Study: Government Online Privacy Regulation Costs Consumers

Published July 5, 2010

Government efforts to protect internet users’ personal data from advertisers significantly reduce the effectiveness of online advertising, according to a study by professors at the Massachusetts Institute of Technology and the University of Toronto. “Privacy Regulation and Online Advertising” also concludes government regulation of online advertising hinders companies from earning revenues needed to fund maintenance of the networks users enjoy.
MIT Professor Catherine E. Tucker and UT Professor Avi Goldfarb conducted the study. Tucker notes the pair examined what happened to the effectiveness of online advertising in Europe, where governments have adopted a more intrusive role in regulating online companies’ privacy standards than in the United States. She says government regulation, even moderate cases, kills more than half the effectiveness of online advertisements.
Double the Cost
“We studied Europe’s government, top-down strictures on what online companies can and cannot do with consumer data,” Tucker said. “We are not saying we do not want privacy regulation—it’s a good idea—but we sought to examine [what] the consequences of light, moderate, and heavy regulation might be….
“What we found is that moderate government regulation of privacy standards for online companies generally results [in a] 65 percent lowering [of] advertisement effectiveness,” she continued. “So what our study strongly suggests is that any form of government privacy regulation makes the process of matching advertising and consumer harder. Government regulation of online privacy standards is tying one hand behind our backs.”
If Washington imposes privacy regulations similar to Europe’s, Tucker explained, it will increase advertisers’ costs in ingmatch advertisements with consumer tastes.
“What our study suggests is that if nothing else changes in the market, [advertisers] will end up having to pay twice as much to achieve the same result,” she said.
Customer Control Cited
Stanford University Marketing Professor S. Christian Wheeler notes customers always have control over their privacy data.
“People can always take measures to control information about them. Certainly people can restrict access to their data, and many companies have found this to be true,” Wheeler said.
Wheeler also stresses it is difficult—and therefore expensive—for companies to process all this data and use it effectively in advertisements.
“Iit is one thing to collect information and a second thing to analyze it. It is easy to collect data from supermarket checkouts to online, but hard to analyze it,” Wheeler said.
Loss of Trust
Rebecca Jeschke, spokeswoman at the Electronic Frontier Foundation, a privacy advocacy group, says her organization understands Web sites such as Facebook and MySpace need to generate revenue in order to survive and that part of that involves selling user data to advertisers.
“People here certainly understand that these companies do need to make money, that what they are doing is not a public service for the people of the world—to build and maintain these gigantic systems. They need to monetize them.”
However, she noted, the sites’ users can see excessive sharing of personal information as a betrayal of trust.
“The issue with Facebook and others is, have they pushed it too far? They have angered their user base. I think that most people know that they are giving something up for the free service, but Facebook has taken it to a level that people fundamentally did not understand,” she said.
Individual Awareness Advocated
Tucker hopes users of online networks will become more informed about how their personal data is being used, instead of embracing more government regulation of a burgeoning industry.
“I think one of the missing parts in this is customer awareness over how their private data is being [used] and potentially abused by advertisers,” she said. “Most of this debate is between privacy advocates and media companies, and I think what is going to change in five years time is a greater awareness on the part of the customers of how their data is being used currently.
“And so, as a result, if one is to be optimistic, we set aside putting in place paternalistic regulations and trust that the customer is aware of what will happen to their data if they use one of these networks and are still willing to engage them,” she concluded.
Thomas Cheplick ([email protected]) writes from Cambridge, Massachusetts.
Internet Info

“Privacy Regulation and Online Advertising”: