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Will the information and delivery services industry like data minimization?

Posted January 27th, 2015 in knowledge economy, knowledge market, privacy and tagged , by Alton Drew

Today the Federal Trade Commission released a report on the Internet of Things and the best practices companies could put in place to protect consumer privacy.  The scope of the report was limited to IoT devices that consumers use to access other devices via the internet.  In addition, one of the best practices for securing consumer privacy mentioned in the report was the concept of data minimization.

How would data minimization impact firms within the information and delivery services industry who rely on large amounts of data in order to analyze consumption behavior?  The FTC defines data minimization as limiting the collection of consumer data, and retaining that information only for a set period of time and not indefinitely.  By minimizing collected data, tyhe FTC believes that larger data storers may make themselves less attractive to thieves and that the risk that data will be used in a way departing from consumer expectations will be reduced.

What the report overlooks are firms that consumers may not have face-to-face exposure to.  Take for example Broadridge Financial Solutions.  Broadridge processes and transfers sensitive personal information provided to them by their clients.  These clients include financial institutions, public companies, and mutual funds.  Under certain circumstances Broadridge’s own vendors may have access to the personal information Broadridge receives.  According to the company, they maintain systems and procedures to protect consumer data including encryption, authentication technology, data loss technology, and the transmission of data over private networks.

Even with their own protections in place, would information and delivery services firms like Broadridge see a decrease in volume if their clients are forced via additonal best practices to collect a limited field of data?  I’ve read nothing in the financials of a number of companies that tell me that they are concerned about additional regulations from the FTC indirectly impacting them.  Bear in mind that the clients for these information firms are other business firms, but since the information they analyze is collected by firms with direct exposure to consumers, information and delivery services firms and their investors should be aware of these developments in the regulation of the internet of things.

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What regulators say about the internet of things

For the past two or three days the chairmen of the Federal Communications Commission and the Federal Trade Commission have been clarifying their regulatory agendas for and approaches to the Internet.  FCC chairman Tom Wheeler plans to issue net neutrality rules around 5 February with the full FCC voting on those rules on 26 February.  Media reports have Mr. Wheeler outlining what he believes the benefits consumers would enjoy from reclassifying broadband as an old school, run-of-the-mill telephone company.  For example at the Consumer Electronics Show in Las Vegas Mr. Wheeler reportedly said the following:

“So, there is a way to do Title II right, that says there are many parts of Title II that are inappropriate, and would thwart investment, but that a model has been set in the wireless business.”

CTIA-The Wireless Association has taken the position that given the level of competition for mobile broadband that net neutrality rules should be “mobile broadband specific” and that mobile broadband has never been regulated under Title II.

Mr. Wheeler, in an attempt to keep net neutrality advocates happy, appears to be willing to use Title II regulation to strike down deals between content providers and broadband operators where content providers pay to have their traffic given higher priority over other providers.  Mr. Wheeler wants the role of determining which transactions and agreements are commercially reasonable and how that traffic should be moved from content provider to broadband provider to ultimate end user.

FTC chairman Edith Ramirez’s approach appears to focus more on transparency of participants in information markets.  Her concern, as shared with CES participants, is about privacy and the Internet of Things. As more devices connect to each other via the internet, more devices become subject to hacking and a wealth of data, thought by consumers to be private, becomes subject to misuse, theft, or fraud.

Ms. Ramirez’s focus on the consumer is not surprising given the nature of her agency’s work, but it also seems the slightly, and I mean slightly, better approach to overseeing market behavior versus individual business behavior.  The internet is a platform for information exchange between information generators and information seekers.  The more information that a provider has on how her information is going to be used in the markets helps her make better decisions not only on whether she should make it available but also on its value and how best to monetize her data. Information gatherers will simply have to provide better incentives to information providers to get them to give up their data.

What kind of growth does the market see for the Internet of Things?  According to Cisco’s Internet Business Solutions Group, some 25 billion devices will be connected to the internet by the end of 2015.  That number will climb to 50 billion connected devices by the end of 2020.  That’s a lot of broadband infrastructure for the FCC to oversee and more hacking access points for the FTC to worry about in five short years.

Investors will see the biggest gains in the infrastructure space of the Internet of Things.  Leading growth in this space will be manufacturers of processor chips, wifi networks, sensors, and software.  Investors should also be concerned with factors that impact demand for devices that talk to each other and I believe the factor that has the heaviest weight is the consumer privacy factor.  Devices aren’t just talking to each other but are gathering information on consumer likes and habits and storing this data for the information gatherer’s future use.  Privacy is an immediate and long term issue because it concerns one half of the parties involved in the information market transaction: the consumer.

As for the FCC’s open access approach it is too short-sighted.  Mr. Wheeler’s focus on competition for broadband service and equal treatment of traffic may have a nice sounding populist ring, but in the internet eco-system what matters is the consumer’s choice of product obtained through broadband.  That product is content and the price the consumer pays in exchange for that content is, ironically, content in the form of personal data.  Consumers already have wireless and wireline choices for broadband access.  The value play for consumers lies in the quality of content available online and consumers are more than capable of deciding that for themselves.

What the government can do is what it does best (albeit it is not the best at it, but work with me); government should adjudicate privacy and other consumer disputes and make available to consumers information that they may not be able to gleen readily from the private sector.  The FTC’s focus on privacy and consumer protection does a better job at this than the FCC.

I’ll go out on a limb and say that the private sector is taking care of the FCC’s mandate of ensuring a nationwide communications network.  The FCC’s focus given the growth in the mobile market and the increasing need for devices to wirelessly connect should remain on allocating spectrum and assuring the reliability and safety of wired and wireless communications infrastructure.  Any other endeavor is waste.