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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."

Meghan Keane

Published 19 May, 2010 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

721 more posts from this author

Comments (3)

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jacob wright

This is the best thing that could happen to online advertising.  People would actually start having to be creative in order to get consumers' intention instead of relying on intrusive and unethical tracking techniques...

about 6 years ago

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Ken Cheung

utter madness...being a numbers geek, tracking gives us (far more) definitive numbers to be able to make educated assessments on the performance and results of specific marketing activity that would otherwise have been finger in the air guesses. this is a step back in the developments of digital marketing. I totally understand the importance of privacy online and the need for regulation to prevent unscrupulous behaviour, but this is hitting a wall nut with a sledgehammer. as for the comment above...Jacob - this isn't anything to do with creativity, the technology to record results and performance don't impede creativity, just because a campaign is tracking doesn't mean it can't be creative. As far as targeting is concerned, again, you need a combination of factual data which this tracking provides as well as creative 'guess work' which you're suggesting. you can't expect a business to shell out a few million simply on a 'gut feel' that a campaign will target the correct customer without any evidential fact (I.e. actual data and statistics).

about 6 years ago

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Aloysius carl

The study was conducted in Germany where the laws are regarding a set of specific tracking and bucketing techniques.  There are still other behavior methods, which are legal and still deliver superior ad performance.  And there is at least one behavior system company that has proven results in Germany after the new privacy laws were in place.

about 6 years ago

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