The New York Times yesterday posted on article on real time bidding for online advertising that I found interesting. The article cited a petition filed with the Federal Trade Commission by the Center for Digital Democracy, where the CDD alleged that real time bidding, a process where advertising space on web sites is sold via an electronic trading platform, amounts to an unfair and deceptive practice.

Specifically, CDD alleged that electronic trading systems for advertising, where marketers can bid for consumers within milliseconds of a consumer visiting a web page, can unfairly stratify consumers, relegating some to inferior treatment while offering better pricing to others. According to CDD, not only does it resemble a cattle auction while reducing consumers to a “chattel” status, but these trading systems also threaten consumer privacy because advertisers are using consumer data obtained via data mining practices by third party aggregators. Consumers are not reaping the financial benefits of their very own data while advertisers, web sites, and third-party aggregators reap the profits.

Under section 45(n) of the Federal Trade Commission Act, the FTC applies a standard of proof and other public policy considerations when determining if an act is unfair and deceptive. There has to be, under the Act, a showing of substantial injury to a consumer from the party exhibiting bad behavior. The substantial injury must be a kind that is not reasonably avoidable by the consumer and not outweighed by countervailing benefits to the consumer and competition.

When reaching its conclusion on whether an action is unfair or deceptive, the FTC may consider, on a secondary basis, public policy.

I think the primary public policy consideration the FTC needs to take is whether a transaction has taken place where consumers are seeing degradation in their welfare. First of all, real time bidding does not directly involve the type of consumer that CDD is apparently concerned about. Consumers visiting web sites may not be interested in purchasing anything. Even if a consumer has a fetish for Gucci handbags and as a result of real time bidding finds her looking at ads for designer accessories, that’s not a deceptive act. It would be as if she walked into her favorite store and the attentive clerk who is aware of her penchant for these items lets her know that the store has some in stock. It’s simply information being shared.

Real time bidding gets information to a consumer faster because it leverages the history of the consumer’s tastes, desires, and ability to pay to get product in front of the consumer that she, based on these consumer characteristics, may be interested in. Back in my merchant days, we called this good marketing. The consumer’s welfare is also increased because she is receiving information that she can take into the market place and use when the time is right for her to make a purchase.

Also, the FTC needs to stay mindful that as households who have not yet adopted broadband continue to see other households take advantage of goods and services marketed directly to them based on their perceived tastes and desires, these unconnected households may choose to join the 21st century and get connected to e-commerce via broadband access. Following CDD’s lead and tainting cyberspace as a scary space to transact in will only delay the closing of a digital divide too many households are still facing today.

The United States Court of Appeals-Tenth Circuit yesterday issued a ruling in Qwest v. FCC, where Qwest appealed a ruling by the FCC denying a the carriers request from certain wireline and local service regulations. Qwest wanted the FCC to find that there was effective competition for certain wire centers in the Phoenix Metropolitan Statistical Area. Qwest argued that the FCC’s ruling denying forbearance from regulatory treatment was arbitrary, capricious, or an abuse of agency discretion. The primary reasoning for the FCC’s denial was that Qwest did not provide econometric data showing that wireless services provided a sufficient constraint on harmful increases in the price for wireline services.

The court also highlighted a decision by the FCC to change the analytical framework under which it would assess the level of competition in a service area when addressing the issue of forbearance. In prior proceedings, the FCC used a two-prong test for determining if forbearance was appropriate. The first prong was a market share test where the petitioning carrier makes a compelling argument that its share has fallen below some specified percentage. The second prong, a coverage test, would evidence that a competitor could reach a significant percentage of a service areas end users.

The FCC decided to abandon the two-prong test, deciding to apply a framework based on the Federal Trade Commission-Department of Justice Horizontal Merger Guidelines. This test would require the petitioner delineate the relevant product and geographic markets; identify market participants; and examine market share data.

Applying this new test, the FCC found that wireless and wireline services were not substitutes for each other (at least in Phoenix), and that Qwest produced no econometric analysis that estimated the cross-elasticity of demand between mobile wireless and wireline access services. (Insert a “WHAT?” using your best Chris Berman voice.)

