DISADVANTAGES — CONSUMER/INTERNET 434

STOPPING PROFILING HURTS CONSUMERS

CONSUMER PROFILING LEADS TO BETTER PROVISION OF GOODS AND SERVICES

But the indirect effects of profiling in enhancing competition are probably more important. That is, profiling will allow consumers to buy goods and services that would otherwise not be offered--and from companies that would otherwise not exist; this competition-enhancing effect is multiplied when detailed online profiles are combined with offline profiles.

PROFILING LEADS TO LOWER PRICES FOR GOODS AND SERVICES

Traditionally, the benefits to consumers from profiling begin with lower prices for goods and services. In the offline world of direct marketing, a company can use profiling and targeted marketing to bring its cost-per-order from as high as ten dollars to as low as two dollars. The cost-per-order is the amount that a company must spend on outreach in order to obtain one new customer. These cost savings are reflected in the prices that consumers pay.

OTHER RESEARCH INDICATES THAT PROFILING IS BENEFICIAL

But the case for the benefits of profiling is strengthened by empirical research done on analogous activities. First, the benefits and costs of profiling in credit reporting are well documented. Sophisticated economic models are used to estimate the changes in business operating costs that would result from a proposed legal change--and to identify the size of the group of consumers who the industry would no longer be able to serve if the change were made. Second, as Jack Calfee writes in his book Fear of Persuasion, economists have also learned how mass advertising benefits consumers by substantially heightening price and quality competition.

INTERNET PROFILING WILL SAVE CONSUMERS MONEY

Does this apply in the online world, where targeted email business is a brand new business model, and the cost of sending out an additional email is near zero (unlike a piece of mail)? Yes. Many electronic merchants wait for the customer to come to them--but profiling will still make a difference in the prices that consumers pay. First, a direct effect: Profiling increases the effectiveness of banner advertising, making companies willing to pay more to web sites that run their ads. This helps fund the site's costs of operation. And the companies online advertising need not imitate the wasteful "broadcast" model of trying to reach 100 percent of consumers to reach the four percent who would be interested in one's product.

CREDIT REPORTING STUDIES SHOW THAT CONSUMER PROFILING IS VERY BENEFICIAL

The results of studies of credit reporting give us reason to presume that broader uses of profiling in the economy could be very beneficial. The advertising studies suggest that more targeted advertising would heighten competition even more.

Summing up the benefits to consumers and business from profiling, these would include:

* Improved product development--a greater chance of success for new ventures and new products.

* An end to wasteful junk mail sent to masses of unlikely prospects.

* Lower costs and lower prices, particularly when online profiles are combined with offline data.

* A chance for small, low-profile ventures to move forward by buying access to strategic information.

* Improved banner advertising economics--and a healthier web economy.

IF WE HAD STOPPED PROFILING EARLIER, IT WOULD HAVE STOPPED THE INVENTION OF CREDIT

It is a fortunate thing for the credit industry that it was invented before the time of the current frenzy about profiling--we might still be living back in the days when poor and middle-class people could get credit only from a friendly storekeeper or a local banker. Inventing such a system from scratch in a world where an expensive consumer access to the database was required from the very early days of the system might have resulted in a world with no credit reporting at all.

PROFILING HELPS CATCH BAD GUYS

Note that profiling helps catch bad guys, too. For example, credit card reporting lowers the costs of fraud to business and consumers by identifying people with a history of not paying their bills. Profiling services could also help people ensure that their baby sitter is not a child molester.

PRIVACY PROTECTIONS CAN MAKE IT DIFFICULT TO EXPOSE CONSUMER FRAUD — CANADA EXAMPLE

JIM BRONSKILL The Gazette (Montreal), March 19, 1999, SECTION: News; A8 TITLE: Planned privacy law slammed: Could cripple efforts to expose consumer scams: rights group Web // acs-EE2001

A national civil-rights group says a proposed federal privacy law could cripple the ability of public-interest organizations to expose consumer scams and other injustices.

The Canadian Civil Liberties Association is urging the federal government to amend legislation designed to protect the personal information of Canadians.

''In the legitimate exercise of protecting privacy, the bill is running the risk of jeopardizing citizen advocacy,'' said Alan Borovoy, general counsel for the association. ''They're trying to do too much with one bill.''

The legislation, now being studied by a Commons committee, would require organizations that collect, use or disclose personal data to ensure the privacy of individuals.

It would oblige companies and associations to tell people the purpose for which the information is being collected. In addition, no personal data could be gathered, used or made public without the knowledge and consent of the individual. The legislation contains exemptions for ''journalistic, artistic or literary purposes.''