Washington, Digital Advertising and Competition

The Federal Communications Commission (FCC) is conducting a rulemaking proceeding right now in which the agency explains that it is trying to come up with additional regulations for Internet service providers (ISPs) that will protect consumer privacy online. 

It's a compelling sound byte, but upon closer examination of the FCC's proposal, it appears the agency's focus is on shaping the digital advertising market, not protecting privacy. The stakes are high among the existing, dominant players so it is not surprising that the FCC wants to wade in. But it is surprising that the FCC seems to want to shield the dominant players from additional competition, an odd motivation when you read the continuous stream of FCC releases on any number of issues heralding its laser focus on increasing competition, not minimizing it.

Let's review some basic facts about the online advertising market. The two largest edge companies by market cap generate more than $90 billion in global revenue per year by selling targeted advertising based on what the company knows about its subscribers. Customers' online information – what they do, where they do it and other data – is the currency on which these businesses are built. This is clearly revenue worth defending and protecting.

Comes now the FCC rulemaking, which claimed to be doing what consumers wanted by setting up a regime of regulation just for ISPs and markedly different from what the Federal Trade Commission (FTC) had already established for online companies. Public surveys reflect that consumers are not clamoring for multiple and different regulations to protect them. Sensibly, a vast majority of American consumers say they want a uniform, strong set of protections.

Related:Democratic Senators Say Digital Ad Fraud Rampant

In a recent CIGI-Ipsos Global Survey on Internet Security and Trust, 82% of Americans said they are concerned that their information may be bought or sold. Similarly, in a recent Progressive Policy Institute (PPI) poll, 97% of those surveyed said they considered online privacy and data security to be important to them, and 94% said that all companies collecting data online should follow the same consumer privacy rules. Furthermore, 90% of Americans expressed that all Internet companies should operate under the same set of rules and regulations. No matter how the data is sliced – gender, age, race, location, political affiliation – Americans are saying the same thing: they want uniform protections.

The clear divide between what the FCC says consumers want versus what consumers actually say they want raises an interesting question: Why has the FCC worked so hard to cloak its unique privacy proposal in a shroud of consumer support? At the risk of assigning a less-than-noble motive to a federal agency, it would appear that saying the proposal is about protecting consumers has effectively kept it off the radars of investors in the sector.

Investors across the Internet sector would be alarmed to find out that the FCC was in fact intervening in the digital advertising market to shield the existing dominant players from fresh competition. By constraining just the ISPs' ability to leverage the consumer information they can legally observe and package for resale to advertisers, the FCC is preventing them from directly competing with companies like Google and Facebook for online advertising. To think that FCC action here is anything other than shaping the market is to fall for the theory that American consumers are clamoring for lots of different and conflicting restrictions on what companies can and can't do with their private information.

The only thing that the FCC's proposal will do is distort the digital advertising market and protect the dominant market position of the existing providers – the very anathema of American competition policy. The health of the online advertising market is critical to the future growth and evolution of the commercial Internet.  Today's dominant players will likely be tomorrow's smaller competitors and consumers will be the beneficiaries.  Everyone is clear that the "privacy as a currency" business model is here to stay. Let's expose it to more rather than less competition and let's give Americans what they want – a consistent, comprehensive regime that protects them as well online as anywhere else.

Roger Entner is founder and lead analyst at telecom consulting firm Recon Analytics.