OFT Report: Online Targeting of Advertising and Prices

May 25, 2010

The Office of Fair Trading has published a new report, Online Targeting of Advertising and Prices, which has the status of a ‘market study’ and is intended to further debate.

The report finds that, although industry self-regulation addresses some concerns about behavioural advertising, more could be done to provide consumers with better information about how personal information is collected and used. It also sets out how regulation might apply to these new and emerging practices.

The revenue from online behavioural advertising is currently between £64m and £95m, but this looks set to rise significantly in the future. The report finds that, while behavioural advertising may offer benefits to consumers such as, for example, free access to content, there are objections to the practice which centre around privacy issues and the possibility for the misuse of personal data. To address these concerns, the OFT will encourage the IAB, the trade association for online advertising, to work with the industry to provide clear notices alongside behavioural adverts and information about opting out.

Data protection law, and the Privacy and Electronic Communications (EC Directive) Regulations 2003 in particular, already requires firms to inform consumers about the purposes of storing a cookie or other tracking system on the user’s computer and to provide people with an opportunity to opt out. The OFT considers that the Consumer Protection from Unfair Trading Regulations 2008 could also apply to business practices in this area, for example where consumers are misled about the collection of information where this would lead consumers to alter their ‘transactional decision’. This would include, in the OFT’s view, a decision on whether or not to visit a web site.

Should industry action prove ineffective, the OFT and the ICO are strengthening the effectiveness of regulation by seeking to agree a Memorandum of Understanding to establish in which circumstances the ICO, or the OFT, would take enforcement action. In the event that the MoU covers areas where OFT and Ofcom have overlapping jurisdiction, the OFT and Ofcom would discuss, on a case-by-case basis, who would be best placed to act. 

The study also examines the prospects for the online targeting of pricing based on previous purchases, browsing behaviour or geographic location. Research suggests that consumer opposition to such practices would be very strong. This has led the OFT to conclude that consumers who knew that targeted prices were being applied would change their behaviour, meaning that failure to inform consumers about the practice could breach the Consumer Protection from Unfair Trading Regulations 2008, and in such an event the OFT would consider enforcement action.

Heather Clayton, OFT Senior Director in the Consumer Market Group said:

‘The OFT is keen to engage with industry players and consumer groups while behavioural advertising is in its relative infancy, and before targeted pricing takes hold, so that the market develops in a way that protects consumers from bad practice. Discussions now about the potential for both benefits and harm, and how consumer protection legislation applies, will stand us in good stead in the event that industry action proves ineffective or targeted pricing becomes a reality.’

Download the OFT’s full report here (pdf 1.8Mb).

An extract from the Executive Summary is reproduced below: 

1.1 In September 2009 over 14 million households in the UK used the internet to find out about goods or services. Between 2003 and 2008 the percentage of advertising revenue generated online grew from three percent to 20 percent. Advertising online has a different, and more complicated, nature than traditional advertising. The internet allows detailed information to be collected about consumers and for the advertising shown to vary according to consumer viewing it. This increases the scope for behaviourally targeted advertising. The benefits this may bring to consumers and the concerns it gives rise to have been the subject of much debate. Fears about the potential for targeted pricing to become widespread in the future have also been voiced. Such concerns have the potential to undermine trust in the online market place and so hinder its development.

1.2 Through research, we have explored the concerns of consumers and asked them whether these concerns are likely to restrict their use of online services. We have looked at the technologies that are being developed, how they are being deployed at present and how they might be deployed in the future. Mindful of both the benefits and possible harm to consumers, we have evaluated existing regulation, including how existing consumer protection legislation could apply, and the emerging self-regulation. We have considered whether the protection afforded by these means is adequate to address consumer concerns.

1.3 This document sets out our current views. We recognise, however, that this area is still evolving, with several important developments taking place even during the time it took to complete this short study. For this reason we do not think it appropriate to form definitive views now. Rather, we invite further debate on these issues and propose to update our thoughts in line with these comments and market developments. We intend to hold a roundtable event to discuss this report in June 2010, and commit to revisiting these matters as needed.

