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Internet, Economy and Privacy
College of Engineering
University of California, Berkeley
Fung Technical Report No. 2013.04.16
www.funginstitute.berkeley.edu/sites/default/ les/Internet-Economy-and-Privacy .pdf
April 16, 2013
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Lee Fleming, Faculty Director, Fung Institute
The Coleman Fung Institute for Engineering Leadership, launched in January 2010, prepares engineers and Advisory Board scientists – from students to seasoned professionals – with the multidisciplinary skills to lead enterprises of all Coleman Fung scales, in industry, government and the nonpro t sector.
Founder and Chairman, OpenLink Financial Charles Giancarlo Headquartered in UC Berkeley’s College of Engineering Managing Director, Silver Lake Partners and built on the foundation laid by the College’s Donald R. Proctor Center for Entrepreneurship & Technology, the Fung Institute Senior Vice President, O ce of the Chairman and CEO, Cisco combines leadership coursework in technology innovation In Sik Rhee and management with intensive study in an area of industry General Partner, Rembrandt Venture Partners specialization. This integrated knowledge cultivates leaders who can make insightful decisions with the con dence that Fung Management comes from a synthesized understanding of technological, marketplace and operational implications.
Lee Fleming Faculty Director
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130 Blum Hall #5580 Berkeley, CA 94720-5580 | (510) 664-4337 | www.funginstitute.berkeley.edu Abstract: The Internet is a critical component of the global and domestic economy. The economic impact of the Internet on people’s lives is di cult to estimate in terms of dollars, but online advertising is the dynamo powering the Internet’s rapid growth. Internet advertising has grown dramatically over the past decade. Ensuring that online advertising revenues continue to grow will be central to the Internet’s growth and success tomorrow. One way websites gain more value from online advertising is by providing more relevant ads, which will bene t both consumers who get more utility from these ads and advertisers who reach their target audience. Ads are targeted are based on information collected about users, which has raised a lot of fear. Several of the most recent privacy violations, security breaches and lawsuits have accentuated these fears. In this report we analyze the growing trend of new regulations, like the Do Not Track bill, that governments are trying to legislate to protect the rights of the general public. These new privacy regulations could reduce the e ectiveness of online advertising and thus reduce the available revenue to support free or low-cost content, applications and services. This report further describes the anticipated business landscape changes and identi es various new opportunities.
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1. Introduction: Internet Economy The Internet is important to our economy and online advertising drives the Internet’s rapid growth.
Many of the websites that millions of Americans depend on for work and play would not be around today without online advertising. In fact, the top five websites in the United States (Google, Facebook, Yahoo, YouTube and Amazon.com) use online advertising to support their products and services.
Internet advertising revenues in the U.S. reached $9.26 billion for the third quarter of 2012, the biggest quarter on record according to 2012 IAB Internet Advertising Revenue Report  figures released by the Interactive Advertising Bureau (IAB) and PriceWaterhouseCoopers (PWC). In addition, they mark a 6 percent increase over the Q2 2012 figures of $8.72 billion.
“This uptick goes beyond a significant year-over-year increase at 18 percent, and also shows a climb from last quarter as well,” said David Silverman, a partner at PWC LLP. “Clearly, digital advertising is continuing its positive trajectory with incredible momentum as it heads into seasonally strong Q4.”
Figure 1: Internet Advertising Revenue Trends (Source: IAB)
If online advertising is important to the Internet ecosystem today then ensuring that online advertising revenues continue to grow will be central to the Internet’s growth and success tomorrow.
One way websites can gain more value from online advertising is by providing more relevant ads.
Targeted ads benefit both consumers who get greater utility from these ads and advertisers who are willing to pay more to reach their target audience. Targeted ads, which are based on information about a user like browsing history or other user-specific data, help deliver higher-value ads.
Collecting user information for targeted advertising has raised a lot of fear and controversies, most particularly towards the privacy rights and policies. Privacy International is fighting to make
governments legislate to protect the rights of the general public. According to Privacy International, interception of web traffic must be conditional to explicit and informed consent from any ethical standpoint. Action must be taken where organizations can be shown to have acted unlawfully.
Policymakers seem intent on imposing data privacy regulations that would limit the ability of Internet publishers to tailor advertising to users based on their interests.
1.1 Impact of Targeting Advertisement on Internet Economy The Network Advertising Initiative conducted a study in 2009  to measure the price and
effectiveness of targeted advertising. It revealed that targeted advertising:
• Secured an average of 2.7 times the revenue per ad more than non-targeted “run of network” advertising.
• Was twice as effective at converting users who just click on ads into buyers One might question what would have happened in the absence of targeting, since the users targeted by advertisers are more likely to convert than the general population. Farahat and Bailey measured the true economic impact of targeted advertising on brand searches and clicks. They found, assuming
the cost per 1000 ad impressions (CPM) is $1, that:
The marginal cost of a brand-related search resulting from ads is $15.65 per search, but is • only $1.69 per search from a targeted campaign.
The marginal cost of a click is 72 cents, but only 13 cents from a targeted campaign.
