Progress Snapshot 5.10 from The Progress & Freedom Foundation

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

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

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

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

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

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

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

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

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

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

The Direct Benefit of Tailored Ads: Relevance

Whatever Americans tell pollsters about “tailored” ads, they also complain about irrelevant ads: A previous poll found that 72% of consumers “find online advertising intrusive and annoying when the products and services being advertised are not relevant to [their] wants and needs” and 85% say that less than 25% of the ads they see while browsing online are relevant to their wants and needs. Real-world experiments confirm that users reveal a clear preference for more relevant advertising. In a 2004 experiment, click-through rates (CTR) for behaviorally targeted ads were between 94% and 225% higher than for contextually targeted ads. A 2009 study found that the difference could be between 670% and 1000% percent, depending on how well-tailored the ads were. In other words, users in the real world were two to eleven times more likely to click on highly-tailored ads. Truly, actions speak louder than words: Users clearly “vote with their clicks” for ads they find relevant—i.e., they vote for “tailoring.”

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

The Indirect Benefit of Tailored Ads: Free Content & Services

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

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

1. Producing the first unit of content (e.g., a news story or video) remains costly, so while the marginal cost of every additional unit is essentially zero,average cost is not.
2. The failure of micropayments online seems to confirm that, no matter how low the technological transaction costs are, the mental transaction costs involved combined with even tiny payments will exceed the perceived value of most content.
3. The world of media scarcity in which consumers could choose from only a few sources of content (e.g., news, entertainment) has given way to a world of staggering media abundance and the choices of users are no longer constrained by the tyranny of physical limitations like distance and printing costs.
4. Because pure information cannot be copyrighted (and fair use allows significant referencing and quotation), very little content is so unique that users cannot find a ready substitute elsewhere if a site (or even cartel of sites) attempted to charge.

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

In short, advertising is indispensable to the future of online media, but it is also currently inadequate to sustain “Free” culture. As Adam Thierer and I warnedearlier this year: “The advocates of regulation pay lip service to the importance of advertising in funding online content and services but don’t seem to understand that this quid pro quo is a fragile one: Tipping the balance, even slightly, could have major consequences for continued online creativity and innovation… Something must give because there is no free lunch.” In 2001, long before Google mattered and before he worked for them, Kent Walker (now Google’s general counsel) put it best in a seminal law review article:

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

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

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

We Need a Behavioral Economics Experiment, Not Just Another Poll

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

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

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

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

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

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

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

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

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

There is only one approach that can address all these concerns: educate users about how online advertising works and how they can implement their own privacy preferences, while constantly striving to further empower users to make privacy management easier.

Fred Vogelstein’s essay in Wired, “Great Wall of Facebook: The Social Network’s Plan to Dominate the Internet — and Keep Google Out” describes the intensifying clash between Google and Facebook—a clash that focuses on the ability to target advertising:

Like typical trash-talking youngsters, Facebook sources argue that their competition is old and out of touch. “Google is not representative of the future of technology in any way,” one Facebook veteran says. “Facebook is an advanced communications network enabling myriad communication forms. It almost doesn’t make sense to compare them.”

Apart from noting that Facebook directs users to Microsoft’s Bing as its default search engine for the Internet at large, the most interesting part of the article is Facebook’s “4-Step Plan for Online Domination”:

1. Build critical mass. In the eight months ending in April, Facebook has doubled in size to 200 million members, who contribute 4 billion pieces of info, 850 million photos, and 8 million videos every month. The result: a second Internet, one that includes users’ most personal data and resides entirely on Facebook’s servers. 2. Redefine search. Facebook thinks its members will turn to their friends—rather than Google’s algorithms—to navigate the Web. It already drives an eyebrow-raising amount of traffic to outside sites, and that will only increase once Facebook Search allows users to easily explore one another’s feeds. 3. Colonize the Web. Thanks to a pair of new initiatives—dubbed Facebook Connect and Open Stream—users don’t have to log in to Facebook to communicate with their friends. Now they can access their network from any of 10,000 partner sites or apps, contributing even more valuable data to Facebook’s servers every time they do it. 4. Sell targeted ads, everywhere. Facebook hopes to one day sell advertising across all of its partner sites and apps, not just on its own site. The company will be able to draw on the immense volume of personal data it owns to create extremely targeted messages. The challenge: not freaking out its users in the process.

