I see you, you see me

Does anyone care about online privacy?

The New York Times thinks so:  just since I’ve been paying attention, I’ve noticed – 1 2 3 4 5 6 7 8 – eight articles about the threat to consumer privacy posed by increasingly effective online behavioral ad targeting.

Jeremy Liew is concerned that the recent public interest push for privacy regulation will threaten startup media companies, suggesting that the ad networks should band together to lobby against online privacy regulation.  He says “While it is always hard to argue against privacy, the impact of this level of restriction would be enormous for companies relying on online advertising.”

It’s not that hard to argue against privacy, it’s just . . . delicate.  And I think simply saying that a lot of money is at stake isn’t enough of an argument.  So I’ll try to make a better argument for why privacy legislation of online advertising is likely to cause more harm than good.

I’m actually a huge fan of the Electronic Frontier Foundation and Consumers Union, and I think their hearts are in the right place on this.  I’m generally in favor of legislation that protects consumers from predatory practices in the marketplace.  But although privacy is a special value, it is not something that is well served by detailed regulation.

The problem is that privacy means many different things to different people, so everybody’s expectations can be quite different in terms of both substance and process.

The substance of privacy is the content of what you want to keep private.  Some people don’t care if you know whether they are male or female, but they don’t want to reveal their age.  Some are ok with gender and age, but not job and income – etc, etc.

The process of privacy is about the availability, collection and use of the information.  Some people want to opt-in to every interaction, some prefer to have opt-out control.  Some are ok with information used in the aggregate but not the individual, or even vice versa.  Some are ok with information being used by private parties, but not the government, or for a day or a month, but not a year or a decade.  Etc ad nauseum.  Few of us are ever thinking about exactly the same thing when we think about privacy.

Privacy may be a fundamental right, but it’s more like the right to freedom of religion than the right to trial by jury.  The latter is a specific procedural right, which we want everyone to have in a very clearly defined way.  The former protects an abstract and highly personal set of values, which each person may regard in a different way.

In the US, we don’t protect religion by telling people what it means; we protect it by saying that the government won’t promote any particular form of religion, and people can exercise any form they choose.  The failing of the public interest proposal on online privacy is that it presumes to define privacy for everyone.  That’s a dangerously unsophisticated view of a standard that varies from person to person and evolves across generations.  A time-traveler from before the Internet would not recognize what the average Facebook user calls “privacy.”

So how do I think privacy concerns should be addressed?  Well, by the market, of course. Don’t get the wrong idea:  despite my love of entrepreneurism and therefore capitalism, I don’t believe that the market is infallible, nor do I believe a free market must be unregulated.  But where you have complex consumer preferences and an infinite variety of potential solutions, a market is often the best way to satisfy the most people.  Think again back to religion:  people basically make their religious choices in a free market as well.

Consumers should have a large variety of choices about how their personal marketing-relevant data is collected and used by advertisers.  The role of governmental regulation here should be limited to traditional consumer protections about clear and full disclosure, contracts of adhesion, and anti-competitive practices.

The government just needs to make a level playing field.  People do care about privacy, and companies that can address those concerns correctly and creatively will make a lot of money.   And that matters not just because it’s a lot of money, but because it’s a case where consumer interest and the pursuit of money can be aligned.

[Apparently I’ve decided that my posts on online privacy must be titled by reference to 80’s hits.]

somebody’s watching

There’s a certain techno-futurist vision of personalized advertising where constant surveillance leads to complete erosion of privacy, all in the service of targeting advertising to your behavior and tastes.  The most popular picture of this future was in the movie Minority Report, where talking ads creepily enveloped the hero in a wash of ad patter while he ran for his life.

adsthatseeyou

Despite this dystopian vision, I think the current level of public concern about the privacy invasion of targeted advertising could be described as significantly beneath swine flu and slightly above Lyme-disease bearing ticks.

But this year, the largest online advertisers and ISPs have really begun to show their power over consumer behavioral data.  The New York Times has been utterly obsessed with this topic, to the point where it’s somehow news when a company decides not to use a targeted ad system.  (I wonder if it there could really be such a thing as behavioral tracking so creepy that even advertisers won’t use it.  The cynic in me says that the system probably just didn’t work well enough to justify the cost.)

Consumers who are asked about privacy generally want greater control over their marketing data, but don’t know how they can achieve it.  In sympathy to this consumer demand, the industry’s leading ad networks have banded together to establish best practices for use of consumer data.  (This sympathy was perhaps supplemented by the interested attention of the FTC.)

Industry self-regulation is a time-honored method of appeasing and forestalling government regulation.  There are areas where this works just fine (in terms of industry commercial interest, if not art) – comics, movies and video games – this tends to involve public morality.  And there are areas where greed and the public interest seem destined to cycles of boom and bust and bust – some industries just don’t seem capable of operating without eventual crisis in a deregulated environment.

So will the ad industry’s attempt self-regulation turn out more like the entertainment industry’s successes with the morality police, or the financial industry’s pathological self-destructiveness?

On the one hand, the dynamics of targeted advertising share some characteristics with complex financial instruments:  advanced algorithms, proprietary trading systems, a leveraged financial return from a slight mathematical edge.  On the other hand, consumers are not in bed with advertisers in the way that they were with their bankers and brokers and realtors.  A little willful blindness made everyone happy for a while in finance, but that same blindness in advertising only covers growing consumer unease.