Online Targeting of Advertising

1.4 The annual UK revenue from behavioural advertising is between £64m and £95m. At present, this represents just a fraction of the total online advertising industry but the increased effectiveness of behavioural advertising suggests it looks set to account for a much larger share in the near future. The wider online advertising industry itself is growing at impressive speed. The internet has taken little more than a decade to become the largest sector of the advertising market in the UK and was worth over £3.35bn in 2008.

1.5 Most behavioural advertising works on the basis of small ‘cookie’ files which are placed on a consumers’ computer and used to track the pages a user visits on the site or on sites which are members of the same advertising network. Users are profiled on the basis of this browsing behaviour and adverts are targeted according to their likely interests. An alternative method of targeting advertising is based on ‘deep packet inspection’ techniques which collect information at the internet service provider level. This was trialled in the UK but is not in use at the moment.

1.6 Behavioural advertising has benefits to consumers. Improving the targeting of advertising decreases suppliers’ advertising costs and increases revenues for web-publishers. This increased efficiency feeds through to reduced costs for consumers for example by enabling free access to content. Consumers are also less likely to receive adverts that are not of interest to them.

1.7 On the other hand, a number of objections to behavioural advertising have been raised. These are centred on privacy issues, concerns about the possibility for misuse of the browsing data collected and fears that behavioural advertising might result in inappropriate or embarrassing advertising being shown.

1.8 As the practices have evolved so too have solutions to the concerns. Market based tools are being developed that allow consumers who are aware of, and concerned by, the collection of information to have greater control. Manufacturers of web browsers are improving functions that allow consumers to block cookies and some browsers have recently added a ‘private browsing’ mode. Other software solutions which allow internet users to block tracking devices, and even adverts altogether, can also be purchased.

1.9 In a few cases, firms themselves have taken steps to increase transparency and consumer control over behavioural advertising, and, in March 2009, the Internet Advertising Bureau (IAB) introduced selfregulatory principles supported by the leading market players. These state that members must tell consumers how browsing information will be collected, usually in the privacy policy of the web publisher, and must allow consumers to opt-out if they wish.

1.10 The Information Commissioner’s Office (ICO) has regulatory powers in this area. Under the Privacy Regulations, it is a legal requirement for firms to inform consumers when a tracking system collects information about them and to give them the opportunity to refuse their continued use. The exact form that the information and consent takes varies according to the situation. In some cases, it is acceptable to put the information in a privacy policy and allow consumers to opt-out but in others, such as behavioural advertising based on deep packet inspection techniques, this is not sufficient. The ICO also enforces the Data Protection Act (DPA) which provides for the regulation of the collection and use of personal data and in a recent consultation the ICO proposed that information about browsing behaviour should generally be treated as though it were personal data. This means that firms would have to inform consumers about such data collection, keep the data secure and must only use it in a way that is fair to consumers.

1.11 In addition to the powers of the ICO, the OFT considers that Consumer Protection from Unfair Trading Regulations (CPRs) do apply in this area. The CPRs may be breached if a consumer alters a transactional decision as a result of misinformation or lack of information. The OFT interprets transactional decision widely and believes it encompasses, for example, the decision to view a website. So it is possible that not informing a consumer about the collection of information about their browsing behaviour could breach the CPRs if that knowledge would have altered their behaviour, perhaps by dissuading them from visiting that website or buying a product from a website.

1.12 Our consumer research investigated the extent of concerns about behavioural advertising. We found that attitudes to online targeted advertising are mixed with 40 per cent of consumers holding neutral views, 28 per cent disliking it and 24 per cent welcoming it. Concerns decreased when consumers were able to opt-out of behavioural advertising, and the associated tracking, if they wished. Around 40 per cent of consumers said they would take some actions to prevent behavioural advertising (such as deleting cookies), although only a very small minority would reduce their internet usage to avoid it. Around 60 per cent would not alter their behaviour at all. 1.13 Based on our work and the results of the consumer research, we believe that it is proportionate to focus on improving and supporting self-regulation. The IAB’s Principles do appear to go some way to addressing consumer concerns, although they are barely a year old and still evolving – during the course of this study, they have been strengthened by the introduction of a policy statement which states that their members do not use ‘flash cookies’, which cannot be deleted by browsers, for behavioural advertising. We have also identified a number of further areas for improvement to the Principles.

