How Not to Regulate the Internet

Not helping.

Photographer: Daniel Acker/Bloomberg

On the internet, ads giveth and ads taketh away. They're the reason you can enjoy so many services for free, and also why everything you do is so relentlessly tracked. It's an awkward duality. But for consumers, it more or less works. 

Last week the Federal Communications Commission tinkered with this delicate equation. It approved new privacy rules that will require broadband providers to get permission from their subscribers before they can collect certain personal data. That sounds great. Unfortunately, it's likely to do more harm than good.

Digital advertising, as you've no doubt noticed, is booming. From 2005 to 2015, revenue from internet ads grew at a rate of 17 percent a year in the U.S., reaching nearly $60 billion. There are numerous reports about how these ads can deliver an impressive return on investment. And thanks to data collection, companies can parse consumer preferences and behavior as never before.

U.S. Internet Advertising Revenue
 
Source: IAC/PwC

That's mostly a good thing. It makes businesses more efficient, productive and attentive to potential customers. More powerfully, it's the reason you can read the news, send e-mail, consult maps, store data, find information, watch videos and browse social media online without paying a dime.

The problem is that the terms of this trade-off aren't always clear to the customer. Web companies have devised cunning methods to track customers and invented elaborate euphemisms to obscure exactly what they do with all that data. Regulators tend to demand strong privacy protections but would prefer not to discuss the economic repercussions.

As a result, internet users have been habituated to think that they have an inherent right to free stuff and to privacy. Alas, they don't.

The FCC's approach won't improve this situation. For one thing, the most avid collectors of data, such as Google and Facebook, aren't under the FCC's purview and thus can still swoop up as much personal information as they like. For another, broadband providers can still get information about their customers to serve ads -- by consulting data brokers, for instance. In raising transaction costs and curtailing a growing source of revenue for broadband providers, the new rules are more likely to result in higher prices than in better privacy.

Is there a better way to resolve this dilemma?

Making the trade-off more explicit would help. So-called pay-for-privacy policies, in which companies charge users more in exchange for not tracking them, is one promising approach. Opportunistic politicians have criticized such models in the past. But in putting a price on personal data, they make it easier to weigh costs and benefits. That's the right way to encourage transparency, which should be the goal for regulators.

The truth is that very few people actually want to see ads. But consumers will tolerate them, and divulge the data they require, so long as the benefits they receive in return are so splendid. Regulators should ensure that choice is an informed one -- but otherwise leave well enough alone.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.