What should be the fate of targeted advertising?

In a video for The New York Times, computer scientist and philosopher Jaron Lanier described online advertising as “the little space in the middle” combining capitalism with the “socialist” concept that Internet content should be free. Now a multi-billion-dollar industry, online advertising is what funds free online content. It is also what has elevated Google and Facebook to some of the wealthiest companies in the world (remember the “Senator, we run ads”?)

It is thus little surprise that digital advertising is in the spotlight, capturing the attention of academics, regulators, but also lawmakers. A significant part of the current debate centers around issues of competition and privacy, and the inevitable trade-offs between them.

On the competition front, more than half of online ad spend is captured by the “walled gardens” of Google and Facebook, the rest being left for the thousands of publishers in the open web, from news media to game apps and small blogs. At the same time, Google controls the ad tech stack – the various software tools used by publishers and marketers to sell and buy ads respectively – and was found by the CMA to have engaged in various leveraging practices (e.g., using its market power in one step of the value chain to gain an advantage elsewhere. Note that Damien and I have authored a series of papers explaining in detail Google’s conduct; if interested, see here and here). Google’s questionable practices in ad tech are also the subject of an ongoing multi-state probe in the US.

On the privacy front, “personalized” or “targeted” advertising (that is, advertising tailored to the user’s interests and characteristics, often inferred from her browsing history) is under pressure from privacy legislation, such as the General Data Protection Regulation in the EU or the California Consumer Privacy Act, and regulators, such as Data Protection Authorities. For instance, even though no formal action has been taken (which has created discontent among privacy advocates) the UK’s Information Commissioner Office has expressed concerns about the practice of Real Time Bidding, where ad auctions are held in real-time each time a user visits the publisher’s webpage.

Rather ironically, privacy instruments such as the GDPR seem to have strengthened the position of large online platforms and in particular Google, when it comes to online advertising. At the same time, large digital platforms such as Google and Apple have become de facto privacy regulators for the millions of businesses that rely on them (e.g., app developers using their app stores or publishers using Google’s ad tech tools), wielding powers far greater than those of any Data Protection Authority. As explained in an earlier post, these platforms often invoke privacy to justify practices that have the potential to restrict competition, the latest example being Apple’s requirement that app developers wishing to access the device’s random advertising identifier need to obtain opt-in user permission through an Apple-designed pop-up box. A number of French trade associations recently filed a complaint with the Autorité de la concurrence against Apple over this policy change, so it will be very interesting to see how the Autorite will approach the issue. (Disclosure: our firm acts for the complainants).

Most recently, the European Parliament backed a report calling for tighter regulation of, or even an outright ban on targeted advertising. According to some commentators, a total ban on targeted advertising could help address problems associated with digital platforms (such as the proliferation of fake news or election interference) by removing the underlying incentive to collect and monetize user data.

While it is for the lawmakers to eventually decide, one should bear in mind that an indiscriminate prohibition on personalized advertising might go too far. At the very least, any decision should be properly informed and take into account its wider implications. Targeted advertising benefits  users (at least those that prefer relevant ads over random ones), marketers (which are able to reach the right person at the right time and place, thus reducing media waste) and publishers (which make up to 50% more revenue, according to studies by Google and Facebook). In the absence of personalized advertising, quality content online may shrink or may have to move behind paywalls, which will translate to a welfare loss for consumers that value free content. For instance, few people will be able to afford multiple subscriptions in order to, e.g., read the news or connect with others or play games. An outright prohibition on personalized advertising may thus on balance harm consumers, and this should be factored in by lawmakers. This of course does not mean that nothing should  be done to address nefarious advertising practices. So perhaps instead of banning targeted advertising altogether, it might be better to regulate it more tightly and/or prohibit certain objectionable forms such as political advertising or advertising on the basis of sensitive information (such as race, gender, political opinions, religious views, sexual orientation or health conditions).

It is interesting to note that with its Privacy Sandbox initiative, Google Chrome has put forward a path in the middle between the two extremes (ban behavioral advertising – do nothing). The aim of the Privacy Sandbox initiative is to increase user privacy by removing the ability to track individuals across sites through third-party cookies (instead, any tracking will move to the cohort level, meaning that users will be tracked only as part of a larger group) without breaking the ad-funded model on which the web has been built (by offering a series of APIs that publishers, marketers and ad tech vendors could use to perform advertising functions, including personalized advertising). This stands in contrast to Apple’s blunt approach on Safari, which cracks down on every form of cross-site tracking without offering any alternative (and which may be explained by the fact that historically, ad revenue has been a small part of Apple’s business).

But, for all its theoretical virtues, the Privacy Sandbox suffers from two major flaws: first, it does nothing to restrict individual user tracking within logged-in properties. Google and Facebook’s ability to track their logged-in users will thus remain intact (note also that, rather perversely, when a user browses the web through Chrome, Google may under certain conditions track the user even across websites; this ability will remain intact post-Privacy Sandbox). This means that the incremental value brought by the Privacy Sandbox in terms of privacy may be limited (to put it bluntly, the Privacy Sandbox will not do anything to prevent a Cambridge Analytica-style scandal), while also creating market distortions (marketers will push an even greater part of their spend to Google and Facebook, to the detriment of the open web). Second, it elevates the browser (which in many cases is Chrome) to a form of bottleneck, as the CMA observed, as it will be responsible for tracking the user and performing key advertising function.

To put it in a nutshell, there are some obvious trade-offs between privacy and competition when it comes to online advertising. One should also have in mind that there is a tension between the desire to crack down on personalized advertising to increase privacy and keeping (quality) online content free for consumers; one can’t simply have their cake and eat it too. These considerations need to be factored in by regulators and lawmakers. In the meantime, however, the landscape is shaped by the decisions of de facto privacy regulators (i.e. mainly Google and Apple) which, unlike public authorities, are accountable to no democratic institution. These companies claim to have the right to strike the balance between the various considerations referred to above and decide for everyone else. And while we do not wish to challenge their intentions, one cannot simply leave these private companies with no oversight, especially when they have a financial interest at stake (for instance, Google itself has a massive advertising business). Regulators should thus monitor closely the decisions of these private regulators, and when appropriate intervene.

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