Chairman Leibowitz’s Disconnect on
Privacy Regulation & the Future of News
Progress Snapshot
Release 6.1 January 2010
by Adam Thierer & Berin Szoka*
View as PDF
Stephanie Clifford of the New York Times posted a
very interesting article this week summarizing a recent “on-the-record chat” the Times staff
had with Federal Trade Commission (FTC) chairman Jon Leibowitz and
FTC Bureau of Consumer Protection chief David Vladeck. The interview is
profoundly important in that it reveals an alarming disconnect regarding the
relationship between “privacy” regulation and the future of media, which were
the subjects of their discussion with Times staff. Namely,
Leibowitz and Vladeck apparently fail to appreciate how the delicate balance
between commercial advertising and journalism is at risk precisely
because of the sort of regulations they apparently are ready to adopt. Because
the value of online advertising depends on data about its effectiveness and
consumers’ likely interests, and because advertising is indispensable to
funding media, what’s ultimately at stake here is nothing short of the future
of press freedom.
The “Day of Reckoning” Is Upon Us
Leibowitz and Vladeck spend the first half of The
Times interview wringing their hands about “privacy policies,” the declarations
made by websites and advertising networks about their data collection and use practices
(for which the FTC can and must hold them accountable). But the two feel that privacy
policies don’t adequately inform consumers. Chairman Leibowitz claims that
online companies “haven’t given consumers effective notice, so they can make
effective choices.” And Mr. Vladeck states that advise-and-consent models “depended
on the fiction that people were meaningfully giving consent.” But he and the
FTC seem ready to abandon the notice and choice model because the “literature
is clear” that few people read privacy policies, Vladeck told the Times.
He and Leibowitz continue:
“Philosophically, we wonder if we’re moving to a post-disclosure
era and what that would look like,” Mr. Vladeck said. “What’s the substitute
for it?” He said the commission was still looking into the issue, but it hoped
to have an answer by June or July, when it plans to publish a report on the
subject. Mr. Leibowitz gave a hint as to what might be included: “I have a
sense, and it’s still amorphous, that we might head toward opt-in,” Mr.
Leibowitz said.
This clearly foreshadows the regulatory endgame we have long
suspected was coming. When the FTC released its “Self-Regulatory Principles
for Online Behavioral Advertising” eleven months ago, we asked: “What’s the Harm & Where
Are We Heading?” Their answers to both questions have become clearer with
each new calculated comment—all apparently intended to slowly “turn up the
heat” on the advertising industry so that the proverbial frog will stay in the
pot until the water finally boils. Leibowitz’s FTC has simply dodged
the “harm” question with a four-part strategy:
1.
Cobble together a “record” full of sympathy-evoking anecdotes submitted
by advocates of regulation in comments and the FTC’s ongoing “Exploring Privacy”
Roundtables;
2.
Let the most extreme Chicken Littles fulminate about the grand
conspiracy of “neuromarketing manipulation” and the like (and sometimes even
shout down FTC staff in panel discussions) in order to redefine the “reasonable
center” of the debate;
3.
Define-down “harm” as purely a matter of “consumer expectations” or consumers’ “dignity interests” (whatever that vague and
infinitely elastic term means); and
4.
Attack the effectiveness of “consent” itself by suggesting that
consumers cannot be trusted to understand privacy policies or be expected to make
any effort to protect their own privacy.
Conveniently, this strategy leads right back to the “day of
reckoning” Chairman Leibowitz threatened was coming last February: We are
heading precisely where he told us we would be—to full-on, opt-in
regulation. The writing on the wall becomes more apparent every
day: Leibowitz set out to bring online advertising to heel even
before becoming Chairman, and his Commission is reprising almost precisely the
same approach that led to the passage of the Children’s
Online Privacy Protection Act (COPPA) of 1998: building a case for new
authority, dismissing industry self-regulation as ineffective, and finally
presenting a report to Congress intended to produce a rapid legislative
response. After the FTC presented its report on the need for regulation
in congressional testimony in June 1998, it took Congress just four months to
pass COPPA—and much of that time was consumed by the summer recess. In
short, Leibowitz is mounting a carefully choreographed campaign for increased
regulation.
