$80 Billion Tab for a "Free Lunch"

We all know there’s no such thing as a free lunch.  Everything comes at a price, including free Internet content and web services, nearly all of which are paid for by advertisers.

Proponents of “Do Not Track” legislation talk about giving consumers what they want, but nobody is asking whether consumers want to start paying the price — if advertisers won’t pay the bills anymore.

An MIT/Univ. of Toronto Study looked at what happened when European countries required opt-in to restrict interest tracking for online advertising.  Catherine Tucker and Avi Goldfarb reached this conclusion:

“Our analysis suggests that after the Privacy Directive was passed, advertising effectiveness decreased on average by around 65 percent in Europe relative to the rest of the world”

The MIT-Toronto Study compared the purchase intentions of 3.3 million individuals across 5 EU and 5 non-EU countries over the 8 years after European nations began implementing opt-in requirements to follow the EU Privacy Directive.  The comprehensive study reduced extraneous factors revealing the advertising effects of the EU opt-in Privacy Directive.

The study also found that the less intrusive ads were those most hurt by an EU style opt-in.  So such a policy might actually encourage advertisements to increase their intrusive nature.  This makes sense since users look more at ads that interest them (for example, interest-based advertisements).  So to get more views and clicks under a system limiting interest-based advertisements the ads must become more intrusive.

Building off the work in the MIT-Toronto study, we recently forecast the effect such an EU-style opt-in legislation on American websites.  The study identified an $80 billion loss to American websites over five years.

Graph of Opt-In mandate for interest-based advertisingWhat does this mean for you the reader?  Well if websites lost all this money, at least one of following — if not all will — come to pass:

  1. Websites will show more ads to make up some of the lost revenue.
  2. Websites will have less to spend on content, services, and innovation.
  3. Some websites will erect pay walls for content that users get for free today.

This means that, under a mandatory EU-style opt-in consent system, you could end up seeing more ads, get fewer features, see less innovation, and find yourself paying for content you previously received free.

Despite what some of our legislators think, the Internet is not free; someone has to pay.

So if lunch is not free, isn’t it better if paid for by advertisers than by you?

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Research for forecast based on: Loss of advertising revenue based on EU research by Goldfarb & Tucker, Privacy Regulation and Online Advertising, Univ. Toronto & MIT (Aug-2010); ad revenue forecasts by Nicole Perrin, 11 Trends for 2011, eMarketer (Dec-2010), and IAB, $6.4 Billion in Q3 2010 Sets New Record for Internet Advertising Revenues (Dec-2010)

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