22nd Mar 2018

Column / Brussels Bytes

e-Privacy law would penalise sites who block ad-blockers

  • A 2015 joint study by Reuters and Oxford University found that only about 10 percent of internet users pay for a news subscription. (Photo: Pixabay)

Online advertising, particularly targeted advertising, underpins the internet economy and funds most of the free content and services internet users rely on.

However, many users attempt to freeload by using ad-blockers on websites, thereby gaining access to content for free without allowing online businesses to receive compensation from advertising. Many sites have responded to the growing use of ad-blockers by requiring users to disable ad-blockers on their site before they can gain access.

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Unfortunately, the European Parliament has backed an amendment to the ePrivacy Regulation, a forthcoming privacy law, that would require online services using targeted advertising to offer users "other fair and reasonable options" to access their services without these ads.

This proposal would prohibit online businesses from simply blocking users who use ad-blockers.

If online businesses can no longer deny access to users who reject targeted advertising, they will face three choices. First, they could let users access their service without ads. However, this means less revenue.

Second, they could use non-targeted ads. If they kept the number of ads the same, this too would hurt their revenue as non-targeted ads bring in less than half the revenue of targeted ones.

Alternatively, they could show twice as many non-targeted ads to attempt to keep revenue neutral, but this would create a worse user experience and possibly drive people away, again cutting into revenue.

In either of these two scenarios, online businesses will receive less revenue. Lower revenue will translate into fewer digital startups in Europe and less investment in better online services among existing firms.

Since some online services tend to have high fixed costs and hardly any marginal costs, the result of the dip in revenue will be smaller-scale online firms that invest less on innovation.

A third option would be for online businesses to offer users an option to pay to access their services without targeted ads. Businesses for whom this is a viable option are likely already doing it. For the rest, this would be an additional cost, with little to no payoff.

The problem is that consumers will not pay for most of the digital services they use, especially since they have become accustomed to getting them for free. For example, a 2015 joint study by Reuters and Oxford University found that only about 10 percent of internet users pay for a news subscription. So while a few media companies can charge for online subscriptions because they are their readers' primary news source, most smaller and newer competitors rely on advertising.

Mobile app developers face a similar problem. Gartner found in 2017 that over half of smartphone users spend nothing on mobile apps, and most of the rest spent no more than $10 over the three months prior to the survey.

It is possible that someday there will be a widely-used service that allows users to make micro-payments to the sites they visit in lieu of seeing ads—there are a few experiments along these lines already—but this is not something that is widely deployed today or that consumers have shown a willingness to adopt, and it would be reckless for policymakers to bet on it becoming dominant when drafting important new regulations.

This amendment will not increase privacy for users or even give them a new ability to opt out of targeted ads, as they already have a myriad of ways to do so.

The proposal is based on the false assumption that some consumers would prefer to pay for every website or app they access—a claim that is contradicted by most research on behavioral economics.

The amendment will damage the funding models that enable most consumers, especially low-income ones, to access free content and services. The Council of the European Union has proposed its own revisions to the commission's draft, so the council and parliament must now negotiate a compromise draft.

To protect Europe's internet economy, they should not let this amendment make it into the final version.

Nick Wallace is a Brussels-based senior policy analyst at the Centre for Data Innovation. His Brussels Bytes column deals with the digital single market and data-related policy issues in the European Union. Daniel Castro is the director of the Centre for Data Innovation and vice-president of the Information Technology and Innovation Foundation.

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