on the advertising-supported Internet.
In a recent research paper2 we begin to
fill this gap by examining how earlier
privacy regulation in Europe affected
the performance of online display advertising in Europe relative to the U.S.
and elsewhere. In this column we summarize the key findings and discuss
how our results inform recent proposals for privacy regulation in the U.S.
Advertisers spend $8 billion each year
on online display advertising and even
more on search engine advertising.
At the heart of this industry is the detailed collection, parsing, and analysis
of consumer data, often without consumers’ consent or knowledge. This
data allows firms to target their advertising to specific groups who might be
most influenced by advertising, and to
measure how well the advertising then
performs as they track the subsequent
behavior of users who were exposed to
an ad. There are growing concerns that
such unregulated data collection may
harm consumers. Specifically, the recent Federal Trade Commission (FTC)
preliminary staff report, “Protecting
Consumer Privacy in an Era of Rapid
Change,” (see http://www.ftc.gov/
identifies three groups of consumers
who might be harmed in the current
˲ ˲ Consumers troubled by the collection and sharing of their information.
˲ ˲ Consumers who have no idea that
any of this information collection and
sharing is taking place.
˲ ˲ Consumers—some teens for example—who may be aware of the sharing that takes place, but may not appreciate the risks it poses.
The FTC document then argues that
there might be benefits to increased
regulation. At the same time, the document makes it clear that another objective of any policy is “preserving the
ability of companies to innovate, compete, and offer consumer benefits.”
Given this objective, it is important
to understand how privacy regulation
might impact economic activity on the
We examined the effect of the EU Privacy and Electronic Communications
became much less
effective in europe
relative to elsewhere
after the regulation
known as the E-Privacy Directive) on
online advertising in Europe. Specifically, we looked at how consumer responses to advertising changed in Europe after it came into effect, relative
to changes in consumer responses to
advertising in the U.S. and elsewhere.
Several provisions of the Privacy Directive limited the ability of companies
to track user behavior on the Internet.
These changes made it more difficult
for the Lexus dealership in our earlier
example to collect and use data about
consumers’ browsing behavior on other Web sites.
The interpretation of this E-Privacy
Directive has been somewhat controversial as it relates to behavioral targeting. For example, it is not clear the extent to which a provision that requires
companies who use invisible tracking
devices such as Web bugs to use them
only with the “knowledge” of consumers means that companies need explicitly to obtain opt-in consent. This is
one of the reasons why, in the recent
“Telecoms Reform Package,” the EU
amended the current regulation to require a user’s explicit consent before
placing a cookie on a computer. Therefore our estimates also capture business responses when there is some
ambiguity over how privacy regulation
should be interpreted.
To measure online advertising ef-
fectiveness, we use unusual data from
a marketing research company that
ran various “a/b” tests of online display
ads across the world over eight years.
The research company developed a
straightforward methodology that per-
mitted comparison of different adver-
tising campaigns over time in order
to allow advertisers to benchmark the
effectiveness of different ads. In this
“a/b” test, some randomly selected peo-
ple are exposed to the ad for a certain
product, while others were exposed to
a placebo ad, usually for a charity. The
market research firm then surveyed
these Web users about their likelihood
of purchasing the advertised product.
This allows a clean measurement of
the effect of the ad: Because these peo-
ple are randomly selected, any increase
in expressed purchase intent toward
the product for the group exposed to
the ad relative to those who were not
exposed can be attributed to advertis-
ing. We use data on 3. 3 million of these
survey responses for 9,596 different
online display advertising campaigns
conducted on hundreds of different
Web sites across many countries.
We found that in Europe, after privacy
protection was enacted, the difference
in stated purchase intent between
those who were exposed to ads and
those who were not dropped by approximately 65%. There was no such
change for countries outside Europe.
In other words, online advertising became much less effective in Europe
relative to elsewhere after the regulation was enacted.
One possible explanation for this
result is that our estimates reflect a
change in attitudes among Europeans
toward targeted advertising, rather
than something that can be causally
attributed to the change in law. To
examine this possibility, we looked at
the behavior of Europeans on non-European Web sites and of non-Europeans on European Web sites. We found
no drop in ad effectiveness for Europeans browsing non-European Web sites
and a substantial drop in advertising effectiveness for non-Europeans
browsing European Web sites. The
drop does not appear to be a result of
changing consumer attitudes in Eu-