THE BLOG

The Cost Of Lost Privacy, Part 1: How Google and Data-Mining Drive Economic Inequality in Our Nation

07/11/2011 08:36 am ET | Updated Sep 10, 2011

This is the first part in a three-part series that will run this week at HuffPost on why lost privacy online matters for economic equity in our economy.

Why has economic inequality increased so radically in the United States over the last generation?

General explanations range from globalization to the decline in trade unions to rising returns to education -- and therefore the loss of income to the less educated. These all no doubt play a role, but in an age of information what is unquestionably true is that control of that information is extremely unequal -- and that inequality drives broader economic inequality in our economy.

Information is power and as companies know more and more about us, while the products they sell become more opaque and complicated -- think mortgage-based Collateralized Debt Obligations (CDOs) -- inequality in information begets a massive transfer of wealth from individuals to corporations and to their shareholders. Companies figure out not just what to sell you but the maximum price you and other people like you will pay for that product.

Privacy is About Economic Power and Inequality: The debate on privacy online is therefore not about whether you think it's creepy that corporations are tracking your online activities. You may not have a strong "ick" factor from corporate surveillance per se -- I don't myself -- but what you should care about is that lost privacy is converted by those companies into information that ultimately drives greater economic inequality in our country.

One original promise of the Internet was that "no one knows you're a dog on the Internet" but we have instead evolved through data-mining and online surveillance into a world where not only do companies know what you are, they know where you are and what you are most interested in. For the economically privileged, that may not seem like much of a problem and even a benefit since companies may be able to service your needs more effectively. But for those who already suffer discrimination and exploitation, whether because of race, poverty or other factors, it means that the Internet can just magnify and target that discriminatory treatment and exploitation.

Which brings us to the Federal Trade Commission antitrust investigation into Google. The problem with Google is not that users don't have enough competing options on search engines but that Google's dominance of search and other online products allows them to extract the most massive quantities of private information from users of any corporation. And as I described in my piece back in March, You're Not Google's Customer, You're the Product, Google's real customers are the whole array of corporations who buy access to that user information to know how to effectively market their products and increase their profits.

Google at the Nexus of the Marketing of Privacy: Google is the key nexus in the information age, pricing individual privacy and monetizing it for the benefit of global corporations. They are the dominant middleman between hundreds of millions of people -- even approaching billions globally -- and the corporations using that Google-generated profiling to market their products and extract profit for their shareholders.

And it is that global market power over private individual data by Google that antitrust regulators need to investigate in order to counteract the rising inequality in the information economy. The cost of lost privacy driven by Google is corporate data-mining and manipulated prices across a whole array of markets and the exacerbation of multiple forms of discrimination in the marketplace. Google's monopoly dominance of personal information thereby helps leverage the broader corporate dominance of our lives by the companies using its data.

Why Free is a Bad Deal: The first step in how lost privacy increases economic inequality begins at the moment users give away their private information in the first place. Google offers the enticement of free services in exchange for users turning over a whole range of basic personal data and even what their basic desires are in the form of the whole record of what they search for on Google's pages.

What could be better than free, most users think, as they take the deal offered? It's a bit like how early bank customers might have felt, being told the bank would keep their money safe for free, only later figuring out that the bank was making tons of money lending that money to other people. The free Google tools into which users drop their private information are like the vault banks offered to store your money: it's not a service but a honeypot that allows both banks and Google to resell what users deposit there. Bank customers now expect actual payment in the form of interest for money deposited in banks but most Google customers don't even recognize that their private information has a monetary value that has economic value.

To put it another way, the fact that users are de facto involved in barter with Google, trading privacy for individual tools, should tell you this is an exploitative situation. Like most barter economies, pricing is opaque and creates massive opportunities for economic arbitrage by the sophisticated side of the barter transaction -- i.e. Google. Essentially, Google users are the primitive tribes of the Internet, accepting the shiny trinkets of Gmail and free search in exchange for their privacy.

Google then takes that private information and monetizes it with advertisers who pay very precise dollar terms in the modern part of the Google economy. And those advertisers pay prices far above the costs spent by Google on the tools provided to users -- as highlighted by Google's massive profits year after year. That advertising side of Google's internal economy is actually a monument to converting privacy into a modern currency, with sophisticated auctions for key words and phrases based on particular user demographics and backgrounds that the advertiser may be looking for. One analyst describes this as less the sale of privacy itself by Google, but rather the sale of a "privacy derivative", where companies invest in Google's appraisal of customers' needs and wants.(See Karl T. Muth's Googlestroika: Privatizing Privacy for more on how Google monetizes user privacy).

So the first step in the transfer of wealth via Google is from users selling their privacy for too little and Google arbitraging user ignorance for profit. If Google had less dominance of the online advertising field, there would be far greater pressure for Google to develop as sophisticated a market for users to be compensated for their privacy as the markets in which it resells that lost privacy.

To get some sense of the value of user information, look at the recent controversy over another big Internet player, namely Apple, when it demanded that sellers of subscriptions to apps on the iPhone had to give Apple not just 30% of sales, but sole control of user information as well. Lauren Idvik at Mashable noted that publishers like the Financial Times may not have liked the 30% cut Apple wanted from subscriptions, but "the main problem is that Apple will not share subscriber data with publishers, long one of publishers' most valuable assets, particularly to advertisers." Think about it -- your personal data is worth potentially more than 30% of the cost of what you are purchasing and most users give it away for free to companies like Google and Apple.

And Google is looking to leverage its position at the nexus of the Internet to further expand its data collection of users -- and the opportunities for marketing that data in Internet commerce. Most recently, Google is making a play for inserting what's called NFC technology into every smartphone and turn them into wireless credit cards -- and a substitute for every other card you carry -- that would make all commerce easier for users, while giving Google information on every transaction you make and providing even more expanded data on user shopping habits. Google is marching from dominance over information about online commerce to trying to dominate information about offline shopping as well.

In part 2 of this series, I look at why this personal information is so valuable to advertisers and how it empowers what economists call "price discrimination" and just plain old racial discrimination. Part 3 will look at the role of Google in the subprime mortgage debacle and its aftermath, as well as the broader antitrust implications of the company's dominant role as an intermediary for behavioral targeting of consumers by advertisers.