Recommendations for self-regulation

Increase transparency to consumers by developing ‘clear ad’ notices alongside behavioural adverts including information about opting out

IAB to give further consideration and provide clearer guidelines around sensitive information and the use of that data for behavioural advertising.

Increase awareness of the Good Practice Principles amongst publishers and advertisers seeking to engage in behavioural advertising

Consider extending coverage of first party behavioural advertisers and whether retargeting companies and social networking sites should be included

Consider whether the Good Practice Principles should include a commitment to maximum length of data storage for the purpose of behavioural advertising

Include non-industry, independent stakeholders in the Board which deals with complaints

1.14 In addition, the OFT will establish a Memorandum of Understanding with the ICO establishing in which circumstances each party would act. In the event that the MoU covers areas where OFT and Ofcom have overlapping jurisdiction, the OFT and Ofcom would discuss, on a case by case basis, who would be best placed to act. This will increase effectiveness of enforcement which is an important fall-back if self-regulation were to fail or if there were concerns about practices which fell outside its scope.

Online Targeting of Prices

1.15 Online price targeting could happen in a number of different ways. Our main focus has been on targeting based on previous online purchases or browsing behaviour. This could result in consumers being offered vouchers or discounts or targeted with adverts containing special offers. It has also been suggested consumers that are tracked may be shown increased prices or a restricted product range. The targeting could take subtle forms for example, offering new customers reduced prices but retracting those offers from consumers who are identified as having already visited, and/or purchased from, a site.

1.16 The OFT does not currently have any information about any firms increasing prices to consumers on the basis of their online behaviour at the moment. Of course, many sites offer tracked consumers discounts. For example, firms may track the purchases of consumers who are logged on to their websites and use that information to email discount offers.

1.17 We have considered the benefit and harm to consumers that could emerge if the use of targeted prices became widespread. It is a wellestablished economic principle that price discrimination has ambiguous effects on consumer welfare and the OFT typically presumes against restrictions on price discrimination. In the online environment, price targeting may be much less transparent which may mean that consumers do not shop around sufficiently or find it harder to compare prices. The use of online tracking also raises the same privacy objections as targeted advertising. Such practices have the potential to undermine consumers’ trust in e-commerce, hindering the development of the sector.

1.18 If the ICO’s current view prevails, information indicative of a person’s web-browsing behaviour should be treated as personal information and consumers must be informed that information about them is being collected and used to support price targeting. The ICO’s code suggests that the form that consent should take will depend on the nature of the practice. Our evidence suggests that consumers regard using data on previous online behaviour to target prices as unexpected and objectionable. We have encouraged the ICO to consider this and to intensify its efforts to ensure the fair collection of information for targeted prices, including formulating a clearer view of when consent is needed and when notice to individuals will suffice.

1.19 In addition, the OFT believes that the CPRs could also apply to such price targeting. If consumer opposition to such practices is strong, it is highly likely that the knowledge that they were being applied would change behaviour. Pricing on the basis of browsing behaviour may therefore breach the CPRs if consumers are not clearly informed about the practice. We propose our Memorandum of Understanding with the ICO would clarify under which circumstances each would act if such practices were to be deployed.

1.20 The use of web-browsing behaviour is not the only way of targeting online prices. In our meetings with stakeholders, however, we were told that that if firms were to try to increase online prices to high willingness to pay consumers, it may be more likely that they would identify such consumers through their postcode which can be inferred from an IP address or entered by the consumer themselves.

1.21 If the targeting is based on the analysis of an individual’s IP address in order to infer geographical location, then this would constitute the processing of personal data and be subject to the DPA. Targeting based on data entered by consumers would also be subject to the DPA and the CPRs.

1.22 Consumers’ opposition to targeted prices may, in itself, prevent firms from undertaking such behaviour. The extent of online price targeting may also be inhibited by other means such as competition between firms for the targeted customers, intermediary firms which spot arbitrage opportunities or technological solutions which develop to allow consumers to avoid targeting.

1.23 Since online price targeting is a possibility but not yet a reality in the UK – except in the form of largely innocuous discount offers – this is an area where more debate and discussion seems likely to be particularly productive. It will therefore be a focus of our proposed June stakeholder event.