The only real question is whether Leibowitz will somehow try
to use the FTC’s existing authority over “unfair or deceptive” trade practices
or wait for expanded authority from Congress. While most observers typically
assume that such expanded authority would come in the form of a
privacy-specific bill—be it a broad “baseline" privacy bill or one specifically
focused on online data collection for advertising purposes—the authority
Leibowitz yearns for could just as easily come in the form of increased
rulemaking authority as part of a broader bill that allows the FTC to
preemptively regulate practices that are not deceptive but merely deemed “unfair.”
This would take the agency “Back to the Future”—to
the late 1970s, when the agency reached the height of its efforts to regulate purely
on “unfairness” grounds by trying to ban advertising to children. The agency’s
behavior earned it the moniker “National Nanny” from the Washington Post,
hardly a bastion of regulatory skepticism.[1] That outpouring of popular resentment caused a heavily Democratic Congress to
cut-off the Democratic-led agency’s regular funding and prohibit it from
regulating advertising merely on the grounds of “unfairness.” In essence,
they told the agency to “go back to its knitting” and focus on protecting
consumers from demonstrated harms.[2] Duly chastened (and actually shut down for several days), the FTC formulated a
meaningful legal standard for “unfairness,” which Congress codified in 1994:
for a practice to be unfair, the injury it causes must be (1) substantial, (2)
without offsetting benefits, and (3) one that consumers cannot reasonably
avoid.
Under this statutory standard, as FTC Commissioner Thomas Rosch has argued, the
commission must carefully consider:
[the] legitimate pro-consumer and pro-competitive benefits
that result from [targeted advertising]. Absent hard data weighing these
benefits against the limited “invasion of privacy interests” involved, it would
seem difficult to conclude that treating that practice as an actionable
violation of the “unfairness” prong of Section 5 will pass muster.[3]
So Leibowitz and Vladeck either need to get serious about
weighing the costs and benefits of targeted advertising—or, in the absence of
such actually measuring these trade-offs, get Congress to give them the
authority to regulate. But one thing is clear from their past statements: they
are in a hurry to do something. As Vladeck told The Times last August, “There
is a sense of urgency around here... Consumers, I don’t think are sufficiently
protected under the current regime.” Apparently, the case is closed in their
minds.
“Left Hand, Meet Right Hand”
The second half of the Times interview
concerns the future of news. Chairman Leibowitz is not optimistic:
“There are some areas where you clearly see positive
creative destruction,” Mr. Leibowitz said, giving the example of travel agents
who were replaced by Orbitz and other online-booking systems. The news, he
said, was not one of those. “When you’re dealing with something as critical as
news is to a democracy, you need to ensure, certainly, that it’s independent,
but also that it’s vibrant going forward,” he said. Areas like investigative
reporting, foreign and domestic bureaus, and state-house reporting, he said,
would likely falter under blog operations because of “economies of scale.”
He said he wasn’t sure what the solution was,
but threw out a few ideas discussed at the conference: maybe special tax
treatment for newspapers, a Corporation for Public Broadcasting-like fund, or
for the newspaper industry to charge fees for the re-use of its content,
similar to the model that the American Society of Composers, Authors and
Publishers uses. [emphasis added]
Mr. Chairman, with all due respect, haven’t you forgotten
about the solution that has powered private media for a few centuries in this
country? You know—advertising! Indeed, what’s stunning about
these comments is the complete disconnect with what Leibowitz and Vladeck said
earlier in the interview. It certainly may be the case that they said more on
the subject than what The Times has reported, but given their escalating
rhetoric, it seems likely that significantly increased FTC regulation is on the
horizon. And, yet, as Chairman Leibowitz marches us into this brave new
world of regulating Internet media through their key funding source, he and Mr.
Vladeck seem to have little appreciation of the vital role played by
advertising in sustaining a truly free and vibrant press.
