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January 10, 2011

FTC’s “Do Not Track” Initiative Portends Major Impact on Online Advertising

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The Federal Trade Commission’s (FTC) publication earlier this month of a proposed framework for protecting online privacy portends a major impact on online advertising. If your website’s business model depends on advertising revenue, either directly from the site itself or via a smart, mobile device, you have a big stake in the outcome of the dialogue kicked off by the FTC report.

The FTC report suggests implementation of a Do Not Track mechanism – similar conceptually to the current Do Not Call list regarding annoying telemarketing calls – that would enable consumers to block the collection of online browsing data. Do Not Track, if implemented, will dramatically change the rules of the road regarding Internet advertising – with a potentially huge impact on relatively smaller websites that publish free content supported by behavioral ads.

The Target – Behavioral Advertising

Behavioral ads are targeted to a user’s browsing history, thereby increasing relevancy – and dramatically increasing conversions to sales. Behavioral ads are based on anonymous data collected on how a user’s computer browses the Internet, including websites visited, searches made, and content read. This data is used to create a behavioral profile that is linked to a specific demographic. The result is that the ads seen by the computer’s user are tailored to the user’s interests. Many industry advertising executives believe that the overwhelming success of behavioral ads is a significant factor in the growth of the Internet commercially.

Behavioral ads should be distinguished from contextual ads that are based solely on the content of the specific website page the user is viewing. Because contextual ads are generally not as relevant to the user’s interests as behavioral ads, contextual ads are less effective, and therefore less profitable.

Behavioral advertising is a big FTC concern regarding consumer privacy. Although behavioral data is essentially anonymous when collected, privacy advocates are concerned about where new data collection technology and methodology may take us. For example, the amount and depth of some data could lead to personal identification of users. In addition, even if users are not personally identified, the enhanced data about them could rise to the level of an invasion of privacy.

How Would Do Not Track Work?

Although it’s unknown at this time exactly how Do Not Track will work, one approach could involve a list similar to the Do Not Call list for telemarketers.

Another, more likely approach, would be for Web browsers to provide a built-in option for a persistent setting that would enable consumers to choose whether to allow or block the collection of behavioral data and behavioral ads. Users would have the ability to turn this option on an off. While on, the user would be able to surf the Web in a mode sort of like stealth mode.

Who Would be Affected by Do Not Track?

The effect of Do Not Track on ad-serving websites would be to lower revenues based behavioral ads. Relatively large websites that publish premium content would likely not be affected significantly by Do Not Track because the vast majority of their ad space is typically sold directly to marketers which may be able to rely successfully on contextual ads. This would not be true for smaller websites that typically rely more heavily on ad networks to place their ads. For this reason, smaller websites which publish free content supported by behavioral ads could face a significant impact on revenue from Do Not Call.

For consumers, Do Not Track could dramatically affect the quantity and quality of content they see on the Web. This is due to the fact that much of the free content on the Web is supported by ad revenue. Consumers operating in stealth mode would likely see limited or reduced content, plus ads would not be as relevant.

Conclusion

Some legal commentators question whether the FTC has the authority to unilaterally implement Do Not Track regulations. They argue that Congress must give them that authority. If Congress must act, it may be that the political appeal for Do Not Track would not be as strong Do Not Call. Many consumers understand the benefits of behavioral ads, and they may believe that behavioral ads are much less intrusive than unwelcome and annoying calls at dinner time by telemarketers.

In any event, the stakes are high for all websites that depend on adverting for revenues. The FTC has requested public comments on their framework report by January 31, 2011, for a final report later in 2011.

If you may be significantly affected by Do Not Track, it’s recommended that you strongly consider providing your comments before the deadline passes.


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