• Targeted Advertisement is possible by tracking files, called "cookies," on users' computers and monitoring them as users browse the Web. Advertising networks then display ads tailored to users' browsing history. Privacy groups, lawmakers and regulators worried about personal privacy have called for restrictions on online tracking. A survey conducted in the United States in 2012 revealed that 68 percent of Americans are not fans of targeted advertising, but rather see it as invasion of privacy.
Online advertisers feel that this is due to misconceptions about how targeting advertising works. The
following two examples illustrate this point:
When Google offered ads to its Gmail users based on contextual information in emails, • privacy advocates objected to Google “reading people’s email.” Yet these claims do not distinguish between ads delivered to these users through automated computer technology and an individual snooping through personal emails.
A wedding photographer in Dallas can pay Facebook to serve an ad to everyone in Dallas who • switches his or her relationship from “single” to “engaged”. This benefits everyone – the photographer gets more clients, the users get more relevant ads. At no time does the photographer learn who sees the ads, unless the user chooses to make contact.
1.2 Impact of Privacy Regulations Regulations limiting data collection and tracking will impact data-tracking companies and companies that have big stakes in ad networks like Google, Yahoo, Apple, Adobe, Facebook,
Microsoft, etc. However, these companies have resources at their disposal to allow them to move swiftly to adapt to the regulations.
In addition to regulations, many startups like Abine, Allow, Evidon and IntelliProtect are selling services to disable tracking. According to the Wall Street Journal, some of the giants (like Microsoft and McAfee) are already hedging their bets. Some online-tracking companies themselves are rolling out new ways to protect users from having their movements monitored online. AOL, one of largest online trackers, recently increased promotion of their privacy services. enCircle Media, an ad agency that works with tracking companies, invested in a privacy start-up, IntelliProtect. Companies like Allow use European legislation make data scarce by removing customers from the marketing databases, and in turn, sell their data for willing customers in return for a portion of the fee received for the data.
Despite the many businesses involved, this will ultimately impact users. The Internet is a free, interactive medium. As the input is limited, there will be an obvious impact to user experience.
While people will have greater control over privacy on one hand, they will lose the richness of the Internet experience. There is a need to balance privacy with ensuring Internet growth.
1.3 Summary of the Report The Internet is a vital part of economic and social life, and federal data privacy legislation should ensure that beneficial uses of data are not curtailed by overly restrictive data sharing policies. In this report, we will explore some business options which can make the user feel safer about the collected data by the internet service provider and also monitor the behavior of the internet provider for wrongly-collected user information. We will analyze the existing and future companies that work on data privacy to make the Internet prosper as a free service, as well as ensure that customers enjoy greater privacy.
2. Government Regulations
2.1. USA Privacy Laws The privacy policies of American companies are voluntary, with the exception of protection under federal laws for certain kinds of sensitive information like health records and data about children younger than 13. On December 1, 2010, the Federal Trade Commission (FTC) published a preliminary report highlighting consumers’ right to prevent websites from tracking their online behaviors. The FTC set the standards for use of an online opt-out function that allows consumers to forbid the collection or use of private information, and to demand a business entity to comply with the choice of a consumer to opt-out of such collection or use. In 2011 and 2013, there were several bills introduced around this issue, which were then dropped after industry groups said they would voluntarily develop ways for users to opt out. However, the industry groups were unable to come to an agreement with consumer rights groups about how to create such mechanisms.
Industry groups argue that tracking is necessary because it helps advertisers show users pertinent ads, which pay for the sites. Furthermore, tracking is more or less anonymous: since data trackers follow IP addresses rather than users directly, no significant information about users is revealed.
Several Web browsers and tech companies have already given users Do Not Track options.
Google built Do Not Track support into its Chrome Web browser in February 2012 and Yahoo implemented a Do Not Track service across its entire global network last March. Mozilla, Microsoft, and AOL have also committed to working with Do Not Track technology. However, without a law, companies are not required to comply with user wishes to opt out. Sen. Jay Rockefeller introduced the Do Not Track Online Act of 2013 again, allowing the FTC to go after those companies that aren't complying with the law. The FTC would also be required to create the mechanisms that would let users choose whether or not they want to be tracked.
2.2. European Union Privacy Laws Europe has tougher data protection rules. European Union policy makers are proposing to harmonize new, tougher rules across the 27-member union. These would require companies to obtain permission before collecting personal data and specify exactly what information will be collected and how it will be used. If asked, companies would have to provide users with data that has been collected about them and allow them to fix inaccuracies. One proposal would include a so-called “right to be forgotten”  that would make it mandatory for companies like Facebook to delete all information about users who want to wipe their slate clean.
Overly costly and restrictive rules have impacted the competitiveness of Europe’s digital companies.
European companies are at a disadvantage compared to U.S. companies because the government is essentially limiting their revenue to less than half of what they could otherwise earn. As a result, Europe has struggled to be an effective player in the Internet economy, whereas the United States is under significantly fewer restrictions.
When Europe unveiled proposals last year to toughen up data protection rules, they were hailed as an important advance in privacy rights. Now Brussels is weighing whether or not to adapt some aspects of the draft regulations in response to concerns over the impact on business. They want to ensure these changes do not sacrifice the fundamental principle that individuals are the ultimate owners of their own personal data.