5 Reasons Why the Federal Trade Commission's Proposed Online Privacy Rules Will Do More Harm Than Good

How self-regulation, consumer choice and free market models are the best tools to protect online consumer privacy

The Federal Trade Commission (FTC) last week published its policy recommendations for the protection of consumer privacy online. While the agency gives lip service to industry "self-regulation," it nonetheless asks Congress for legislation that would impose top-down controls on information collection that could undermine the future growth, innovation and economy of all web-based information services.

The digital economy runs on information. Any regulations that impede the collection and processing of any information will affect its efficiency. Given the overall success of the Web and the popularity of search and social media, there's every reason to believe that consumers have been able to balance their demand for content, entertainment and information services with the privacy policies these services have.

In order to understand what's at stake, it's important to understand what type of data the FTC is addressing. This is not about protection of confidential information, such as bank accounts, social security numbers, and other information that, if disclosed, pose a real threat of theft or fraud. Currently Internet privacy protection in this respect is quite strong. Companies that promise to safeguard sensitive personal information and fail to do so have incurred hefty legal and civil penalties.

Instead, the FTC is seeking to regulate the way websites use data that is supplied voluntarily by users. This includes data collected from site visits, searches and "likes" and "dislikes" checked off on social networking sites. This data is then used to deliver or "serve" ads on websites that users visit. Because the display of a particular ad is derived from user preferences, the ad itself is more relevant.

This same information also personalizes the site experience. It's why weather websites can be set to one's hometown, maps can be oriented to one's current location, why e-commerce sites can hold items in "shopping carts" and remember past orders. All of these services, which provide immense value to consumers at no additional cost to them, are possible because users make the decision to provide information about themselves, their preferences, their tastes and location.   

These platforms are so effective that other Web companies are springing up with variations of the theme. Groupon offers online coupons that help businesses better target consumers interested in their product. Foursquare combines social networking with mobility. Yelp combines search, directory services and location tracking to help consumers get immediate directions to - and comments about - nearby businesses, be they gas stations, hardware stores or coffee shops. Pinterest, which describes itself as an online pinboard, integrates social networking with photos and video in a way that allows users to organize design ideas, wardrobe options, gourmet cooking and any other concepts with a strong visual component.

The FTC's proposed rules, however, treat Americans as if they are children that can't be trusted with their own privacy decisions. And it seeks a regime in which websites will default to a position of gathering no information as visits won't be "tracked" without specific opt-in from the user. For the consumer, the result could be a requirement to enter one's home address every time one seeks a weather update. Meanwhile, online shopping carts would automatically empty if the user goes offline before checking out.

Consider an equivalent situation in the real world. You have gone to a store with your 15-month-old daughter and are half way through your shop when she starts crying. You realize she needs changing and so take her to the restroom. You leave your cart outside the bathroom, and while you are wrestling with your daughter's dirty diaper, a friendly shopping assistant notices that you haven't put a sign affirming that you have 'opted in to the temporary storage of shopping while changing diapers' and so removes your cart and places all the items you have selected back on the shelves. This would be your virtual reality should Congress implement the FTC's proposed rules

Consumers who are concerned about privacy can enable "do not track" features that are easily accessible in all web browsers. They can opt-out of site registration. They do not have to join social media sites, and they can use search engines like Ixquick that do not track search terms. Of course, in doing so, they sacrifice some of the Web's robustness. But that's the trade-off.

Congress and the FTC should recognize that many consumers are willing to trade some degree of personal information in return for free content and personalized services, and that substantial opt-out mechanisms exist for those who don't. Self-regulation, consumer choice and free market models already work. Imposing regulations can only hurt. Here are five reasons why:

Top-down mandates slow technology innovation

Legislative and regulatory directives pre-empt experimentation. Consumer needs are best addressed when best practices are allowed to bubble up through trial-and-error. When the economic and functional development of European Web media, which labors under the sweeping top-down European Union Privacy Directive, is contrasted with the dynamism of the U.S. Web media sector which has been relatively free of privacy regulation - the difference is profound.

An analysis of the web advertising market undertaken by researchers at the University of Toronto found that after the Privacy Directive was passed, online advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world. Even when the researchers controlled for possible differences in ad responsiveness and between Europeans and Americans, this disparity manifested itself. The authors go on to conclude that these findings will have a "striking impact" on the $8 billion spent each year on digital advertising: namely that European sites will see far less ad revenue than their foreign counterparts.

Free services go away and paywalls go up

Thousands of sites support themselves through targeted advertising. If the federal government began to clamp down on websites' ability to use consumer information to target ads, an immediate consequence would be the decline of the amount of free content, information and services available on the Web. Regulation would add a new compliance burden on any startup hoping to use targeted ads, creating an obstacle that would affect capitalization requirements at best and kill the business model for free services at worst.

Consumers push back when they perceive that their privacy is being violated

Google and Facebook, two of the largest and most visible Web-based enterprises that collect user data, have felt user backlash on several occasions when they have changed their privacy policies or, in the eyes of users, have disregarded them. In every case the companies reacted and adjusted before the government could get a handle on the problem. Just as important, despite their missteps, neither Facebook nor Google lost much in terms of user goodwill. Their CEOs apologized and promised to do a better job communicating privacy policy and any changes. They serve as excellent examples of how the market can correct itself when consumers express displeasure.

 Web advertising lives or dies by the willingness of consumers to participate

As a corollary to the point above, websites which derive revenues from targeted advertising must be sensitive to user perception because if users believe they have been exploited, they will stop visiting the site. Once that happens, advertisers go away, too. Although they are dominant at the moment, there are no guarantees that Google or Facebook will remain so. MySpace is an example of a social network that dominated its space. But its reputation as being a largely unsupervised community for teens, and its trouble with  phishing, malware and spam, as well as overhyped reports of it being an easy source of pornography and a haven for child predators, ultimately were fatal.

Facebook and LinkedIn, however, learned from MySpace's mistakes. Nonetheless, MySpace's failures adequately to meet user satisfaction levels, especially after Facebook and LinkedIn arrived on the scene, demonstrates that users will move away from a popular site if they are unhappy with its privacy approaches.

Greater information availability is a social good

An unfortunate aspect of the FTC's call for privacy regulation is that it assumes from the start that commercial information gathering and targeted advertising are questionable practices from which consumers need to be protected. In truth, information gathering in all areas of market research, but certainly audience research in media, has a long and valued history. Consumers historically have been willing to provide information about age, gender, income, lifestyle, preferences and tastes in return for more streamlined and customized information about products and services which might interest them.

While these mechanisms serve the specific needs of buyer and seller, it is worth noting that there are wider social benefits when more information is available to buyers and sellers. For one, limited resources can be allocated better. Suppliers can know which regions of the country will have the greatest demand, and adjust their distribution networks to meet it. Product goes to where it's most needed; more value is derived from transportation costs, and there is less waste. These are just basic examples. When this is applied to thousands of parameters across global markets, productivity and wealth begin to grow throughout the economic ecosystem.

There can be nothing more counterproductive to an information economy than government policies designed deliberately to inhibit the voluntary exchange and use of information. At present, search, social media and informational websites are the most visible users of consumer information. In the near future this will extend to thousands of automated, intelligent services, from web-enabled refrigerators that sense when you're low on milk, to critical health care management services - all of which will trade user information. The applications we already see on the iPad and other web-enabled tablets point the way. This is why privacy policies should emerge from detailed knowledge of the practices of consumers rather than being codified into laws that, in their failure to foresee innovation, will short-circuit it.

Steven Titch is a policy analyst at Reason Foundation.





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