Can Markets Deliver Privacy Enhanced Services on Scale?

Abstract

The market for many online services are dominated by “free” offerings that collect personal data. There are niche offerings that exchange performance and convenience for privacy, with much less popularity. This is often interpreted as a lack of demand for privacy. There are however many signs pointing to a market demand for privacy. For instance, how Apple is positioning itself. Or the considerable percentage of users reporting concern for privacy in surveys.

This research paper draws upon 30 in-depth interviews to investigate this supply gap. The interviewees include entrepreneurs and developers of leading privacy-enhanced technologies and services (PETS), as well as online publishers, marketers, and privacy regulators . The study uncovers a number of unique economic challenges that make PETS difficult to scale.

The paper briefly reviews the privacy economics literature. It motivates - among the many aspects of privacy – its focus on services not monetize personal data. It presents a classification of PETS, reviews studies showing demand for privacy, and summarizes the explanations given for a weakened demand, such as hyperbolic discounting or information asymmetry. It then moves onto its core empirical part.

METHODS: responsive interviews, analysis of themes, literature review, economic modeling

PRELIMINARY FINDINGS:

We foremost find that PETS developers have different motivations and definitions of privacy. Interestingly enough, all claim sufficient demand for privacy, at least in their respective niches. As one interviewee phrased it, “we can’t supply fast enough”. Multiple mechanisms are used to signal trust to user. Privacy has to however compete with other features and qualities.

We develop a framework to classify the supply-side challenges expressed by PETS developers. The framework constitutes four axis that pull projects toward the dominant Silicon Valley model. The axis include: (i) funding and monetization, (ii) marketing, (iii) design tradeoffs, and (iv) costs of services. Common challenges can be identified under each axis.

PETS face entry barriers similar to software start-ups, such as high development costs and network-effects. They have additional challenges as well, such as fewer monetization options or higher costs of services (caused by staying outside the mainstream ecosystem). Overall, scaling and competition become harder than average. Dominant market players, such as Google and Facebook, can leave most PETS to die naturally, and acquire the ones that survive.

The paper concludes by exploring possible remedies, such as community funding, the role of standard-bodies, and teaching PETS developers additional skills. The research question has broad policy implications. Privacy regulation differs considerably across the Atlantic – with the E.U. seeing it as a fundamental right, and the U.S. a matter of consumer protection. Yet both regulatory approaches are shaped by assumptions about what the market can or cannot offer. If the markets and competition cannot indeed deliver privacy enhanced services for the masses, then regulatory intervention to reduce risks might be justifiable.

Keywords: privacy economics, privacy, regulation, privacy enhanced technology