rope. Instead, it suggests that, coincident with the timing of the enactment of European privacy regulation, advertising at Web sites in Europe became less effective.

This drop in ad effectiveness was not uniform across all types of Web sites and advertisements. In fact, many Web sites and ad formats were barely affected. We did not see any significant decline in ad effectiveness on Web sites that had specialized content, such as baby and automotive Web sites. It was Web sites that did not have content that was easily matched to a specific product (Web sites like CNN.com and Dictionary.com) that drove the measured drop in advertising effectiveness. We believe this result is driven by the difficulty of matching a customer to an ad on such Web sites because the Web site content does not reveal specific preferences. In contrast, it is easy to target advertising to a visitor at a Web site for parents of babies, even without data on browsing behavior.

Large, intrusive ads also showed little decline in effectiveness. Instead, the fall in ad effectiveness in Europe was largely driven by plain banner ads. This makes sense because more discreet ads rely on the inherent interest of a customer in that kind of product, rather than on a striking ad design. 1

Limitations

Before concluding, we clarify some of the limitations of this analysis:

˲ ˲Our measures of advertising effectiveness are representative only for people who are willing to answer an online market survey. Though respondent demographics seem representative of the general population, they

our results provide
some of the first
empirical evidence
about the likely
consequences of
privacy regulation.

may be unusual in dimensions we do not observe. Therefore, a conservative interpretation of our results is that we measure a decline in a measurement of advertising effectiveness commonly used by the online advertising industry.

˲ ˲ The campaigns we study are representative of those launched by large firms who had substantial resources. We do not know how privacy regulation affected smaller firms. On the one hand, the costs of compliance may have been higher for such firms. On the other hand, small firms may have been less careful about compliance.

˲ ˲The campaigns we study were placed directly by the advertiser on particular Web sites rather than being distributed through an advertising network—a common distribution channel for online advertising. It is possible that advertising networks were better able to invest resources to mitigate the effects of privacy regulation, and therefore experienced less of a decline.

˲ ˲We do not know whether the change in advertising effectiveness affected advertising revenues. This would depend on substitution patterns between online and offline media.

˲ ˲ It is not clear whether our results generalize to Web sites that explicitly offer users control over their privacy settings, such as Facebook. Such proprietary opt-in Web sites may even benefit from regulation of this kind, if it means they are more efficient at delivering ads than their competitors.

What It means

Notwithstanding these limitations, our results provide some of the first empirical evidence about the likely consequences of privacy regulation. This is important because of recent developments in the U.S. concerning regulation. In their preliminary staff report, the FTC made the following proposal: The most practical method of providing such universal choice would likely involve the placement of a persistent setting, similar to a cookie, on the consumer’s browser signaling the consumer’s choices about being tracked and receiving targeted ads. Commission staff supports this approach, sometimes referred to as “Do Not Track.”

Obviously this persistent “opt-out” is a different approach from the EU regulation that we study. However,

any decline
in advertising
effectiveness that
results from the new
regulation will not
be borne equally
by all Web sites.

our estimates suggest that one could reasonably expect a large drop in advertising effectiveness for consumers who choose to opt out of targeting. Therefore, the likely effects of the proposed regulation depend on the number of consumers who would ultimately choose to persistently opt out, which in turn will be driven by the specifics of the regulatory framework.

Crucially, our empirical findings suggest any decline in advertising effectiveness that results from the new regulation will not be borne equally by all Web sites. In the long run, this may change the kind of Web sites and firms that prosper on the advertising-supported Internet, perhaps leading to fewer free (ad-supported) general-interest Web sites. Our results also suggest that advertisers may move toward more visually arresting types of advertising in order to compensate for their inability to target. Therefore, the potential benefits to consumers of increased privacy should be weighed against the consumer benefits of a potentially broader advertising-supported Internet that has fewer visually distracting ads.

 

References

1. Goldfarb, a. and Tucker, C. online display advertising: Targeting and obtrusiveness. Marketing Science.

Forthcoming.

2. Goldfarb, a. and Tucker, C. Privacy regulation and online advertising. Management Science 57, 1 (Jan. 2011), 57–71.

 

Avi Goldfarb ( [e-mail]) is an associate professor of Marketing in the rotman School of Management at the university of Toronto.

Catherine Tucker ( [e-mail]) is Douglas Drane Career Development Professor of Information Technology and Management and an assistant professor of Marketing at the MI T Sloan School of Management, Cambridge, Ma.