Facebook can’t keep losing money forever.  Indeed, investors are willing to keep sinking money into Facebook during Phases 1-3 because they think it will pay off in Phase 4—when Facebook really threatens to be a fGoogle-killer.  But rather the fact that investors are willing to subsidize the creation of a wonderful platform now used by 200 million people (one fifth of all Internet users worldwide), or that Facebook might finally provide a counter-weight to the fearsome Google, the People for the Ethical Treatment of Data (PETD) are appalled.  One commenter on the Wired story put it best:

I find it amazing that people will willingly post personal information to websites that will only use it for data mining and advertising revenue. They lay their entire life open to a corporation that’s only looking to profit from the information said corporation can gather for itself or it’s affiliates. When the government reads our emails, listens to our phone conversations, reads our text messages and monitors what we do online people are outraged at the invasion of our privacy. But then they log in to Facebook or Myspace or Twitter and reveal all. The Facebook “community”. Please. It’s a way for Big Business to pry into our private lives and exploit us in any way they can for the money they can make.

Such arrogant entitlement is astonishing—but hardly atypical: What makes this person (or his PETD comrades) so certain that they really know what’s best for everyone else and that Facebook users are poor, ignorant suckers being victimized by corporate greed?  As Adam Thierer and I have been saying, there is no free lunch! Do the PETD folks expect investors to pour hundreds of millions into building innovative social networks like Facebook out of… love?  As Adam Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

While most in the PETD crowd are too young (or just historically deprived) to know the words to  The Internationale (my favorite line: “Masses, slaves, arise, arise!”), one can easily imagine them kicking off PETD meetings with a somewhat more recent anthem, Aquarius, from the hit 1967 rock musical Hair:

When the moon is in the Seventh House And Jupiter aligns with Mars Then peace will guide the planets And love will steer the stars This is the dawning of the age of Aquarius Harmony and understanding Sympathy and trust abounding No more falsehoods or derisions Golden living dreams of visions Mystic crystal revalation And the mind’s true liberation

Nothing better captures the spirit of that thankfully-bygone era of narcissistic self-indulgence than the beginning of the 1979 film version:

Yes, Virginia, the marijuana-induced socialist-utopian delusions of the Sixties live on in a new generation of Techno-Aquarians, who want to have their digital cake—and eat yours too.  Something for nothing, free lunch for everyone!  Down with profit, up with privacy!  The “vision” (as in “Golden living dreams of”) behind this frenzy of frustration with online capitalism and PETD’s demands for regulation is what Thomas Sowell has called the “Vision of the Anointed,” “the talented few” who consider themselves wiser than everyone else, and therefore seek to impose their preferences on others, as Adam Thierer and I have both discussed.

But back to Wired:

The drumbeat of controversy surrounding Facebook illustrates the catch-22 the social network faces: It has a massive storehouse of user data, but every time it tries to capitalize on that information, its members freak out. This isn’t an academic problem; the company’s future depends on its ability to master the art of behavioral targeting—selling customized advertising based on user profiles. In theory, this should be an irresistible opportunity for marketers; Facebook’s performance advertising program allows them to design and distribute an ad to as narrow an audience as they would like. (It has also developed a program to create ads that are designed to be spread virally.) But as the Beacon debacle showed, there is a fine line between “targeted and useful” and “creepy and stalkerish”—and so far, not enough advertisers have been willing to walk that line… In a way, Facebook’s dilemma extends from its success. Users see the site as sanctified space, a place to engage in intimate conversations with friends—not to be laser-beamed by weirdly personal advertising. But with initiatives like Connect and Open Stream, Facebook can sell ads beyond its own site. Just as Google’s AdSense program sells ads on any participating Web site, Connect and Open Stream will eventually push Facebook-brokered advertising to any member site or app. But unlike with AdSense, Facebook’s ads could be exquisitely tailored to their targets. “No one out there has the data that we have,” says COO Sandberg.

Better targeted ads?  More useful information for Internet users?  A strong competitor for Google that could provide an alternative channel for advertisers and help drive up advertising revenue for publishers of “free” content and services?  Sounds great for all concerned.  Oh, but some people find relevant advertising “creepy?”  Ah, well, let’s call the whole thing off!  I’m sure Facebook will get by just fine selling crudely targeted ads on its own site for pennies a click.  Maybe they could ask for donations or hold a digital bake-sale (including tie-dyed t-shirts, of course)? Or we could just have “the government” support the most popular social networks (along with newspapers, banks, hedge funds and car manufacturers). And while they’re at it, why not have wise bureaucrats use antitrust laws to cripple Google and thus make up for the lack of a competitive threat from Facebook and the other Google-killers-that-might-have-been?

