Legislating Privacy May Hurt Bottom Line

Privacy regulation has the potential to raise a company's marketing and IT costs, say industry groups and end users who are preparing to challenge the growing push for privacy laws in Congress by outlining the economic consequences.

For instance, the Information Services Executive Council, in a study that hasn't yet been released, says a preliminary estimate of the impact of a variety of opt-in requirements on catalog and Internet apparel retailers shows that such a requirement could add $1 billion in costs to a $15 billion industry. That's because consumers are less likely to opt in--that is, check a box to say they agree to the sharing of personal data with third parties for marketing purposes--than they are to opt out when given the opportunity to forbid the sharing of that information.

And the loss of that data would be a blow to companies' efforts to establish databases of marketing information, says Michael Turner, the council's director. Those firms would face higher costs as they try to compensate for the data loss.

By better targeting customers, "I can be more efficient marketing-wise, and that is going to lower my cost, and I can pass those cost savings to consumers," says Peter McGonagle, a senior vice president at Cendant, a conglomerate that runs businesses ranging from hotels to financial services firms.

When privacy regulations are applied to IT systems, specific privacy rules are "very akin to the accounting world," says Andy Martin, former chief technology officer at Garden.com, which sold its assets to Wal-Mart Stores subsidiary Walmart.com and Burpee Holding Company. "Everything has to be strictly audited, and that's where I think the IT effect can be."

The economic impact of privacy hasn't gotten enough attention from regulators, says Federal Trade Commissioner Orson Swindle, a Republican who says he disagrees with the approach the Federal Trade Commission (FTC) took toward privacy during the Clinton administration. The FTC's recommendation to Congress last year for privacy regulation made "a rather burdensome (online privacy) regulatory regime without any kind of a cost-benefit analysis," he says.

"We argued that self-regulation was not working when, in fact, all the facts indicated that it is working," he says.

The FTC might see a shift in its approach to online privacy when the term of Chairman Richard Pitofsky ends in September. Pitofsky is one of three Democrats on the five-member FTC board, and President Bush is expected to appoint a Republican, creating a Republican majority that would be more inclined toward promoting self-regulation.

Many privacy groups argue that there's a lack of economic data to show that adopting an opt-in standard would be burdensome to businesses.

'"Right now I think the case can be made that companies are losing business because of lack of trust, and it seems right now any way to help trust will help business," says Ari Schwartz, a policy analyst at the Center for Democracy and Technology.