The Internet: It ain't designed to protect your privacy

Why do web companies keeping pushing users' limits on privacy protections? Basic economics, my dear Watson

Over at Forbes, Scott Cleland has a pretty good column examining why there aren't more social networks and email services that fully protect user privacy, despite the fact that users always get up in arms whenever companies such as Google and Facebook make changes to their services that could harm our ability to keep our data to ourselves.  Cleland uses a lot of econospeak in his column (which I'll do my best to translate for people without econ degrees), but his argument basically boils down to this: We can't keep our privacy on the web because we're too addicted to all the free stuff it has to offer.  Let's take a look:

What is the essential critical element of achieving audience/user scale fastest? Free. No direct cost to the user fuels fastest, frictionless, viral adoption. This free economic model presupposes online advertising as an eventual monetization mechanism and shuns products and services directly paid for by the user because their inherent time-to-market is too slow and their upfront sunk cost of sales and customer service is too high for this predominant value creation model.

Anyone who likes to read the news on a regular basis knows this is true.  After all, how many of us are actually willing to pay the New York Times for access to content once we hit our monthly limit on articles?  We just figure "t'hellwit'it" and head on over to the Washington Post, Politico or any number of blogs that will satiate our need for information.  This means that in order to make the web profitable, it has to be based on an advertising model rather than a subscription model.  And in order to be a really profitable venture, web advertisers have to know as much about us as possible so they can tell their clients, "Look, guys like Brad Reed talk about My Little Ponies all the time over Gmail and are attending Brony Meetups next week*.  Google can send My Little Pony ads into their Gmail accounts so you'll know you're paying to reach a willing audience.  What do ya say?"

Cleland also touches on why consumers have comparatively little power to change web companies' incentives to keep their privacy better:

The third big reason market forces for privacy protection are so weak is the glaring lack of user leverage/consumer power in the market equation. By design, the Silicon Valley venture capital/IPO model produces first-movers that can dominate their chosen Internet segment:Google-search, Facebook-social networking, eBay-online auctions and payments, Amazon-retailing, Twitter-real-time-micro-blogging, Zynga-games, etc. By design, this adoption-fastest model seeks to preclude or limit the viability of a significant competitive alternative. Thus the purveyors of this model can claim users have privacy choice, when they know their model has limited choice of alternatives and the limited choices that are available also have limited market incentives to protect privacy. 

Remember the time you tried to go into your friends' treehouse and they said they'd only let you in after you submitted yourself to getting a monster wedgie?  And remember how you decided to storm off and build your own treehouse to show them you could have just as much fun on your own?  And then remember how you realized that sitting alone in your own treehouse made you feel like the giant loser you were?  Well, the web is sort of like that.  There's no point in packing up all your stuff on Facebook and moving to a supposedly more-private social network if none of your friends are there.  Web companies know this and they know you love, love, love all the free stuff they're giving you access to so you won't really jump ship over teensy-weensy little privacy concerns, will you?  I mean, you don't want to be that loser sitting alone in your own treehouse, right?

Cleland concludes:

The very specific market failure here is twofold. First, extremely lax enforcement of the FTC Section 5 law against deceptive business practices, created market failure here because users were systematically denied fair representation in the marketplace, which is the first and most important line of defense against consumer fraud. Without effective fair-representation law enforcement, the consumer incorrectly assumes the online businesses in question are being forthright. Second, dysfunctional Federal privacy law — that only protects privacy expectations offline and not online — creates market failure as well, because users have minimal market control over the market for their online personal data. What is needed is new privacy legislation that is a consumer-driven, technology/competition-neutral privacy framework that works online and offline.

Simply, what is needed here to correct this specific market failure, is for law enforcement to ensure online businesses fairly represent their privacy and financial conflicts of interest to consumers/users so they can better protect themselves, and for Congress to harmonize Federal privacy law to close the huge Internet loophole in privacy law so that users enjoy the same expected privacy protections online that they do offline.

Sounds all right to me.  But in the meantime, try to understand that just because something is free doesn't mean it doesn't have a cost.

*No I am not a Brony and will not be attending any Brony meetups.  It was just a hypothetical.  Why are you looking at me like that?  WHAT??!!!

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