Wired suggests that Facebook’s strategy played some role in causing Google to embrace Interest-Based (behavioral) Advertising, playing catch-up to No.2 Yahoo!:

Google has even shown a willingness to join Facebook in gingerly tapping the third rail of Internet marketing—behavioral targeting. The search giant has long assured its users that it would never use their personal information to deliver targeted advertising, relying instead on aggregate data or search activity that preserves anonymity. (“There is a line with users that you don’t want to cross,” Google CEO Eric Schmidt said in the wake of the Beacon controversy.) But in March, Google started its own behavioral targeting campaign—tracking users’ browsing to deliver more-customized ads. Users have the option to either edit their profiles or opt out entirely.

With Google in the game, the fight is on.  The grand prize is clear—tapping into the most lucrative advertising purchased by leading brands:

Today, global online brand advertising accounts for just $50 billion a year. Offline brand advertising, meanwhile, accounts for an estimated $500 billion.

But I doubt there will ever be any clear “winner” in this race.  Instead, we’re likely to see fierce competition and ongoing one-upsmanship over the coming decade (and beyond) for users, for user data, and for they ad dollars they bring, among a variety of paradigms for what the Internet of the future should look like.  Facebook has already started implementing its paradigm with  Connect (launched Dec. 2008) and  Open Stream API (launched April 2009):

Connect and Open Stream don’t just allow users to access their Facebook networks from anywhere online. They also help realize Facebook’s longtime vision of giving users a unique, Web-wide online profile. By linking Web activity to Facebook accounts, they begin to replace the largely anonymous “no one knows you’re a dog” version of online identity with one in which every action is tied to who users really are. To hear Facebook executives tell it, this will make online interactions more meaningful and more personal…  But you don’t build a competitor to Google with people alone. You need data. And Connect and Open Stream are intended to make Facebook a much more powerful force for collecting user information. Any time someone logs in to a site that uses Connect or Open Stream, they give Facebook the right to keep track of any activity that happens there—potentially contributing tons more personal data to Facebook’s servers. Facebook Connect and Open Stream are also designed to make each user’s friend network, which belongs to Facebook, even more valuable and crucial to the Web experience. Together, they aim to put Facebook users’ social networks at the center of all they do online.

I, for one, think this competition will create enormous value for users by driving innovation that improves the usefulness of the Internet and increases the amount of funding available for an ever-greater, ever-richer torrent of “free” (ad-supported) content and services.  But if the Techno-Aquarians at PETD succeed in imposing regulatory mandates on the collection and use of online data through legislation or creeping regulation at the FTC, the Internet of the future won’t look all that different from the Internet of today: online content and services will continue to attract a small share of all ad dollars (just 7% in 2008), search engines will reap the bulk of that (42% in 2008), and most online content-publishers and service-providers will continue to get literally pennies per click while only a few are able to meet evolving standards of quality with purely ad-supported business models.

Heaven forbid we should allow those who offer “free” content and services to extract… profit from the unwashed masses of helpless consumers who are either too stupid, too lazy or too ignorant to manage their own privacy, no matter how powerful the privacy management tools at their disposal! The better alternative is empower users to make their own decisions about privacy, rather than imposing top-down “Industrial Policy for the Internet” on the entire country through outright prohibitions or restrictive defaults concerning data collection and use for targeting advertising—as Adam and I have said:

The ideal state of affairs would be to create a system of tools and data disclosure practices that would empower each user to implement their personal privacy preferences while also recognizing the freedom of those who rely on advertising revenues to “condition the use of their products and services on disclosure of information”—not to mention the viewing of ads!

As Google and Facebook do battle with each other, Microsoft, Yahoo! and other upstart rivals as-yet-unknown, I only hope they all—particularly their government affairs departments—remember that their common enemy is the Techno-Aquarians who seek to impose their subjective preferences about privacy on everyone else, no matter the costs to innovation, consumers, culture or media. We’ll discuss these trade-offs at our upcoming PFF Capitol Hill Briefing on July 10.

I’ve already laid out my own reactions to Google’s roll-out of an “interest based advertising” (IBA) program here.  In a nutshell, I applauded Google setting a new “gold standard” in user empowerment by providing:

• Notice in their IBA-targeted ads of who’s paying for the ad and the fact that Google is serving it; and 
• A link to a powerful “Ad Preference Manager” that allows users to:
  • See and modify the “digital dossier” (to use the fearmonger’s term) of interests associated with the cookie on their computer; and 
  • Opt-out of tracking for IBA purposes.    

