’t like that.  Everyone can use it at the same time.  It exists everywhere and nowhere.  Once it’s used, it’s still there, and often more valuable for having been used.  It can be remixed, modified, and adapted in ways that create new uses, even as the original information remains intact and usable in the original form.

Tangible property obeys the law of supply and demand, as does information forced into tangible containers.  But information set free from the mortal coil obeys only the law of networks, where value is a function of use and not of scarcity.

But once the privacy conversation (as well as the copyright conversation) enters the realm of the property metaphor, the cognitive dissonance of thinking everyone is right (or wrong) begins.  Are users of copyrighted content “pirates”?  Or are copyright holders “hoarders”?  Yes.

(“Intellectual property,” as I’ve come to accept, is an oxymoron.  That’s hard for an IP lawyer to admit!)

It’s true that there are other kinds of property that might better fit our emerging information markets.  Real estate (land) is tangible but immovable.   Use rights (e.g., a ticket to a movie theater, the right to drill under someone’s land or to block their view) are also long established.

But both the legal framework and the economic theory describing these kinds of property are underdeveloped at the very least.  Convincing everyone to shift their property paradigm would be hard when the new location is so barren.

Here are a few examples of the problem from the conference.  What term would make consumers most comfortable with a product that helps them protect their privacy, one speaker asked the audience.  Do we prefer “bank,” “vault,” “dossier,” “account” etc.?

“Shouldn’t consumers own their own information?” an attendee asked, a double misuse of the word “own.”   Do you mean the media on which information may be stored or transferred, or do you mean the inherent value of the bits (which is nothing)?  In what sense is information that describes characteristics or behaviors of an individual that person’s “own” information?

And what does it mean to “own” that information?  Does ownership bring with it the related concepts of being bought, sold, transferred, shared, waived?  What about information that is created by combining information—whether we are talking about Wikipedia or targeted advertising?  Does everyone or no one own it?

And by ownership, do we mean the rights to derive all value from it, even when what makes information valuable is the combining, processing, analyzing and repurposing done by others?  Doesn’t that part of the value generation count for something in divvying up the monetization of the resulting information products and services?  Or perhaps everything?

Human beings need metaphors to discuss intangible concepts like immortality, depression, and information.  But increasingly I believe that the property metaphor applied to information is doing more harm than good.  It makes every conversation about privacy a conversation of generalizations, and generalizations encourage the visceral responses that make it impossible to make any progress.

Perhaps that’s why survey after survey reveals both that consumers care very much about the erosion of a zone of privacy in their increasingly digital lives and, at the same time, give up intimate information the moment a website asks them for it.  (I agree with everything and its opposite.)

There’s also a more insidious use of language and metaphor to steer the conversation toward one view of property or another—privacy as personal property or privacy as community property.  Consider, for example, how the question is asked, e.g.:

“My cell phone tracks where I go”

or

“My cell phone can tell me where I am.”

A recent series of articles in The Wall Street Journal dealing with privacy (I won’t bother linking to it, because the Journal believes the information in those articles is private and property and won’t share it unless you pay for a subscription, but here is a “free” transcript of a conversation with the author of the articles on NPR’s “Fresh Air”) made many factual errors in describing current practices in on-line advertising.  But those aside, what made the articles sensational was not so much what they reported but the adjectives and pronouns that went with the facts.

Companies know a lot “about you,” for example, from your web surfing habits (in fact they know nothing about “you,” but rather about your computer, whoever may be using it), cookies are a kind of “surveillance technology” that “track” where “you” go and what “you do,” and often “spawn” themselves without “your” knowledge.

Assumptions about the meaning of loaded terms such as ownership, identity and what it means for information to be private poison the conversation.  But anyone raising that point is immediately accused of shilling for corporations or law enforcement agencies who don’t want the conversation to happen at all.

A User and Use-based Model – Productive and Destructive Uses

So if the property metaphor is failing to advance an important conversation—both of a business and policy nature—what metaphor works better?

As I wrote in “Laws of Disruption,” I think a better way to talk about information as an economic good is to focus on information users and information uses.  “Private” information, for starters, is private only depending on the potential user.  Whether it is our spouse, employer, an advertiser or a law-enforcement agent, in other words, can make all the difference in the world as to whether I consider some information private or not.  Context is nearly everything.

