Progress Snapshot

Volume 6, Issue 1 January 2010

Chairman Leibowitz’s Disconnect on

Privacy Regulation & the Future of News
by Adam Thierer & Berin Szoka*

Stephanie Clifford of the New York Times posted a very interesting article this week
summarizing a recent “on-the-record chat” the Times staff had with Federal Trade Commission
(FTC) chairman Jon Leibowitz and FTC Bureau of Consumer Protection chief David Vladeck. The
interview is profoundly important in that it reveals an alarming disconnect regarding the
relationship between “privacy” regulation and the future of media, which were the subjects of
their discussion with Times staff. Namely, Leibowitz and Vladeck apparently fail to appreciate
how the delicate balance between commercial advertising and journalism is at risk precisely
because of the sort of regulations they apparently are ready to adopt. Because the value of
online advertising depends on data about its effectiveness and consumers’ likely interests, and
because advertising is indispensable to funding media, what’s ultimately at stake here is
nothing short of the future of press freedom.

The “Day of Reckoning” Is Upon Us

Leibowitz and Vladeck spend the first half of The Times interview wringing their hands about
“privacy policies,” the declarations made by websites and advertising networks about their data
collection and use practices (for which the FTC can and must hold them accountable). But the
two feel that privacy policies don’t adequately inform consumers. Chairman Leibowitz claims
that online companies “haven’t given consumers effective notice, so they can make effective
choices.” And Mr. Vladeck states that advise-and-consent models “depended on the fiction
that people were meaningfully giving consent.” But he and the FTC seem ready to abandon the
notice and choice model because the “literature is clear” that few people read privacy policies,
Vladeck told the Times. He and Leibowitz continue:
“Philosophically, we wonder if we’re moving to a post-disclosure era and what
that would look like,” Mr. Vladeck said. “What’s the substitute for it?” He said
the commission was still looking into the issue, but it hoped to have an answer
by June or July, when it plans to publish a report on the subject. Mr. Leibowitz
gave a hint as to what might be included: “I have a sense, and it’s still
amorphous, that we might head toward opt-in,” Mr. Leibowitz said.

Adam Thierer is President of The Progress & Freedom Foundation and Director of PFF’s Center for Digital
Media Freedom. Berin Szoka is a PFF Senior Fellow and Director of PFF’s Center for Internet Freedom. The
views expressed herein are their own, and are not necessarily the views of the PFF board, fellows or staff.

1444 EYE STREET, NW  SUITE 500  WASHINGTON, D.C. 20005

202-289-8928  mail@pff.org  @ProgressFreedom  www.pff.org
Page 2 Progress Snapshot 6.1

This clearly foreshadows the regulatory endgame we have long suspected was coming. When
the FTC released its “Self-Regulatory Principles for Online Behavioral Advertising” eleven
months ago, we asked: “What’s the Harm & Where Are We Heading?” Their answers to both
questions have become clearer with each new calculated comment—all apparently intended to
slowly “turn up the heat” on the advertising industry so that the proverbial frog will stay in the
pot until the water finally boils. Leibowitz’s FTC has simply dodged the “harm” question with a
four-part strategy:

1. Cobble together a “record” full of sympathy-evoking anecdotes submitted by advocates

of regulation in comments and the FTC’s ongoing “Exploring Privacy” Roundtables;
2. Let the most extreme Chicken Littles fulminate about the grand conspiracy of
“neuromarketing manipulation” and the like (and sometimes even shout down FTC staff
in panel discussions) in order to redefine the “reasonable center” of the debate;
3. Define-down “harm” as purely a matter of “consumer expectations” or consumers’
“dignity interests” (whatever that vague and infinitely elastic term means); and
4. Attack the effectiveness of “consent” itself by suggesting that consumers cannot be
trusted to understand privacy policies or be expected to make any effort to protect their
own privacy.
Conveniently, this strategy leads right back to the “day of reckoning” Chairman Leibowitz
threatened was coming last February: We are heading precisely where he told us we would
be—to full-on, opt-in regulation. The writing on the wall becomes more apparent every
day: Leibowitz set out to bring online advertising to heel even before becoming Chairman, and
his Commission is reprising almost precisely the same approach that led to the passage of the
Children’s Online Privacy Protection Act (COPPA) of 1998: building a case for new authority,
dismissing industry self-regulation as ineffective, and finally presenting a report to Congress
intended to produce a rapid legislative response. After the FTC presented its report on the
need for regulation in congressional testimony in June 1998, it took Congress just four months
to pass COPPA—and much of that time was consumed by the summer recess. In short,
Leibowitz is mounting a carefully choreographed campaign for increased regulation.

