Premature Privacy Concerns Over Verizon-AOL Deal

The recent announcement that Verizon Communications Inc. intends to acquire AOL Inc. generated a surprising amount of media coverage, and unfortunately some groups are using the news as an excuse to push for expanded privacy regulations that would stifle innovation and competition in the burgeoning mobile ecosystem.

By telecom standards, this is not a huge transaction. At $4.4 billion, it is a full order of magnitude smaller than either the AT&T-DirecTV deal or the ill-fated Comcast-Time Warner Cable merger. And Verizon’s purchase of the 45% stake Vodafone had in Verizon Wireless was almost 30 times larger. Nevertheless, reporters flocked to the story, perhaps drawn by potential jokes about promotional CDs or the opportunity to poke fun at the 2 million Americans who remain AOL dial-up subscribers.

More likely interest in the deal was driven by its implications for the business Verizon wants to become. AOL is well known for its content, such as Huffington Post and TechCruch, but its growth is now in online ad sales—especially in video ads. The nation’s leading wireless company is looking down the road and seeing mobile video (presumably sprinkled with advertisements) as the future. “Verizon’s vision is to provide customers with a premium digital experience based on a global multiscreen network platform,” Verizon CEO Lowell McAdam explained. “This acquisition supports our strategy to provide a cross-screen connection for consumers, creators, and advertisers to deliver that premium customer experience.”

The AOL acquisition will be just one piece of this puzzle of course. Verizon is expected to launch a wireless video offering this summer, and, furthermore, the dispute with ESPN over the FiOS slimmed down bundle shows a willingness to experiment with new business models.

Mobile video is still a very young industry with both technical and business challenges—targeted advertising may well be an important part of making mobile video economically viable for consumers. Getting the capacity to satiate customer’s ever-increasing video streaming demands in the midst of competitive pressure on price will not be easy. Targeted advertising is a likely part of the solution.

Some are, predictably, skeptical of the deal for this very reason. Public Knowledge’s Harold Feld called for an accelerated rulemaking to regulate broadband network information. This is a new area of jurisdiction for the commission opened up when it decided to classify broadband providers as common carriers under Title II. With the new classification, the commission inherits statutory authority from the old landline phone laws to create rules around “customer proprietary network information,” or CPNI.

Feld claims that “whether or not the combination of a major online advertiser with the largest mobile services provider raises substantial antitrust concerns, it raises extremely substantial and urgent privacy concerns.” Besides the fact that it raises no antitrust concerns, it also raises no “urgent privacy concerns.” Targeted advertising is not the bogeyman that privacy absolutists like Public Knowledge and others make it out to be. It is in fact pro-consumer and pro-innovation and one reason America’s Internet ecosystem is so much more developed than Europe’s (which limits the ability to do targeted ads).

Moreover, as we argued in a recent report on the FCC’s privacy foray, a transparent opt-out mechanism would provide sufficient baseline privacy protection. Otherwise treating carriers differently than other parts of the Internet ecosystem when it comes to privacy will result in higher prices for consumers. Indeed, telecom carriers may well be able to better protect the privacy of users than other potential industry configurations where personal information is dispersed broadly. If Feld wants mobile video without advertising he will have to find a higher priced plan that will scratch that itch.

Mobile broadband is still a nascent sector—rushing headlong to regulate away new business models that might increase its affordability would be a mistake. Instead we should allow it flexibility to innovate with new uses of data, provided customers’ baseline expectations of privacy are protected. We should resist the temptation to assume that the business models of the past will remain the business models of the future.

In fact, it is not clear how internalizing part of the advertising value chain makes any difference as to the “urgency” of CPNI rules. The Verizon-AOL merger does not raise any urgent privacy issues. Groups like Public Knowledge are looking for any excuse to saddle ISPs with new regulations. In this case, Public Knowledge may even be working against expanding consumer privacy because ISPs may serve as a useful intermediary to protect consumer privacy while allowing targeted advertising. One way to protect consumer privacy while allowing targeted advertising is to have an intermediary match ads to users without sharing personal data with advertisers. This is the model used by many platforms, such as Google and Facebook, where advertisers buy access to display ads to specific demographics rather than buy actual user data. If anything, bringing in AOL’s advertising platform in house would reduce the number of partners Verizon would be sharing information with, ultimately increasing customer privacy.