Huffpost Business
The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Nathan Newman Headshot

The Cost of Lost Privacy: How Google and Datamining Drive Economic Inequality in Our Nation

Posted: Updated:

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 datamining 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 exploitive 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 to 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.

Finding "Pain Points": Why that Private Information so Valuable to Advertisers: But before cycling back to the antitrust implications of Google's control of user information, the real question is why user information is so useful to companies and why they pay Google so much for the precision in user targeting that it can deliver.

The nicest version of why companies pay so much is that it helps them find the customers most likely to be interested in their products, and that's no doubt part of it. But the darker version is that it also helps them differentiate between different customer segments and target particular offers to different audiences. One great advantage of online marketing is that it facilitates what economists call "price discrimination", selling the same exact good at a variety of prices. This is based on the reality that people have different maximum prices that they are willing to pay, a so-called "paint point" after which they won't buy the product.

The ideal for a seller would be to sell a product to each customer at their individual "pain point" price. With public advertising, a customer willing to pay a higher price will demand the lower price advertised to someone else. However, datamining and targeted Internet advertising allows sellers to make different advertising offers to particular groups of consumers based on correlations derived from past behavior. The New York Times recently profiled how web coupons are used in a similar manner to target offers based on user behavior. As Ed Mierzwinski, consumer program director for the United States Public Interest Research Group (USPIRG) noted, companies "offer you, perhaps, less desirable products than they offer me, or offer you the same product as they offer me but at a higher price." USPIRG is asking the Federal Trade Commission for tighter rules on all online advertising precisely because of this problem.

Behavioral Tracking and Google: Such an approach does not require sellers to know who any individual user is - and Google makes a big deal about not sharing personally identifiable data about individuals with advertisers. But given a company database on how different groups interact with their product, any general data shared by Google with advertisers will pay off in maximizing profit extracted from customers.

Technology consultant Ahmadali Arabshahi gives an example of how such behavioral tracking works for Google in creating a profile for advertisers: "If a user frequents websites with information on how to save money then Google would know that the user is price sensitive. But if a Gmail user receives a reservation confirmation email from a very expensive restaurant then Google would conclude that the user is price insensitive." He sees Google's launch into Groupon-like Offers working with local businesses as a way for the company to directly cash in on that data.

As early as 2005, Google was applying for patents on how to sell advertising based on such behavioral tracking, where as one patent specified, "advertisements are personalized in response to a search profile that is derived from personalized search results. The search results are personalized based on a user profile of the user providing the query. "

Google is now working with advertisers so they can coordinate datamining information those companies have created based on particular demographic groups independently with the profiling Google develops on users based on their previous browsing activity, behavior and location. Google began a beta test of this capability two years ago back in 2009 and has been introducing it to different groups of advertisers over time.

All of this means that companies working with Google can more and more effectively divide the market into thousands of segments and target advertising and offers to maximize the price paid by each demographic and interest group they can identify.

Reempowering Racial Discrimination: This targeted price discrimination based on behavioral tracking, unfortunately, directly enhances the most traditional kinds of racial discrimination. Study after study has shown that employers, financial lenders, car salesmen and other merchants continue to charge black and Hispanic customers more for the same service when they can identify them.

For example, a study by the Urban Institute using paired "testers" - one white person and one person of color with similar economic profiles - found that non-white homebuyers received less favorable financial terms from mortgage lending institutions. Job seekers face similar discrimination with one study, where nearly identical resumes were sent to 1300 help-wanted ads, found that resumes with a "white-sounding" name were 50 percent more likely to get a call for an interview than one with a black-sounding name.

The Internet was supposed to let people escape such easy discrimination, but behavioral tracking makes such identification trivial. Add together someone's taste in music and a few more characteristics and you have an almost perfect proxy for race. As Rebecca Goldin, a George Mason University professor, argued in a 2009 article, it's clearly illegal to discriminate based on race, but if companies offer loan rates based on their shopping habits, it raises the question of "would it be legal or ethical to use the kind of music one buys to determine his or her loan rate?"

Given that we know straight up racial discrimination happens all the time in these commercial transactions, what the Internet supplies is a multivariate datamining opportunity to discriminate in ever more precise ways that may largely escape legal scrutiny.

Google and the Subprime Mortgatge Meltdown: All of these issues come together in Google's role in the subprime mortgage meltdown and its aftermath. Most people don't think of Google as a key player in the financial debacle that crashed the economy, but like almost every company making billions of dollars in the last decade, a chunk of Google's profits were coming straight from the subprime mortgage lenders in the form of targeted online advertising using Google to find customers.

Back in 2007 as the housing market was beginning to teeter, a range of market analysts noted Google's and other online advertising companies' dependence on the subprime industry. As Jeff Chester of Center for Digital Democracy said at the time, "Many online companies depend for a disproportionate amount of their income on financial services advertising, with subprime in some cases accounting for a large part of it."