The only real question is whether Leibowitz will somehow try to use the FTC’s existing authority
over “unfair or deceptive” trade practices or wait for expanded authority from Congress. While
most observers typically assume that such expanded authority would come in the form of a
privacy-specific bill—be it a broad “baseline” privacy bill or one specifically focused on online
data collection for advertising purposes—the authority Leibowitz yearns for could just as easily
come in the form of increased rulemaking authority as part of a broader bill that allows the FTC
to preemptively regulate practices that are not deceptive but merely deemed “unfair.”

This would take the agency “Back to the Future”—to the late 1970s, when the agency reached
the height of its efforts to regulate purely on “unfairness” grounds by trying to ban advertising
to children. The agency’s behavior earned it the moniker “National Nanny” from the
Washington Post, hardly a bastion of regulatory skepticism.1 That outpouring of popular

1
Washington Post, March 1, 1978.
Progress Snapshot 6.1 Page 3

resentment caused a heavily Democratic Congress to cut-off the Democratic-led agency’s

regular funding and prohibit it from regulating advertising merely on the grounds of
“unfairness.” In essence, they told the agency to “go back to its knitting” and focus on
protecting consumers from demonstrated harms.2 Duly chastened (and actually shut down for
several days), the FTC formulated a meaningful legal standard for “unfairness,” which Congress
codified in 1994: for a practice to be unfair, the injury it causes must be (1) substantial, (2)
without offsetting benefits, and (3) one that consumers cannot reasonably avoid.

Under this statutory standard, as FTC Commissioner Thomas Rosch has argued, the commission
must carefully consider:
[the] legitimate pro-consumer and pro-competitive benefits that result from
[targeted advertising]. Absent hard data weighing these benefits against the
limited “invasion of privacy interests” involved, it would seem difficult to
conclude that treating that practice as an actionable violation of the “unfairness”
prong of Section 5 will pass muster.3

So Leibowitz and Vladeck either need to get serious about weighing the costs and benefits of
targeted advertising—or, in the absence of such actually measuring these trade-offs, get
Congress to give them the authority to regulate. But one thing is clear from their past
statements: they are in a hurry to do something. As Vladeck told The Times last August, “There
is a sense of urgency around here... Consumers, I don’t think are sufficiently protected under
the current regime.” Apparently, the case is closed in their minds.

“Left Hand, Meet Right Hand”

The second half of the Times interview concerns the future of news. Chairman Leibowitz
is not optimistic:
“There are some areas where you clearly see positive creative destruction,” Mr.
Leibowitz said, giving the example of travel agents who were replaced by Orbitz
and other online-booking systems. The news, he said, was not one of those.
“When you’re dealing with something as critical as news is to a democracy, you
need to ensure, certainly, that it’s independent, but also that it’s vibrant going
forward,” he said. Areas like investigative reporting, foreign and domestic
bureaus, and state-house reporting, he said, would likely falter under blog
operations because of “economies of scale.”

2
Congress terminated the FTC’s efforts to prohibit advertising to children, and barred the agency from issuing
any advertising regulation predicated solely on unfairness for three years. FTC Improvements Act, Pub. L. No.
96-252, § 11 (May 1980). See generally J. Howard Beales, Director of the Bureau of Consumer Protection,
Federal Trade Commission, The FTC's Use of Unfairness Authority: Its Rise, Fall, and Resurrection,
www.ftc.gov/speeches/beales/unfair0603.shtm.
3
Thomas Rosch, Some Reflections on the Future of the Internet: Net Neutrality, Online Behavioral Advertising,
and Health Information Technology, Remarks at U.S. Chamber of Commerce Telecommunications & E-
Commerce Committee Fall Meeting, October 26, 2009, 13, www.ftc.gov/speeches/rosch/091026chamber.pdf.
Page 4 Progress Snapshot 6.1

He said he wasn’t sure what the solution was, but threw out a few ideas
discussed at the conference: maybe special tax treatment for newspapers, a
Corporation for Public Broadcasting-like fund, or for the newspaper industry to
charge fees for the re-use of its content, similar to the model that the American
Society of Composers, Authors and Publishers uses. [emphasis added]

Mr. Chairman, with all due respect, haven’t you forgotten about the solution that has powered
private media for a few centuries in this country? You know—advertising! Indeed, what’s
stunning about these comments is the complete disconnect with what Leibowitz and Vladeck
said earlier in the interview. It certainly may be the case that they said more on the subject
than what The Times has reported, but given their escalating rhetoric, it seems likely that
significantly increased FTC regulation is on the horizon. And, yet, as Chairman Leibowitz
marches us into this brave new world of regulating Internet media through their key funding
source, he and Mr. Vladeck seem to have little appreciation of the vital role played by
advertising in sustaining a truly free and vibrant press.