An Attack on Advertising Is an
Attack on Media Itself
Let’s step back and revisit Media Economics 101. Almost
every serious scholar in the field acknowledges this truism: Advertising
cross-subsidizes media platforms and the creation of valuable information—especially
news. “Advertising is the mother’s milk of all the mass media,” Wall
Street Journal technology columnist Walt Mossberg
has noted. Similarly, Harold L. Vogel, author
of Entertainment Industry Economics, the leading text in the field,
has noted, “Advertising is the key common ingredient in the tactics and
strategies of all entertainment and media company business models. Indeed, it
might further be said that advertising has substantively subsidized the
production and delivery of news and entertainment throughout the last century.”[4] Mossberg agrees
and notes, “Without ads, most editorial products and other programming
would be either unavailable or prohibitively expensive.”
The reason for the indispensability of advertising is
simple: Information (including news and other forms of “content”) has “public
good” characteristics that make it is very difficult (and occasionally
impossible) for information-publishers to recoup their investments. Simply
put, they quite literally lack pricing power: Whatever they charge, someone
else will charge less for a close substitute, inevitably leading to “free”
distribution of the content, even though the content is anything but free to
produce. Advertising is the one business model that has traditionally saved
the day by rewarding publishers for attracting the attention of an
audience.
Which raises another under-appreciated point: Private
advertising promotes press independence. “Newspapers, magazines, radio,
television, and many websites all receive their primary income from
advertising,” notes William F. Arens, author of Contemporary
Advertising, another leading textbook in the field. “This
facilitates freedom of the press and promotes more complete information” he
concludes.[5] Why? Because, contrary to what some critics claim, advertising and marketing
help keep private media providers independent of the need for taxpayer subsidies
or private patrons. This begs an even more profound question: If not
advertising, then what else?
A “Public Option” for the Press?
What’s most troubling about Chairman Leibowitz’s comments to
the Times is that he has apparently found his alternative to
advertising: a “public
option” for the press! He mentions special tax treatment for newspapers or
a new CPB-like fund (don’t we already have one?) as two possibilities. That
certainly will be music to the ears of radical, pro-regulatory activist groups
like the ironically-named “Free Press,” which wants to see a massive “public works”
program for the media sector.
Free Press recently filed comments with
the FTC in the agency’s recent workshop, “Can Journalism Survive the
Internet Age?” and proposed a far-reaching industrial policy for “saving the news.” They
call for over $50 billion in subsidies for the Corporation for Public
Broadcasting and other bureaucracies, a “journalism jobs program” for that
would be part of AmeriCorps, a variety of new tax incentives for struggling
media operations or individuals who support favored institutions, and an
assortment of government incentives to encourage local ownership and media
divestiture (by handing over control to smaller operators or minority-owned
groups). Ironically, “Free Press” has also floated the concept of “a small tax
on advertising” as one way to pay for a press bailout.
The organization’s founder Robert
W. McChesney, the prolific neo-Marxist media scholar, penned an
essay with John
Nichols of The Nation last year, claiming that saving
journalism essentially requires that media become an appendage of the State. Although
advertising has supported journalism as a “public good” for centuries, the only
way they can conceive to provide a public good is to socialize its means of
production. Thus, journalism, like education and national defense, requires
constant government oversight and support: “A moment has arrived at which we
must recognize the need to invest tax dollars to create and maintain news
gathering, reporting and writing with the purpose of informing all our
citizens.” They ask us to consider the $60 billion in government spending they
propose as a “free press ‘infrastructure project,’” which would “keep the press
system alive.”
Some in Congress seem willing to listen. The Senate has
already held
hearings about the future of journalism. And Senator Benjamin L.
Cardin (D-MD) recently introduced what he has called the “Newspaper
Revitalization Act,” which would allow newspapers to become nonprofit
organizations in an effort to help them stay afloat. Importantly, however, the
bill would also disallow political endorsements on newspaper editorial
pages—which, like campaign finance restrictions, would be a boon for incumbent
politicians. That bill should serve as fair warning to journalists about the
sort of strings lawmakers will attach to press-welfare efforts going forward. What
other “golden shackles” might come with media subsidies?
