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PFF Working Paper
November 6, 2009
1444 EYE STREET, NW
SUITE 500
WASHINGTON, D.C. 20005202-289-8928
mail@pff.org
www.pff.org
The Benefits of Online Advertising& Costs of Privacy Regulation
by Berin Szoka & Mark Adams
*
“Advertising is the mother’s milk of all the mass media.”
- Wall Street Journal technology columnist Walt Mossberg
“
Half the money I spend on advertising is wasted; the trouble is I don't know which half.
”
- John C. Wanamaker,
“
father of modern advertising
”
(1838-1922)
Contents
VIII. Policy Recommendations ...................................................................................................... 21
*
Berin Szoka(bszoka@pff.org)is a Senior Fellow and Director of the Center for Internet Freedom at The Progress
& Freedom Foundation. Mark Adams is a Visiting Fellow with The Progress & Freedom Foundation. The viewsexpressed here are their own, and are not necessarily the views of the PFF board, other fellows or staff.
Page 2 November 6, 2009 Working Paper
I.
Introduction
Congress appears more likely than at any point in the last decade to pass legislation furtherregulating the collection and use of consumer data on the Internet as well as on otherinteractive media, such as mobile phones and cable television. While such data can significantly
improve the relevancy of advertising to consumers’ interests, advocates of data regula
tion
argue that such data collection and use violates users’ privacy. Moreover, some critics argue
that targeted advertising is inherently invasive or manipulative. Unfortunately, as politicalsupport grows in Washington for
“
baseline federal privacy regulation,
”
1
what leading onlineadvertising analyst David Hallerman has called a
“
perfect storm
”
of
“
[c]oncurrent economic,societal and technological trends
”
threatens to ravage advertising and ad-supported media.
2
Inshort, regulation may restrict the evolution of online advertising at a crucial time in itsdevelopment, stymieing the transition of traditional media to the digital age and the growth of new online content and services.The importance of Internet advertising goes far beyond corporate bottom lines. Whileadvertising is itself an important channel for non-commercial speech, it has also long been the
“mother’s milk”
of media in America, funding the speech of others since the birth of ad-supported newspapers in the colonial era.
3
Like print, radio and television ads, Internetadvertising supports a wide array of online media, but unlike traditional media the Internetallows anyone who can set up a website to earn ad revenue
—
if they can draw traffic. Thus,advertising supports not only traditional content publishers, but also a staggering
“
long tail
”
of millions of publishers of niche and minority-oriented text, audio and video content, and a widevariety of Internet services, including software that was traditionally sold at high prices.
4
Hallerman notes that total U.S. advertising revenue declined 0.7% in 2007 and 3.6% in 2008
—
the first recorded two year decline in the U.S. since tracking began in 1940. He predicts thatoverall ad spending will fall another 8.2% in 2009 and 3.0% in 2010, while growing only 0.4% in2011, 1% in 2012, and 0.6% in 2013
—
a total drop of 12.4% by 2013.
5
In the first half of 2009,
1. For a discussion of the criticism of targeted advertising,
see generally
Berin Szoka & Adam Thierer, TheProgress & Freedom Foundation,
Targeted Online Advertising: What’s the Harm & Where Are We Heading?
,Progress on Point 16.2, Apr. 2009, http://www.pff.org/issues-pubs/pops/2009/pop16.2targetonlinead.pdf ;Berin
Szoka & Adam Thierer, The Progress & Freedom Foundation,
Online Advertising & User Privacy: Principles to Guidethe Debate
, Progress Snapshot 4.19. Sept. 2008, http://www.pff.org/issues-pubs/ps/2008/ps4.19onlinetargeting.html. 2. David Hallerman,
US Advertising Spending: The New Reality
, eMarketer, Apr. 2009, at 16http://www.emarketer.com/Reports/All/Emarketer_2000576.aspx. 3. Walter Mossberg,
Now You See 'Em...
, SmartMoney.com, June 15, 2000,
available at
http://web.archive.org/web/20061124235126/http://www.smartmoney.com/mossberg/index.cfm?story=20000615. 4.
See generally
Chris Anderson,
The Long Tail:
Why the Future of Business is Selling Less of More
(Hyperion2006); Chris Anderson,
The Long Tail
supra
November 6, 2009 Working Paper Page 3
online advertising revenues fell by 5.3%.
6
Even Capitol Hill has noticed the particular distress of newspapers,
7
whose print ad revenues are projected to decline 28-42% from 2007 to 2010.
8
Hallerman concludes
“
the shifting advertising landscape will require more experimentation
—
different ad formats, different ways to market that engage the audience, different spending.
”
9
Amid this economic turmoil, only online advertising revenue is expected to continue growing inthe next few years
—
but at a considerably slower pace (~10%) than over the last 12 years, whenrevenues grew at a 31.5% compound annual growth rate (and even more in some recentyears).
10
As the overall advertising market shrinks and as ad dollars follow users online,Internet advertising is expected nearly to double its share of total ad spending from 8.7% in2008 ($23.4 billion) to 15.2% ($37.2 billion).
11
This revenue supports content and servicesoffered both by the large web portals like Google, Yahoo!, Microsoft and AOL, and by themillions of publishers, large and small, that depend on online advertising revenue. Among thetop fifty websites by traffic,
all
offered users considerable amounts of free content while 65%prominently serve ads.
12
Estimates indicate that at least one third of web applications rely onadvertising.
13
The importance of these growing revenue streams is not simply economic. Yet many criticshave ignored or downplayed the key benefits of online advertising in favor of strict, pre-emptive privacy regulation such as opt-in mandates or a
“
Do Not Track
”
registry.
14
No matterhow well-intentioned privacy regulation is, such regulation necessarily amounts to an industrialpolicy for the Internet because, as with all media policy, intervention that affects both the
amount and distribution of available funding has profound cultural, societal, and politicalconsequences. As Szoka and Thierer concluded:
6.
See
Interactive Advertising Bureau,
Internet Advertising Revenue Report
, Oct. 2009, at 5 [hereinafter
2009Half Year IAB Revenue Report
See, e.g
, Susan Milligan,
Senators consider options for ailing newspapers
, Boston Globe, May 7, 2009,www.boston.com/news/local/massachusetts/articles/2009/05/07/senators_consider_options_for_ailing_newspapers/. 8. Hallerman,
supra
supra
See
Interactive Advertising Bureau,
Internet Advertising Revenue Report
, March 2009, at 7 (presentingannual growth rates for each year) [hereinafter
2008 IAB Revenue Report
supra
note2at 5 and 7.12. Survey conducted by Eric Beech, PFF Summer Fellow, on Alexa.com in July 2008 (excluding sites primarilyfocused on pornography); site lists available at http://www.alexa.com/topsites/countries/US.
13. Chris Anderson,
Terrific Survey of Free Business Models Online
, March 26, 2009,http://www.longtail.com/the_long_tail/2009/03/terrific-survey-of-free-business-models-online.html 14.
See, e.g,
Berin Szoka & Adam Thierer,
Behavioral Advertising Industry Practices Hearing: Some Issues that Need to be Discussed
, PFF Blog, June 18, 2009, http://blog.pff.org/archives/2009/06/behavioral_advertising_industry_practices_hearing.html;
see also supra
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