An Attack on Advertising Is an Attack on Media Itself

Let’s step back and revisit Media Economics 101. Almost every serious scholar in the field
acknowledges this truism: Advertising cross-subsidizes media platforms and the creation of
valuable information—especially news. “Advertising is the mother’s milk of all the mass
media,” Wall Street Journal technology columnist Walt Mossberg has noted. Similarly, Harold L.
Vogel, author of Entertainment Industry Economics, the leading text in the field, has noted,
“Advertising is the key common ingredient in the tactics and strategies of all entertainment and
media company business models. Indeed, it might further be said that advertising has
substantively subsidized the production and delivery of news and entertainment throughout
the last century.”4 Mossberg agrees and notes, “Without ads, most editorial products and
other programming would be either unavailable or prohibitively expensive.”
The reason for the indispensability of advertising is simple: Information (including news and
other forms of “content”) has “public good” characteristics that make it is very difficult (and
occasionally impossible) for information-publishers to recoup their investments. Simply put,
they quite literally lack pricing power: Whatever they charge, someone else will charge less for
a close substitute, inevitably leading to “free” distribution of the content, even though the
content is anything but free to produce. Advertising is the one business model that has
traditionally saved the day by rewarding publishers for attracting the attention of an audience.
Which raises another under-appreciated point: Private advertising promotes press
independence. “Newspapers, magazines, radio, television, and many websites all receive their
primary income from advertising,” notes William F. Arens, author of Contemporary
Advertising, another leading textbook in the field. “This facilitates freedom of the press and
promotes more complete information” he concludes.5 Why? Because, contrary to what some
critics claim, advertising and marketing help keep private media providers independent of the

4
Harold L. Vogel, Entertainment Industry Economics (Cambridge, MA: Cambridge University Press, 7th Edition,
2007), at 46.
5 th
William F. Arens, Contemporary Advertising (McGraw-Hill Irwin, 10 Ed., 2006) at 50.
Progress Snapshot 6.1 Page 5

need for taxpayer subsidies or private patrons. This begs an even more profound question: If
not advertising, then what else?

A “Public Option” for the Press?

What’s most troubling about Chairman Leibowitz’s comments to the Times is that he has
apparently found his alternative to advertising: a “public option” for the press! He mentions
special tax treatment for newspapers or a new CPB-like fund (don’t we already have one?) as
two possibilities. That certainly will be music to the ears of radical, pro-regulatory activist
groups like the ironically-named “Free Press,” which wants to see a massive “public works”
program for the media sector.
Free Press recently filed comments with the FTC in the agency’s recent workshop, “Can
Journalism Survive the Internet Age?” and proposed a far-reaching industrial policy for “saving
the news.” They call for over $50 billion in subsidies for the Corporation for Public Broadcasting
and other bureaucracies, a “journalism jobs program” for that would be part of AmeriCorps, a
variety of new tax incentives for struggling media operations or individuals who support
favored institutions, and an assortment of government incentives to encourage local ownership
and media divestiture (by handing over control to smaller operators or minority-owned
groups). Ironically, “Free Press” has also floated the concept of “a small tax on advertising” as
one way to pay for a press bailout.
The organization’s founder Robert W. McChesney, the prolific neo-Marxist media scholar,
penned an essay with John Nichols of The Nation last year, claiming that saving journalism
essentially requires that media become an appendage of the State. Although advertising has
supported journalism as a “public good” for centuries, the only way they can conceive to
provide a public good is to socialize its means of production. Thus, journalism, like education
and national defense, requires constant government oversight and support: “A moment has
arrived at which we must recognize the need to invest tax dollars to create and maintain news
gathering, reporting and writing with the purpose of informing all our citizens.” They ask us to
consider the $60 billion in government spending they propose as a “free press ‘infrastructure
project,’” which would “keep the press system alive.”
Some in Congress seem willing to listen. The Senate has already held hearings about the future
of journalism. And Senator Benjamin L. Cardin (D-MD) recently introduced what he has called
the “Newspaper Revitalization Act,” which would allow newspapers to become nonprofit
organizations in an effort to help them stay afloat. Importantly, however, the bill would also
disallow political endorsements on newspaper editorial pages—which, like campaign finance
restrictions, would be a boon for incumbent politicians. That bill should serve as fair warning to
journalists about the sort of strings lawmakers will attach to press-welfare efforts going
forward. What other “golden shackles” might come with media subsidies?