To be clear, Chairman Leibowitz hasn’t called for a complete
press takeover along the lines of the Free Press plan. Yet, he hasn’t answered
a key question in this debate: Who pays for news? He appears ready to endorse
a bold new regulatory scheme for the Internet and online media that, in the
name of “protecting privacy” would put at risk the
one traditionally successful method of supporting private media operations—advertising.
As the Pew Research Center’s Project for Excellence in Journalism noted in its
latest State of
the News Media report, “The problem facing American journalism is
not fundamentally an audience problem or a credibility problem. It is a
revenue problem—the decoupling… of advertising from news.” There’s probably no
way policymakers can stop this process, nor should they try. But they shouldn’t
be creating new obstacles to the survival of traditional media creators, either.
Unfortunately, that’s exactly what Chairman Leibowitz’s new
regulatory scheme would do. The revenue “delta” between “smart” advertising (tailored
to consumers’ likely interests and measured for effectiveness in producing
clicks, purchases, etc.) and “dumb advertising” (based purely on surrounding
keywords or demographics of users presumed to visit the site) is difficult to
measure but potentially enormous—even 10 times as great for some sites.[6] The difference between opt-in and opt-out could be nearly as dramatic, because
it’s difficult to get consumers to opt-in for anything, especially for small
players—which means that opt-in regulation could, perversely, force
consolidation in the online advertising and content markets. If the FTC cares
about its statutory responsibility to safeguard competition, they should take this
dynamic seriously and be hyper-cautious about heavy-handed mandates that could
derail smarter advertising.
Finally, to be fair, in his interview, the Chairman also
suggests the newspaper industry might want to find new way “to charge fees for
the re-use of its content.” We’re certainly not opposed to the notion and
think that, if it could somehow be made to work (especially by removing
antitrust obstacles), it could part of a diverse revenue mix for digital
journalism. But, there’s the rub. Micropayments inevitably face the
problem of “mental transaction costs” that likely swamp the perceived value of
most content and, like pay-walls, have generally worked only in media environments
characterized by a scarcity of providers and a uniqueness of a sufficiently
valuable product. These cold, hard economic realities are why advertising
remains indispensable.
The Principled Alternative to
Regulation
Convinced that privacy policies simply don’t work, Leibowitz
and Vladeck are asking what a “post-disclosure era” would look like. We
appreciate the continued sensitivities expressed by certain groups
and individuals about online privacy and data use more generally. But
there is another way forward. We have proposed the following “5-E”
layered approach to concerns about online privacy, focusing on restraining
government access to data as a clear harm, rather than crippling the private
sector uses of data that directly benefit consumers:
1. Erect a higher “Wall of Separation between Web and
State” by increasing Americans’ protection from government access to their
personal data—thus bringing the Fourth Amendment into the Digital Age.
2. Educate users about privacy risks and data management
in general as well as specific practices and policies for safer computing.
3. Empower users to implement their privacy preferences
in specific contexts as easily as possible.
4. Enhance self-regulation by industry sectors and
companies to integrate with user education and empowerment.
5. Enforce existing laws against unfair and deceptive
trade practices as well as state privacy tort laws.
Such a layered approach would not only be a “less
restrictive” alternative to top-down, one-size-fits-all government regulation,
but also potentially more effective in key respects than government data
use/collection mandates. In
an ideal world, adults would be fully
empowered to tailor privacy decisions, like speech decisions, to their own
values and preferences (“household standards”). Consumers would have (1)
the information necessary to make informed decisions and (2)
the tools and methods necessary to act upon that information.
Importantly, those tools and methods would give them the ability to block the
things they don’t like—annoying ads or the collection of data about them, as
well as objectionable content—while also helping them find the information and
content they desire.
But of course, the devil’s in the details. Leibowitz and
Vladeck would set the bar so high as to what constitutes “effective” consumer
choice that current privacy policies necessarily fail their test—if only
because most users don’t care enough to make the “right”
privacy choices. Privacy policies, even if read by relatively few
consumers, nonetheless allow privacy advocates, journalists and
watchdog-bloggers to scrutinize what companies say they’re doing—promises to
which the FTC should hold companies stringently. That’s clearly not good
enough for Leibowitz and Vladeck, who want to give up on “notice and choice”
and move on to “opt-in” mandates. But why not first try to make “notice” more
effective? The advertising industry is currently developing standardized interfaces
that could communicate key information about privacy practices in a single
icon, label or other easily-digested “consumer touch point.”
