As Congress mulls a recently proposed online privacy bill draft, advertisers and privacy advocates are making the case for their competing interests on the matter. But a new study from two marketing professors argues that any privacy regulation will negatively effect the utility of online advertising.
According to the study, called "Privacy Regulation and Online Advertising," forcing users to opt-in to online tracking can have a negative effect on advertising efforts — reducing effectiveness by 65%.
The University of Toronto's Avi Goldfarb and MIT's Catherine E. Tucker surveyed 3.3 million people who had been exposed to a total of 9,596 online ad campaigns
between 2001 and 2008. Researchers asked web surfers exposed to a specific campaign whether they intended to purchase the products they saw. They then asked a control group who hadn't seen the ads if they would purchase the same products.
Comparing results between EU and non-EU countries, the study concluded that Europe's laws reduced effectiveness (according to purchase intent) by over 65%.
Why? Because the privacy rules implemented by the EU rendered targeting efforts much less effective. European Union data protection laws ban marketers from tracking users through "bugs" or "cookies" without notifying people and getting their consent.
The study also checked its assumptions by tracking loopholes to the EU regulations. According to the study:
"We found that when Europeans browsed websites outside of Europe (mostly in the US) that were not affected by these laws, there was no reduction in ad effectiveness. Conversely, when non-Europeans browsed EU websites that were covered by the laws, there was a reduction in ad effctiveness. This suggests that the change in effectiveness we observe is not linked to time-varying changes in consumer attitudes in Europe relative to the US."
Does that mean that online ads will completely lose their effectiveness if and when opt-in regulations come to the U.S.? Not exactly. The distinction was greater at general news sites than niche properties where users self-select according to interest:
"Customers at travel and parenting websites have already identified themselves as being in a particular target market, so it is less important for those websites to use data on previous browsing behavior to target their ads."
If and when opt-in precepts come to the U.S., advertisers could be forced to change their methods if they want to replicate their current rate of return. The study speculates that in the EU, marketers respond to ambigiuty in legislationg by taking on a "conservative legal
interpretation" and often curbing their targeting more than may even be necessary.
The reaction could be similar in the U.S. Goldfarb tells MediaPost:
"At least in the short run, the U.S. online ad industry would be affected. In the long run, they might adjust. They might figure out how to do the right kind of advertising that works, but that doesn't violate the privacy regulations."
The IAB estimates that $8 billion is currently spent on online ads in the US. The study suggests that if EU-like legislation came to the U.S., advertisers would need to spend $14.8 billion more online to get the results they currently get.
"If the entire burden of the regulation fell on the websites through reduced prices, online ad revenues could fall as low as $2.8 billion. Our estimates also suggest that this decrease in advertising revenue will be most pronounced for
websites providing general-interest content."
Those numbers are sure to strike fear in online advertisers. Will they be taken seriously by regulators and privacy advocates? That's another story. But Goldfarb has advice for those groups:
"There might be lots of reasons why you care about privacy regulation, but it has a cost. The cost is in how effective the online ads are."