What’s the Big Deal About Internet Privacy (Part 3)

This is the third installment of a four part series on the recent repeal of the 2015 FCC privacy rule. Here are links to Part 1 and Part 2.

Part 3: Stakeholder concerns – who are the winners and losers?

 

The Winners – ISPs and Retailers

ISPs are the only real winners of the FCC rule roll-back, and honestly, they had a lot at stake. Targeted ads have become an essential component of ISP growth strategies, for very good reason: the market for cellular connectivity isn’t really growing – everyone basically has a provider, which means the game is less about finding new customers and more about getting them to switch, usually by offering heavily reduced prices; Fiber to the home (FTTH) and cable markets are growing, but network build-outs are costly and slow, limiting near term profitability; ISPs are faced with dwindling options for growth: they can either get customers to buy more services, or find other ways to monetize the value of their customer base. The former is a tough proposition – you can’t just raise prices on basic services or customers will switch providers. Offering new services to consumers (think TWC’s “intelligent home” offering) will only get you so far, as it requires the customer to value the service enough to reallocate their disposable income away from something else. That basically leaves monetizing customer data as the most viable option, and certainly the most profitable one. The U.S. advertising market was worth ~$200 billion in 2016 (by far the largest in the world), with over $50B spent on digital advertising. ISPs want a piece of that pie, and the FCC rule would have made it more difficult to compete by requiring customers to consent to the collection and sale of their data.

ISPs are well positioned to compete in certain segments of the digital ad market, in particular with targeted ads. Somewhere around $22B will be spent on programmatic ad buys in 2016, and that number is widely expected to grow aggressively through 2020.  (“Programmatic” advertising is basically another term for targeted advertising, where an automated platform matches the brand/buyer with the desired target audience).  Types of programmatic advertising include audience (targeted based on demographics), behavioral (targeted based on online activity), retargeting (targeted based on search history), and geotargeting (location-based targeting). A great summary of these categories can be found here.

I would wager that demographic-based targeting isn’t particularly exciting for ISP’s, nor is retargeting, where search and social media platforms will likely continue to be better positioned.  ISPs have terrific ability to deliver location-based ads on both mobile and in-home devices, which up to this time has been done primarily through application or O/S software, and no doubt they will wade into these waters.  But even this pales in comparison to the opportunity presented by behavioral targeting. There is growing consensus among advertising professionals that behaviorally-tailored as are among the most effective ways to motivate a purchase, but internet platforms are still developing and refining their tools and trying to prove that they’re effective. It’s a growth market with very strong demand for a quality product, and plenty of room for new entrants.  ISPs have a significant potential competitive advantage, in that their networks could provide unparalleled visibility into the online activity of individuals across multiple devices.  ISPs simply have access to more data points about an individual, and these data points are the raw material from which they, or their advertising partners, can build a nuanced a picture of who that person is. Social media platforms (i.e. Facebook) can provide valuable insights about some users, but what about the population that rarely or never uses social media?  ISPs can provide similar or potentially better insight into the habits and mindsets of these consumers. Think about what the sum of your online activity, television viewing habits, and other interactions with connected devices could reveal about you, and what that would be worth to advertisers.

Retail brands seeking effective marketing channels stand to gain as well, as increased competition in the digital advertising space will lead to lower prices and better products.

 

The Losers – Internet Platforms and American Consumers

Search and social media platforms had a clear financial interest in keeping ISPs out of the targeted advertising market, as ISPs are now a competitive threat in their core advertising markets.  This isn’t the first time Internet giants and ISPs have butted heads on policy – they stood on opposite sides of the net neutrality debate as well, for similar reasons (primarily financial).  But once again, the policy interests of Internet Platforms happen to align with the interests of consumers.

The business model these companies use – providing free, high quality services that consumers want, paid for by advertising revenue – is a model that consumers have more or less accepted, depending on the service.  If you don’t want to see ads, some sites and apps allow consumers to pay for an ad-free version of the service. If a site or app insists on collecting cookies, you can always find an alternative or choose not to use the service at all.  ISP’s business models, and the nature of the services they provide, are different. People pay for internet connectivity – sometimes quite a high monthly rate.  And now every service people use, all the data that flows back and forth on that network is visible to a single company.

I would argue there should be greater privacy protections for consumers everywhere – whether it’s a search engine, a social media platform, a mobile app, or an ISP collecting the data.  Right now, either you use the internet as part of modern society and allow your data to be mined, or you lead an ascetic life.  It’s not a real choice for most people. Recent research into consumer sentiment revealed that if people were given a real choice, a majority would limit the sharing of their personal data. The FCC rule wasn’t perfect, but it was a first step toward correcting this situation, and would have afforded consumers more control over their privacy.

In addition to taking away consumer choice, repealing the FCC rule blocked the chance for an alternative business model to emerge. This third business model would have actually compensated consumers for their data, which philosophically, I believe each individual rightfully owns.  The FCC rule didn’t prohibit ISPs from competing in the digital ad market, it simply required them to get permission first.  Given that consumers don’t feel the current trade-off is fair, ISPs probably would have need to find a way to incentivize people to participate. A rebate on your monthly internet bill, for example.  Perhaps a platform connecting data brokers with individuals that fit a certain profile.  Maybe even tools that can track personal data after it’s sold, can ensure the data isn’t resold or repurposed without authorization, and can destroy the data after it is used.  There were numerous possibilities, but Congress removed any inventive for ISPs to pursue these models by making personal data collection involuntary.

Consumers also have much to lose as targets of behavioral advertising – the end result of this data collection.  Behaviorally-targeted ads, when done well, have great power to manipulate our opinions, actions, and even how we see ourselves.  It’s important to remember that these same tools will have applications in politics, and with no limits on election spending we can be assured they will be used extensively. Far too few people are even aware of what data is being collected and how it’s being used, but even with that visibility, the impact of a clever ad can be hard to recognize.

 

The fourth and final installment in this series will look at what is likely to come next, and what can be done about it.

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