There are startups that tried to give greater consumer control over marketing data, but none really got a lot of traction.  The problem may have been that the problem wasn’t big enough yet.  Until everyone’s singing like Rockwell, it could still be too early.

advertising in 3 E-Z slides

Has the Internet ushered in a revolution in advertising, or is web advertising destined to fail?

I couldn’t begin to have an opinion without some basic context about advertising, so I gave myself a crash course.  Here’s the 3 most important things I learned:

1.  Advertising has multidimensional sectors.

Two of the fundamental axes in advertising are the lines between brand and direct response marketing, and between online and offline ads.

ad status

I can’t do the differences justice here, but essentially brand marketing is intended to make you feel a certain way about a product, while direct response is intended to make you take an immediate action regarding a product.

The concepts seem simple, but whenever new media arises, it can be quite tricky to determine what kind of advertising is suited to the media.  When the Web first burst into mass acceptance, some advertisers treated this new medium as a branding opportunity, plastering their logos and flashy campaigns wherever they could.  Google was among the first to realize that direct response principles fit the Web much better than branding – deliver ads against search results and you have a natural audience to act upon that hyperlink.

But the Web continues to evolve, giving continued opportunities to make the wrong choices about ads.  When social networks like Facebook reached mass popularity, many advertisers tried to deliver targeted direct response advertising to demographics discovered through the social graph.  But “banner blindness” and the very social intent of these sites combined to make pure direct response ads ineffective.  The better strategy for advertisers in social networks is to build a community and create engaging viral media to enhance the brand.

So the lesson here is that advertisers have to make very savvy choices between brand and direct response advertising as the evolution from offline to online continues.

2.  Online and offline ad spending patterns are currently inverted.

In the excitement about the growth of online advertising, it’s easy to forget that offline is still much bigger, with online making up roughly $23 billion of a $137 billion U.S. ad market.  These numbers are even more interesting when examined along the divide between brand and direct response.

 

According to one estimate, around 75% of offline ad dollars are spent in brand marketing, while 80% of online ad dollars are spent in direct response.  Because offline is so much bigger than online, that means that direct response offline (a.k.a. “junk mail”), makes up around $28 billion.  Yep, junk mail is bigger than the entire Internet ad industry.

Now here’s a point that’s a little more abstruse, but I hope it’s worth the time to understand it:  the advertiser’s spending pattern is inverted in online vs offline.

Offline brand advertising is expensive to create, but reaches a mass audience, so the spend per viewer is low.  Take a Super Bowl ad:  a 30-second commercial can cost $4 million (for air time and a lavish production cost), but with 95 million viewers, that’s only 4 cents per viewer.  Let’s call this low cost per viewer a mass spending pattern.

Offline direct response advertising total cost is lower, but higher per person reached.  For example, it can cost $50K to produce and mail a catalog to 10K recipients.  At $5 per person, that’s 125 times more expensive per person than a Super Bowl ad!  But it works because of the targeting – those 10K people have been identified by the advertiser as being likely to be interested in the product.  This low threshold, high cost per viewer is a targeted spending pattern.

The patterns are rewired online.  Search advertising and email campaigns are direct response in that there is a clear desired action (usually a click).  Though the cost of the keyword or email campaign can be relatively low, the distribution is very broad, so the cost per viewer is extremely low –  this is a mass spending pattern.

Conversely, doing effective brand advertising on a social network requires really identifying the target demographic and crafting a creative campaign to get that ballyhooed viral explosion.  That means relatively high creation cost and a specific audience, resulting in a high cost per viewer – this is targeted spending.

So offline, brand advertising is mass spending while direct response is targeted spending.  And online, brand advertising is targeted spending while direct response is mass spending. Or at least, that’s the way it is today . . .

3.  Successful advertising tactics will seek equilibrium.

Pundits are always rushing to declare failure, or any new method the death of all old ones.  But offline advertising feeds online, and online direct response may morph into “brand response.”  Advertising, like nature, restlessly searches for equilibrium.  The story above is heading towards a more stable balance so the value of the spending better matches the returns.

ad future

It’s not controversial to suggest that offline ad dollars will move online – that’s more an observation than a suggestion at this point.  And it’s also been an observable trend that offline direct response marketing is declining at an even faster rate than offline brand marketing, because Internet direct response has rapidly become effective for larger audiences.  But I’m adding two conjectures that aren’t easily observable today.

First, online brand marketing will grow at a faster rate than online direct response.  This means that social media like Facebook and Twitter (like them, not necessarily those two) will grow revenues faster than Google.

Second, online brand spending will revert back to the offline spending pattern of mass rather than targeted, and online direct response will similarly go to targeted spending rather than mass.  I believe that dominant social media sites and practices will arise that allow brand advertisers to reach a large audience at a low cost per viewer.  At the same time, increasingly effective data collection on Internet consumers will allow data holders to sell highly targeted direct response ads at premium prices per consumer.

What does it take to get from here to equilibrium?  In monetary terms, holding the total ad industry constant at $140 billion (not a safe assumption):

  • $50 billion will move from offline to online
  • $15 billion will move from offline direct response to online direct response
  • Online direct response will grow by $20 billion, while the revenue per viewer seeks a relatively high number
  • Online brand marketing will grow by $30 billion, while the revenue per viewer seeks a relatively low number

That is a lot of money sloshing around, in a lot of different directions.  I think it’ll happen within 5 years.