But as I predicted, despite these pro-privacy features (and despite the fact that other major companies such as Yahoo! and Microsoft already have IBA programs), a number of privacy advocacy organizations are attacking Google for daring to enter the IBA (or “online behavioral advertising”) business at all.   I’ll have much more to say about the criticism of Google’s new Ad Preference Manager soon, especially coming from Marc Rotenberg of EPIC (a “disaster“) and Jeff Chester of CDD—precisely the sort of the “paroxysms of privacy hysteria” I predicted.  

But first, the criticism from Ari Schwartz of the Center for Democracy & Technology requires a response today.  At its best, CDT plays a vital role in calling corporations to continually raise the bar on privacy.  My own think tank, the Progress & Freedom Foundation, works closely with CDT on many issues, such as advocating user empowerment through technological means as a constitutionally “less restrictive” way of protecting children than government censorship.

 Here’s what Ari had to say:

[T]he opt-out is based on a failed premise. The truth of the matter is that the industry needs to work together to move beyond the discredited cookie opt-out model….  Google claims to have improved upon the old model by creating a plug-in for users to keep their opt-out cookie while deleting the rest of their cookies. While as a technical matter that may be true, without an industry-wide solution these plug-in options just serve to confuse users about what they need to do to protect themselves. If this plug-in approach catches on, will users need to download a plug-in from every network advertiser and every analytics company to stop the tracking? That model just isn’t sustainable.

Ari is setting up a straw man when he suggests that users are going to have to download a separate plug-in for every ad network.  The obvious solution, as Ari points out, is an industry-wide plug-in. But if it’s so obvious, why can’t CDT just write it themselves?  Indeed, why didn’t they write it years ago?

These aren’t rhetorical questions.  I  really  want to know what would be required to create a plug-in that does what Google’s plug-in does for every other ad network’s opt-out cookie in the Opt-out tool developed by the Network Advertising Initiative (NAI):  Maintain “persistent” user choice by checking to see whether a user has deleted whatever their opt-out cookies and, if so, restoring those cookies.  

CDT will probably insist that, if it’s really so easy to create such an industry-wide plug-in, NAI should have done so years ago.  Maybe so.  Perhaps if the industry had moved faster to innovate in privacy protection, they would be in a stronger position right now politically.  Of course, if the industry moves slowly in this regard, maybe that’s because they’ve got their hands full trying to keep advertising, the economic engine that funds the Internet’s “free” content and services, working-a reality Ari ignores.  Or perhaps it wouldn’t matter:  It seems that no matter what industry might do, it’s just not good enough for Ari.  Under the banner of “Keeping the Internet Open, Innovative and Free,” Ari is in fact leading CDT in a full-on attack on the Internet, pushing for regulation that will make the Internet:

• Less “Open” to competition among service providers and the diversity of voices and choices produced by online content creators who depend on advertising;
• Less “Innovative” in terms of new content, new services, new online personalization technologies, and new advertising business models that could broaden the base of economic support for the entire Internet; and
• Less “Free” both in political terms—“free” from government regulation and controls—and in financial terms—“free” to users because advertisers foot the bill.

CDT ignores these very real costs to crippling online advertising, which will ultimately be borne by the very consumers whom CDT claims to be protecting.  This is precisely why Adam Thierer and I have argued so strongly for a layered approach (and here at page 7) to privacy concerns about online advertising that combines self-regulation and tough FTC enforcement of privacy policies with a recognition that only by empowering individual users to make their own choices can we balance inherently subjective concerns about privacy with the need to fund the Internet’s future:

We stand at an important crossroads in the debate over the online marketplace and the future of a “free and open” Internet.  Many of those who celebrate that goal focus on concepts like “net neutrality” at the distribution layer, but what really keeps the Internet so “free and open” is the economic engine of online advertising at the applications and content layers.  If misguided government regulation chokes off the Internet’s growth or evolution, we would be killing the goose that laid the golden eggs. 

Back to the plug-in…  CDT argues that the opt-out cookie system is flawed in respects other than ensuring the persistence of user opt-outs.  We can debate that question.  But I’d just like to get a clear answer once and for all about why CDT hasn’t already developed this plug-in themselves.

Here‘s the NAI opt-out, Ari, and here‘s the code for Google’s plug-in—it’s open source! How much easier could Google have made this for you?  Quit yapping and start coding! 