To be clear, Chairman Leibowitz hasn’t called for a complete press takeover along the lines of
the Free Press plan. Yet, he hasn’t answered a key question in this debate: Who pays for news?
He appears ready to endorse a bold new regulatory scheme for the Internet and online media
that, in the name of “protecting privacy” would put at risk the one traditionally successful
method of supporting private media operations—advertising. As the Pew Research Center’s
Project for Excellence in Journalism noted in its latest State of the News Media report, “The
Page 6 Progress Snapshot 6.1

problem facing American journalism is not fundamentally an audience problem or a credibility

problem. It is a revenue problem—the decoupling… of advertising from news.” There’s
probably no way policymakers can stop this process, nor should they try. But they shouldn’t be
creating new obstacles to the survival of traditional media creators, either.

Unfortunately, that’s exactly what Chairman Leibowitz’s new regulatory scheme would do. The
revenue “delta” between “smart” advertising (tailored to consumers’ likely interests and
measured for effectiveness in producing clicks, purchases, etc.) and “dumb advertising” (based
purely on surrounding keywords or demographics of users presumed to visit the site) is difficult
to measure but potentially enormous—even 10 times as great for some sites.6 The difference
between opt-in and opt-out could be nearly as dramatic, because it’s difficult to get consumers
to opt-in for anything, especially for small players—which means that opt-in regulation could,
perversely, force consolidation in the online advertising and content markets. If the FTC cares
about its statutory responsibility to safeguard competition, they should take this dynamic
seriously and be hyper-cautious about heavy-handed mandates that could derail smarter
advertising.

Finally, to be fair, in his interview, the Chairman also suggests the newspaper industry might
want to find new way “to charge fees for the re-use of its content.” We’re certainly not
opposed to the notion and think that, if it could somehow be made to work (especially by
removing antitrust obstacles), it could part of a diverse revenue mix for digital journalism. But,
there’s the rub. Micropayments inevitably face the problem of “mental transaction costs” that
likely swamp the perceived value of most content and, like pay-walls, have generally worked
only in media environments characterized by a scarcity of providers and a uniqueness of a
sufficiently valuable product. These cold, hard economic realities are why advertising remains
indispensable.

The Principled Alternative to Regulation

Convinced that privacy policies simply don’t work, Leibowitz and Vladeck are asking what a
“post-disclosure era” would look like. We appreciate the continued sensitivities expressed
by certain groups and individuals about online privacy and data use more generally. But there
is another way forward. We have proposed the following “5-E” layered approach to concerns
about online privacy, focusing on restraining government access to data as a clear harm, rather
than crippling the private sector uses of data that directly benefit consumers:
1. Erect a higher “Wall of Separation between Web and State” by increasing Americans’
protection from government access to their personal data—thus bringing the Fourth
Amendment into the Digital Age.
2. Educate users about privacy risks and data management in general as well as specific
practices and policies for safer computing.
3. Empower users to implement their privacy preferences in specific contexts as easily as
possible.

6
See Berin Szoka & Mark Adams, The Benefits of Online Advertising & Costs of Privacy Regulation, PFF Working
Paper, Nov. 8, 2009, www.scribd.com/doc/22445754/Benefits-of-Online-Advertising-Paper.
Progress Snapshot 6.1 Page 7

4. Enhance self-regulation by industry sectors and companies to integrate with user

education and empowerment.
5. Enforce existing laws against unfair and deceptive trade practices as well as state
privacy tort laws.
Such a layered approach would not only be a “less restrictive” alternative to top-down, one-
size-fits-all government regulation, but also potentially more effective in key respects than
government data use/collection mandates. In an ideal world, adults would be fully empowered
to tailor privacy decisions, like speech decisions, to their own values and preferences
(“household standards”). Consumers would have (1) the information necessary to make
informed decisions and (2) the tools and methods necessary to act upon that information.
Importantly, those tools and methods would give them the ability to block the things they don’t
like—annoying ads or the collection of data about them, as well as objectionable content—
while also helping them find the information and content they desire.