To give some sense of its importance, look at this Nielsen/Netratings chart from July 2007 on which online advertisers were spending the most money:


Low Rate Source and Countrywide, the first and fourth company on the list, were both major subprime players - with Countrywide's bad assets continuing to plague Bank of America, which purchased the company early in 2008 as the company headed for default. The second company on the list, Nextag, had a large role in aggregating online leads for mortgage sellers, while the fifth company on the list, InterActiveCorp owned Lending Tree, a key mortgage lending advertiser, so a chunk of that traffic was no doubt for mortgage-related searches. And Experian, the credit report company, was of prime interest to people pursuing those loans.

So what you had in 2007 was the top five online advertisers involved in the mortgage lending industry to some extent, delivering almost $200 million in monthly revenue to online advertising companies like Google, with literally hundreds of billions of views of those online ads driving the frenzy for refinancing and subprime mortgages with ads like "LowerMyBills" and other online enticements.

Those numbers above are for display ads only, a segment in which Google is a prime player through its Doubleclick purchase. Google does not share data on specific revenue from particular companies on its AdWords and related search advertising, but reports at the time showed the mortgage companies paying top dollar for related keywords like "mortgage" and "refinance" with prices going as high as $20 to $30 for each user click on an ad using those terms.

And the racial aspect of the subprime mortgage crisis was endemic, with the whole fiasco described by some scholars as "reverse redlining," the practice of targeting borrowers of color for loans on unfavorable terms. Companies preyed on the lack of many customers' familiarity with the mortgage market to entice them with unrealistic "teaser rates" - heavily advertised online - that burdened them with toxic terms and unmanageable obligations that exploded in later years.

Even with the crash of the housing market, the online exploitation of the victims did not end. As the group, Consumer Watchdog, complained in a Feb. 8 letter to the Federal Trade Commission, Google and other search engines continue to profit from deceptive advertisements of fraudulent "loan mortgage modification" services. The companies promise to help families solve their mortgage and credit problems, yet just end up costing consumers thousands of dollars and even their homes . In their report, Liars and Loans: How Deceptive Advertisers Use Google , Consumer Watchdog details how at least 20 companies were running fraudulent versions of these services and paying Google to run these advertisements, with Google making as much as $8.29 each time someone clicked on a term like "stop foreclosure." Literally millions of people each month are searching for variations on the phrase "loan modification" only to find these fraudulent services advertising on Google's pages, making Google, in Consumer Watchdog's words, a "prominent beneficiary of the national home loan and foreclosure crisis of the past two years."

That makes Google one of the few companies to profit hugely from the mortgage bubble as it expanded and to continue to profit from the housing meltdown aftermath. And it means that the company is still facilitating the continuing transfer of wealth from working families to financial firms that lay at the heart of the housing debacle.

Antitrust, Google and Reversing the Surge in Economic Inequality: In this way, Google continues to be the middleman using its vast reservoirs of data on individual behavior online to help other companies extract money from working families. The reason antitrust investigations of Google are needed is because its business is not search or email or any other visible tool most users see, but the accumulation of vast aggregations of personal data deployed on behalf of its advertising customers.

Former Federal Trade Commissioner Pamela Jones Harbour has argued for a definition of Google's market as encompassing the collection of "data used for behavioral marketing." Domination of such a market inevitably erodes not just individual privacy but, as argued above, helps perpetuate the broader rise in economic inequality in our society. The less our personal data is held by one company like Google, the less our marketing vulnerabilities can be aggregated, packaged, and sold effectively.

We need a broad-based investigation of how Google and related companies use individual data in packaging its services to advertisers, how its dominance allows it to more effectively extract user information, and what are the broader social harms to the public welfare from Google's actions. It is this cost of lost privacy and how behavioral tracking is facilitating the extraction of income from working families to Google's shareholders and the shareholders of its advertisers that need the most scrutiny.

No one would argue that many of its tools like its search engine or Gmail don't benefit average users, but many commentators continue to operate under the illusion that those tools are Google's business.

They're not. Google makes its money from data accumulation and selling that data to advertisers. It's that business of selling user privacy to advertisers where the social harm is occurring and where antitrust action is needed.

And because this violation of privacy lies at the heart of the antitrust problem, the solution by the Federal Trade Commission can address much of the problem by changing Google's use of user data. Stronger privacy protection for individuals using Google tools would blunt many of the data-mining driven problems created by the company's dominance. Other countries are pioneering rules that block the tracking of online activity without explicit consent, give individuals the ability to remove personal data from Google's databases, and create public alternatives to products like Google maps which do not require the disclosure of personal data in order to use them.

This won't necessarily change the operation of most of Google's consumer tools - something that some Google defenders seem to fear and may drive their reflexive defense of the company. The most important changes in Google's behavior under any antitrust decree should be largely invisible to the average Google user - although would be dramatic for the corporate advertisers who currently exploit Google's datamining in their marketing efforts.

Restoring a degree of control by individuals of what personal data is shared online can eliminate some of the information inequality in modern marketplaces that itself helps drive greater overall economic inequality. And the FTC antitrust investigation of Google can itself be a chance for a much broader public debate on the abuses of datamining online and how to make all markets work more fairly for average working families.