Since CDT doesn’t seem up to the task, we’ve already modified the Google plug-in to preserve another ad network’s opt-out cookie (download our beta plug-in here) and are currently working to expand the plug-in to work for multiple cookies—which is simply a matter of coding.  We’d welcome help from anyone with experience in writing Firefox plug-ins. 

NAI could (and probably should) do this, themselves.  But if CDT wants to start being philosophically consistent about empowering consumers across in the board —on privacy issues as well as child protection issues—writing this plug-in themselves is a great way to shame the rest of the advertising industry into picking up where Google left off.   I suspect CDT’s failure to do so thus far reflects a crass political calculation that anything they does to empower users to manage their own privacy through technical solutions simply undermines their arguments that only government can protect users—thus weakening their push for regulation.  So much for CDT’s declared mission of “seek[ing] practical solutions to enhance privacy!”

Statue at FTC Headquarters: “Man Controlling Trade” (We’re rooting for the horse!)

Adam Thierer and I have just released a new PFF paper entitled “Targeted Online Advertising: What’s the Harm & Where Are We Heading?” (PDF) about the FTC’s new “Self-Regulatory Principles for Online Behavioral Advertising.”  Adam lampooned some of the attitudes at play in this debate in a great rant yesterday.

But we give the FTC credit for resisting calls to abandon self-regulation, and for its thoughtful consideration of the danger in stifling advertising-the economic engine that has supported a flowering of creative expression and innovation online content and services.  That said, we continue to have our doubts about the FTC’s approach, however-well intentioned:

1. Where is this approach heading?  Will a good faith effort to suggest best practices eventually morph into outright government regulation of the online advertising marketplace?
2. What, concretely, is the harm we’re trying to address?  We have asked this question several times before and have yet to see a compelling answer.
3. What will creeping “co-regulation” mean for the future of “free” Internet services?  Is the mother’s milk of the Internet-advertising-about to be choked off by onerous privacy mandates?

We stand at an important crossroads in the debate over the online marketplace and the future of a “free and open” Internet. Many of those who celebrate that goal focus on concepts like “net neutrality” at the distribution layer, but what really keeps the Internet so “free and open” is the economic engine of online advertising at the applications and content layers. If misguided government regulation chokes off the Internet’s growth or evolution, we would be killing the goose that laid the golden eggs.

The dangers of regulation to the health of the Internet are real, but the ease with which government could disrupt the economic motor of the Internet (advertising) is not widely understood-and therein lies the true danger in this debate.  The advocates of regulation pay lip service to the importance of advertising in funding online content and services but don’t seem to understand that this quid pro quo is a fragile one: Tipping the balance, even slightly, could have major consequences for continued online creativity and innovation.

As we conclude:  Self-regulatory efforts can be refined, especially through technological innovation to better satisfy the concerns of policymakers, privacy advocates, and average consumers.  For example, if websites and ad networks participating in a self-regulatory framework supplemented their current “natural language” privacy policies with equivalent “machine-readable” code, that data could be “read” by browser tools that would implement pre-specified user preferences by blocking the collection of information depending on whether the privacy policies of certain websites or ad networks met the user’s preferences about data-use. Such robust and granular disclosure, if implemented for behavioral advertising, would exceed the wildest dreams of those who argue that users currently do not read privacy policies-without disrupting the browsing experience or cluttering websites.  But this system would only work if users had to make real choices about paying for”‘free” content and services by disclosing their personal information.

Truly privacy sensitive users should be free to opt out of whatever tracking they find objectionable-but not without a cost:  The less data they agree to share, the less content and services they can fairly expect to receive for free.  Concretely, this means that they might not be able to access certain sites, content, or functionality without watching extra (untargeted ads), or paying for that content or service (assuming such a micropayment model can be worked out).  Of course, there will always be ways to “cheat” in such a system, but Commissioner Harbour is exactly right on one point:  Each content creator and service provider must be “free to strike whatever balance it deems appropriate.” This freedom is vital to the Internet’s future because the easier we make it for some users to get “something for nothing,” the smaller will be the economic base for the content and services everyone else takes for granted.  Again, there is no free lunch.

You can download our paper in PDF form on the PFF website or view it below in Scribd.  (Click the rectangle-in-rectangle button at the top right to maximize the iPaper viewer.)

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

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

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

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

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

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

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

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

The Online Advertising Market

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

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

The Perceived Harm Driving Calls for Regulation

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

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

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

The Less Restrictive Means: A Layered Approach

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

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

The Benefits of Smarter Advertising

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

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

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

The Larger Implications of Potential Regulation

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

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

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

Conclusion

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

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