In general, the court upheld the FCC’s ruling, but issued a clear warning about its policy shift. Describing the FCC’s decision to change its analytical framework as “goalpost-moving”, the court said:

“This kind of goalpost-moving does not reflect an optimal mode of administrative decision-making. And we do not foreclose the possibility that under some circumstances an agency’s shifting of the policy goalpost (e.g. evidentiary requirements for satisfying a particular statutory or regulatory standard) may lead us to conclude that the agency has acted arbitrarily or capriciously.”

My initial response to this was “regulatory uncertainty”. While I personally dislike the phrase, if ever there were an example, put in concrete by a court ruling, this would be it. While this case addressed forbearance from rules for wireline services, the same behavior could have repercussions for carriers delivering broadband services in the new world of net neutrality rules. Less than optimal regulatory decision making can, in my opinion, create volatility in the broadband access markets, especially where new net neutrality rules will be put to the test.

Volatility means unnecessary price increases that, on the one hand, will be put in place to cover increased compliance costs, while possibly impairing broadband adoption. The FCC needs to be mindful that its validity as a regulator, certainty in the investor community, and consumer welfare are dependent on a stable policymaking framework and that policy shifts should be properly telegraphed and explained.

The U.S. Senate Committee on Commerce, Science, and Transportation has scheduled a hearing on how well the online industry is self-regulating consumer privacy concerns. The committee’s chairman, Senator John Rockefeller, said the following:

“In our prior hearing on consumer privacy, both the Obama Administration and the FTC commended recent industry efforts to provide consumers with more privacy protections,” said Chairman Rockefeller. “However, their reports also stated that industry can do more and that federal legislation is necessary. In this follow-up hearing, I intend to closely examine how industry intends to fulfill its recent pledge to not collect consumers’ personal information when they utilize the self-regulatory ad icon or make “do-not-track” requests in their web browsers.”

The hearing is scheduled for 28 June 2012.

Federal Trade Commission Chairman Jon Leibowitz yesterday signaled the FTC’s preferences for future online privacy policies before the House Sub-Committee on Commerce, Manufacturing, and Trade. Chairman Leibowitz would like to see a best practices for protecting consumer online privacy; an acceleration of self-regulation within the online industry; a consumer privacy bill of rights which is heavily endorsed by the Obama Administration, and further developments in a do not track mechanism that would protect consumers visiting certain websites.

Chairman Leibowitz also recommended that Congress enact general privacy legislation. The legislation should require that companies implement reasonable measures and notify consumers of certain security breaches while providing consumers access to information maintained on them by information data brokers.

I can understand consumer concerns about the leakage of certain pieces of information, i.e., financial and medical information. Unfortunately sensitive information can be used against consumers during job searches or legal proceedings. Consumers should have this assurance especially if we want to promote broadband adoption among 100 million households over the next decade.

Investors and businesses should not be too overly concerned that the best practices proposed by the FTC are overly intrusive. The FTC appears to be saying before the consumer goes past Checkpoint Charlie, agree on the information that he is going to share and assure him of how it is being used and who else may be seeing it. Once he passes Checkpoint Charlie, however, the flow of commerce should be left uninterrupted. Delays in information flow will only drive up business costs by creating a false scarcity of information and added uncertainty in decision making.

According to The Wall Street Journal, Facebook may be entering into a settlement agreement with the Federal Trade Commission regarding when Facebook subscribers are notified about the changes in the use of their personal information. Facebook will allegedly submit its privacy practices to an outside audit for 20 years.

Mr. Zuckerberg would, according to the article, like to make it easier for subscribers to control how much of their personal data is released to the public.

If I were investing in Facebook, LinkedIn, or Twitter, and read Mr. Zuckerberg’s last statement about making user control over privacy easier, I’d dump the stock. It’s like a cattle rancher telling his herd, I’ll make it easier for you to escape.

The information that Facebook collects is the raw resource that it converts into ad and other sales. The more information that he can package for sale to advertisers and other data aggregators, the better it is for Facebook and other social media firms. Better meaning greater profit.

By failing to get in front of regulators, all he has done is driven up the cost of acquiring his most important factor input: personal information. A good cattle rancher knows how to head of the herd at the pass.