MIT Sloan Executive Education Blog

Post PRISM: The relationship between innovation and privacy

In the aftermath of whistleblower Edward Snowden and the ongoing press coverage of the National Security Association’s (NSA) clandestine surveillance program, the political ramifications of all of the above remain uncertain. What is apparent, however, is the immediate, collective increase in awareness of just how much data we “give away” every day online, and how that data is used by organizations—government and business alike—for their benefit.

Many business leaders and marketers are wondering how a resurgence of consumers attempting to regain their privacy will affect innovation in the global economy. While there is a clear relationship—and now a growing tension—between innovations that rely on consumer data and the protection of consumer privacy, there may be compromises to consider that are amenable to both the innovator and the consumer.

Catherine Tucker, Associate Professor of Marketing at MIT Sloan and one of the world’s leading experts on digital privacy, has studied at length the relationship between innovation and privacy regulation. In her article “Privacy and Innovation," published last year in the journal, Innovation Policy and the Economy (University of Chicago Press), and co-authored with Avi Goldfarb of Rotman School of Management, Tucker argues that there is a definite tradeoff between the use of consumer data and the effectiveness of online advertising. In order to calibrate this relationship, Tucker and Goldfarb examined responses of 3.3 million people to 9,596 online display (banner) advertising campaigns.

The authors discovered that ad effectiveness does indeed change with consumer awareness of privacy, proving that “consumers react negatively to ads that are both disruptive and targeted, and the primary reason behind the negative reaction is privacy concerns.” They also found that the relationship between data collection, advertising, and consumer responses is not an either/or issue. In fact, there were instances where consumers tolerated and even favored specific types of targeted advertising, suggesting that there is a balance that can be struck on behalf of the innovator to create a stronger relationship with their consumer. Rather than simply providing an opt-out mechanism for the consumer, businesses can choose to empower users to control what information is used, and how.

For example, Tucker and Goldfarb used field experimentation data to evaluate the effect of Facebook users’ increased control over their privacy settings as of spring 2010. They found that after Facebook allowed users more transparent control over their privacy settings, personalized advertising (ads that target specific users based on profile details and browsing history of that user) actually became more effective. According to the authors, “This suggests that regulation does not need to be a simple binary choice as to whether to have privacy protection or not. Giving users control over their privacy settings might still serve the purpose of privacy protection while reducing the potential harm to the online advertising industry and the advertising-supported Internet.”

Innovation and privacy, working hand-in-hand, may welcome the next wave of win-win solutions for both sides of the equation. For example, the new and still unproven innovation known as decentralized social media is a social network that is hosted by a community and allows users to maintain control of their data by choosing a server they trust to hold that data. Decentralized social networks have the potential to provide a better environment within which users can have more control over their privacy, as well as the ownership and dissemination of their information. Therefore, online social networking will be more immune to lack of privacy, censorship, monopoly, regulation, and other expressions of central authority.

As for the future, consumers have made it clear that some innovations, like Facebook, have become a very strong thread in the tapestry of their daily digital experience, and most users—even with the NSA surveillance scandal fresh in our minds—are not going to immediately jump off the digital ship, hoping to escape surveillance of any kind. Future leaders of the digital space will be those innovators who strike a balance between effective data gathering and a respect for consumer choice in matters of privacy.

Catherine Tucker is an Associate Professor of Marketing at MIT Sloan and teaches in the Entrepreneurship Development Program and the Global Executive Academy, as well as the Strategic Marketing for the Technical Executive and Systematic Innovations of Products, Processes, and Services programs at MIT Sloan Executive Education.