But of course, the devil’s in the details. Leibowitz and Vladeck would set the bar so high as to
what constitutes “effective” consumer choice that current privacy policies necessarily fail their
test—if only because most users don’t care enough to make the “right” privacy choices. Privacy
policies, even if read by relatively few consumers, nonetheless allow privacy advocates,
journalists and watchdog-bloggers to scrutinize what companies say they’re doing—promises to
which the FTC should hold companies stringently. That’s clearly not good enough for Leibowitz
and Vladeck, who want to give up on “notice and choice” and move on to “opt-in” mandates.
But why not first try to make “notice” more effective? The advertising industry is currently
developing standardized interfaces that could communicate key information about privacy
practices in a single icon, label or other easily-digested “consumer touch point.”

More radically, why focus on tinkering with consumer interfaces, when standardized data
disclosure formats like the Protocol for Privacy Preferences (P3P) could distill legalistic privacy
policies into “machine-readable” code? Such disclosures could provide a powerful form of
“notice” that the ordinary consumer could “use”: simply setting their own privacy preferences
in a browser tool that automatically implements those preferences by blocking tracking that
users object to. Such a privacy disclosure format could also allow the FTC to automate
enforcement of its existing authority to punish unfair or deceptive trade practices.

Conclusion
And so we return to the question the FTC asked in its recent workshop, “Can Journalism Survive
the Internet Age?” Answer: Not if the FTC kills the golden goose that lays the golden eggs
through onerous advertising regulations and data controls in the name of “privacy.” Chairman
Leibowitz and Bureau Chief Vladeck shouldn’t foreclose the possibility that advertising can play
a central role in the future of a free press in the Digital Age—just as it has done historically in
the United States. Indeed, they would be wise to remember that advertising has always been
with us. As the Supreme Court noted in its 1996 decision, 44 Liquormart, Inc. v. Rhode Island.
Advertising has been a part of our culture throughout our history. Even in
colonial days, the public relied on “commercial speech” for vital information
about the market. Early newspapers displayed advertisements for goods and
services on their front pages, and town criers called out prices in public squares.
Page 8 Progress Snapshot 6.1

Indeed, commercial messages played such a central role in public life prior to the
founding that Benjamin Franklin authored his early defense of a free press in
support of his decision to print, of all things, an advertisement for voyages to
Barbados.7

Of course, for advertising to continue to play the role as sustainer of the press, it must be
allowed to evolve. Media operators—large and small alike—must be allowed to craft new
strategies, some of which may require data collection and marketing practices that will make
some privacy-sensitive users uncomfortable, but will also ensure that the goose keeps on laying
golden eggs for them and everyone else.
While Chairman Leibowitz may decry the creative destruction at work in the news sector and
information industries today, that shakeup will continue and, no doubt, be painful for
incumbent players. Advertising alone may not “save the day” for media as it has in the past,
but it will likely remain essential to sustaining private media platforms and providers going
forward—if federal policymakers allow it. The alternative—massive government intervention
into the news and media sectors—is too horrifying to think about.

Related PFF Publications

 Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise
Prices, Quash Digital Innovation & Curtail Free Speech, Berin Szoka, Comments to the
Federal Trade Commission “Exploring Privacy” Roundtable, November 10, 2009.
 Online Advertising & User Privacy: Principles to Guide the Debate, Berin Szoka & Adam
Thierer, Progress Snapshot 4.19, Sept. 2008.
 Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Berin Szoka &
Adam Thierer, Progress on Point 16.2, April 2009.
 Privacy Polls v. Real-World Trade-Offs, Berin Szoka, Progress Snapshot 5.10, Oct. 2009.
 The Benefits of Online Advertising & Costs of Privacy Regulation, Berin Szoka & Mark
Adams, PFF Working Paper, Nov. 8, 2009.
 Benefits of Online Advertising, Berin Szoka, Mark Adams, Howard Beales, Thomas Lenard
& Jules Polonetsky, PFF Capitol Briefing, July 2009.
 Public Option for Press Should Get the Red Pen, Adam Thierer, The Daily Caller, Jan. 12,
2010.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its
implications for public policy. Its mission is to educate policymakers, opinion leaders and the public about issues
associated with technological change, based on a philosophy of limited government, free markets and civil liberties.
Established in 1993, PFF is a private, non-profit, non-partisan research organization supported by tax-deductible
donations from corporations, foundations and individuals. The views expressed here are those of the authors, and do not
necessarily represent the views of PFF, its Board of Directors, officers or staff.
The Progress & Freedom Foundation  1444 Eye Street, NW  Suite 500  Washington, DC 20005
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7
517 U.S. 484, 495 (1996), http://www.law.cornell.edu/supct/html/94-1140.ZO.html