Proposed New York Law Could Doom Online Advertising

Published July 1, 2008

New York lawmakers are contemplating introduction of a bill that would spell doom for the advertising models many expect to fuel the Internet’s future.

Some see the Wild Wild Web as a realm warranting legislative assurances that all information stays private, hidden beyond the reach of marketers without explicit consent. They prefer that we opt in, rather than opt out, of marketing opportunities.

New Advertising Models

An alternative interpretation of the nature of cyberspace is that any advertiser may legitimately assemble information that has been transmitted on what is clearly a very public network.

The server farms and fiber optic cables that power today’s Internet are not cheap, and somebody has to pay for them. Ad revenues indirectly fund many of the network upgrades needed to prepare for the ever-increasing stream of global Web traffic.

As advertisers are expected to tighten their belts as the global economy slows down, effective advertising models are more important than ever. If the Internet is to realize its full potential, firms must be free to develop experimental new methods of delivering ads.

Rise of ‘Smart’ Advertising

Increasingly, today’s “dumb” online advertisements are yielding to “smart,” behavioral ads. By cataloguing individualized information about a user’s browsing tendencies, behavioral advertisers such as Phorm and NebuAd can guess what sort of ads might interest that person, and select which product to promote accordingly.

In this model, advertisers don’t even have to record specific Web addresses. Instead, browsing habits are stored only under broad subject categories such as automobiles or golf. Sensitive Web sites such as WebMD aren’t logged at all.

All this information is tied not to our names but to anonymous identifiers such as cookies or an IP address, which typically cannot be traced back to a particular individual except by court order.

The recent emergence of behavioral advertising reinforces the oft-forgotten reality that there’s more to the Internet than the Web–and there are even more commercially valuable avenues for marketing yet to be discovered. Targeted advertising makes use of heretofore unexploited underlying capabilities of the Internet, possibilities that hadn’t yet occurred to anyone else, just as the original banner ad trailblazers first did years ago.

Consumers Benefit Too

Targeted ads don’t just benefit Web site owners. They are also better able to inform site visitors about products that might actually interest them.

The user who frequents bicycling Web sites, for example, could learn about the latest BMX bargains even when checking the weather or researching allergy medicine. Women might no longer be barraged with Viagra ads, and wine connoisseurs won’t hear about seasonal beer releases.

The ascendance of targeted advertising doesn’t mean personal privacy goes out the window. Privacy protections can coexist with behavioral advertising. Google (among others) has at its fingertips an unprecedented collection of private data analyzed on an impersonal basis to deliver targeted ads on services such as Gmail, benefiting consumers and businesses alike.

Privacy Violations Rare

Even though dozens–perhaps hundreds–of companies collect and store our sensitive personal information, privacy violations are rather rare. The private sector has a solid track record when it comes to protecting user data; the most serious privacy infringements are the government’s fault.

Companies in the “offline” world already collect much the same details as online firms, yet most people are not worried about the video store selling their rental history. This is because reputable firms safeguard user information by operating secure, proprietary environments.

Consider what would happen if Google suffered a data breach. Consumers would lose trust in the Mountain View giant, flocking to competing search engines such as Yahoo and Google’s stock price would plummet, and the company would be dismissed as yet another faded, once-insurmountable powerhouse like AOL or AltaVista.

Market justice is swift, severe, and effective, and it sends a stronger signal to Silicon Valley than any law could.

Consumers Can Protect Selves

On the Internet, consumers are hardly a voiceless mass in need of lawmakers’ protection. Web users have transformed into citizen-journalists, harnessing the power of the blogosphere to express collective discontent. In the age of ubiquitous social networking, any time a company’s information practices chafe, people act.

This phenomenon was evident in the recent Beacon controversy, when Facebook began alerting users to their friends’ purchasing habits. A month later, more than 50,000 people had signed an online petition against the service, and Beacon was shut down.

From Facebook groups to YouTube videos, users are empowered to educate the world about unsavory business practices. When Comcast silently blocked certain file-sharing transfers last year, rumors of the practice first surfaced on Web forum Broadband Reports. Weeks later the Associated Press began covering the story, and eventually even the FCC launched an investigation.

Ultimately, Comcast decided to adopt a more transparent network management system, before any law was enacted.

Business Model Death Sentence

The New York legislation would be a death sentence for the online business models of the future because the bill makes it illegal to record any user behavior unless that user has granted permission to be tracked. Imagine the Web if users viewed ads only if they asked to see them. Fewer eyeballs mean fewer clicks, depriving sites of revenue and giving Web sites little choice but to push unpopular subscription-based services on consumers.

To some extent, advertising is already opt-in. Consumers are able to ignore ads or download simple software to avoid them altogether. Ad-Block, a popular Firefox plug-in, now has more than 2.5 million users, and myriad anonymity services make it easier than ever for concerned users to conceal their IP addresses.

Arguably, the consumer-control ethos–the notion that we don’t have to be tracked–puts consumers, not advertisers, in the drivers’ seat on the Internet’s road ahead. Ultimately, ownership of the collective desktop rests with the user, not the company.

Hypothetical privacy infringements hardly justify a new law to regulate online advertising. The Internet can better serve customers as a realm with few top-down rules. Lawmakers cannot foresee the technical achievements of tomorrow, but laws can indeed stop pioneers in their tracks.

Wayne Crews ([email protected]) and Ryan Radia ([email protected]) are technology policy scholars at the Competitive Enterprise Institute. An earlier version of this article appeared on the CEI Web site. Reprinted with permission.