Example:  Is location tracking software on cell phones or embedded chips an invasion of privacy?  It is if a government agency is intercepting the signals, and using them to (fill in the blank).  But ask a parent who is trying to find a missing child, or an adult child trying to find a missing and demented parent.  It’s not the technology; it’s the user and the use.

Use, likewise, often empties much of the emotional baggage that goes with conversations about privacy in the abstract.  A website asks for my credit card number—is that an invasion of my privacy?  Well not if I’m trying to pay for my new television set from Amazon with a credit card.   On the other hand, if I’m signing up for an email newsletter that is free, there’s certainly something suspicious about the question.

To simplify a long discussion, I prefer to talk about information of all varieties through a lens of “productive” (uses that add value to information, e.g., collaboration) and “destructive” (uses that reduce the value of information, e.g., “identity” “theft”).  Though it may not be a perfect metaphor (many uses can be both productive and destructive, and the metrics for weighing both are undeveloped at best), I find it works much better in conversations about the business and policy of information.

That is, assuming one isn’t simply in the mood to vent and rant, which can also be fun, if not productive.

Recent revelations about Microsoft’s internal debate over Internet Explorer’s handling of tracking cookies, as chronicled by The Wall Street Journal earlier this month, have prompted harsh criticism from self-described privacy groups, who’ve called on Congress to investigate Microsoft’s actions. But as Jim Harper pointed out in an excellent WSJ essay, Web users stand to lose a great deal if online tracking is squelched by the hand of government. Data gathering on the Internet is largely harmless, and individually targeted advertising coexists with robust privacy safeguards.

Over on AOLNews.com, my colleague Carolyn Homer discusses these privacy tradeoffs, arguing that Microsoft and other Internet firms have a strong incentive to set privacy defaults that align with their users’ preferences. She points out that most consumers are, in practice, quite willing to live with allegedly “pervasive” tracking in exchange for the enormous benefits that targeted advertising makes possible. While many surveys and polls indicate consumers are very worried about their privacy, the actual decisions that consumers make every day tell a very different story (as documented extensively by Berin Szoka). From Carolyn’s piece:

A body of research reveals a sizable disparity between how much people say they value privacy and how willing they are to actually protect it. In a 2003 Duke Law Journal article, Michael Staten and Fred Cate found that fewer than 10 percent of users exercise their right to opt out and share less. Conversely, if given the opposite choice, fewer than 10 percent of users elect to opt in and share more. The vast middle is apparently indifferent. If consumers were required to affirmatively opt in before sharing data, the Internet’s prevailing advertising-based business model would be decimated. The effectiveness of online advertising in Europe, for example, fell 65 percent after the European Union in 2002 required a blanket opt-in system. For more than a decade, the Internet has thrived on the assumption that most people believe it is a fair trade to receive free content in exchange for viewing ads. Mere advertisements shouldn’t be equated with gross privacy violations.

She goes on to discuss how privacy settings are evolving as consumer preferences adapt to new technologies and firms experiment with new ways to use and collect data. You can read the rest over at the AOL News website.

Wall Street Journal columnist Holman Jenkins has a terrific, wide-ranging interview with Google CEO Eric Schmidt in today’s paper that is well worth reading. One thing worth highlighting is Schmidt’s comments on the “economic disaster that is the American newspaper.”  He argues that, “The only way the problem [of insufficient revenue for news gathering] is going to be solved is by increasing monetization, and the only way I know of to increase monetization is through targeted ads.”

Absolutely correct. It’s a point that Berin Szoka, Ken Ferree and I tried to make in PFF’s mega-filing in the FCC’s “Future of Media” proceeding in early May, and Berin and I stressed it in even more detail in our piece on”Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of News.” The key takeaway: If Washington goes to war against advertising — and targeted advertising in particular — then there will be no future for private news. As we stated there:

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

Thus an attack on advertising is an attack on media / news itself. And yet Washington is currently engaged in an all-out assault on advertising, marketing, and data collection efforts / business models.

Incidentally, Google recently submitted comments with the Federal Trade Commission in reaction to its Staff Discussion Draft about the future of journalism and laid out their views on many of these issues. More importantly, as summarized on pg. 30 (of the pdf) of this Newspaper Association of America filing to the FTC, Google has proposed an interesting monetization model that utilizes Google Search, Google Checkout and DoubleClick ad server, “to build a premium content system for newspapers.”  Worth checking out.  Kudos to Google for taking these steps and to Schmidt for again stressing the importance of targeted advertising for the future of media.