More radically, why focus on tinkering with consumer
interfaces, when standardized data disclosure formats like the Protocol for Privacy Preferences (P3P) could distill legalistic privacy
policies into “machine-readable” code? Such disclosures could provide a
powerful form of “notice” that the ordinary consumer could “use”: simply
setting their own privacy preferences in a browser tool that automatically implements
those preferences by blocking tracking that users object to. Such a privacy
disclosure format could also allow the FTC to automate enforcement of its
existing authority to punish unfair or deceptive trade practices.
Conclusion
And so we return to the question the FTC asked in its recent
workshop, “Can Journalism Survive the
Internet Age?” Answer: Not if the FTC kills the golden goose that
lays the golden eggs through onerous advertising regulations and data controls
in the name of “privacy.” Chairman Leibowitz and Bureau Chief Vladeck shouldn’t
foreclose the possibility that advertising can play a central role in the
future of a free press in the Digital Age—just as it has done historically in
the United States. Indeed, they would be wise to remember that advertising has
always been with us. As the Supreme Court noted in its 1996 decision, 44
Liquormart, Inc. v. Rhode Island.
Advertising has been a part of our culture throughout
our history. Even in colonial days, the public relied on “commercial speech”
for vital information about the market. Early newspapers displayed
advertisements for goods and services on their front pages, and town criers
called out prices in public squares. Indeed, commercial messages played such a
central role in public life prior to the founding that Benjamin Franklin
authored his early defense of a free press in support of his decision to print,
of all things, an advertisement for voyages to Barbados.[7]
Of course, for advertising to continue to play the role as
sustainer of the press, it must be allowed to evolve. Media operators—large
and small alike—must be allowed to craft new strategies, some of which may
require data collection and marketing practices that will make some
privacy-sensitive users uncomfortable, but will also ensure that the goose
keeps on laying golden eggs for them and everyone else.
While Chairman Leibowitz may decry the creative destruction
at work in the news sector and information industries today, that shakeup will
continue and, no doubt, be painful for incumbent players. Advertising alone
may not “save the day” for media as it has in the past, but it will likely
remain essential to sustaining private media platforms and providers going
forward—if federal policymakers allow it. The alternative—massive
government intervention into the news and media sectors—is too horrifying to
think about.
Related PFF Publications
* Adam Thierer is President of The Progress & Freedom Foundation and Director of PFF’s Center for Digital Media Freedom. Berin Szoka is a PFF Senior Fellow and Director of PFF’s Center for Internet Freedom. The views expressed herein are their own, and are not necessarily the views of the PFF board, fellows or staff.
[1]Washington Post, March 1, 1978.
[2] Congress
terminated the FTC’s efforts to prohibit advertising to children, and barred
the agency from issuing any advertising regulation predicated solely on
unfairness for three years. FTC Improvements Act, Pub. L. No. 96-252, § 11
(May 1980). See generally J. Howard Beales, Director of the Bureau of
Consumer Protection, Federal Trade Commission, The FTC's Use of Unfairness
Authority: Its Rise, Fall, and Resurrection, www.ftc.gov/speeches/beales/unfair0603.shtm.
[3] Thomas
Rosch, Some Reflections on the Future of the Internet: Net Neutrality,
Online Behavioral Advertising, and Health Information Technology, Remarks at
U.S. Chamber of Commerce Telecommunications & E-Commerce Committee Fall
Meeting, October 26, 2009, 13, www.ftc.gov/speeches/rosch/091026chamber.pdf.
[4] Harold
L. Vogel, Entertainment Industry Economics (Cambridge, MA: Cambridge
University Press, 7th Edition, 2007), at 46.
[5] William
F. Arens, Contemporary Advertising (McGraw-Hill Irwin, 10th Ed., 2006) at 50.