PK Seeks Consumer Privacy Rules in Wake of Verizon/AOL Deal

Verizon is buying AOL for $4.4 billion, in a deal aimed at strengthening Verizon's LTE wireless video and over-the-top (OTT) video platforms. AOL still offers dial-up ISP service and is also a content company with assets that include AOL.com, Engadget, Huffington Post, Makers and TechCrunch. The transaction also gives Verizon AOL’s expertise in mobile advertising, the companies said Tuesday.

Public Knowledge said the proposed deal points to the urgency of the FCC's beginning a rulemaking on protecting consumer privacy, which PK said makes sense now that the agency has reclassified broadband as a common carrier service under the Communications Act's Title II. Either the FCC or the FTC is expected to be asked to clear the deal, but likely not the FCC, a Verizon official said.

“Verizon’s vision is to provide customers with a premium digital experience based on a global multiscreen network platform,” said Verizon CEO Lowell McAdam. “This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience.” AOL is to become a separate division within Verizon, headed by AOL CEO Tim Armstrong.

In June, Verizon is scheduled to release a wireless OTT offering, featuring “sports, live events and other short form content geared for smaller screens,” analyst firm UBS emailed investors. “Verizon is expected to monetize this through subscriptions, advertising and increased wireless data usage. AOL's adtech assets will help the company leverage the advertising model while expanding the amount and diversity of content the service provides." The people at AOL “are the only guys who have figured out programmatic [advertising] for video,” CNBC’s Jim Cramer said Tuesday on the network’s Squawk on the Street. “This is a great way to take on Google.”

Public Knowledge urged the FCC to push forward on a rulemaking on consumer privacy. “Whether or not the combination of a major online advertiser with the largest mobile services provider raises substantial antitrust concerns, it raises extremely substantial and urgent privacy concerns,” said Senior Vice President Harold Feld. “Verizon has already shown an alarming tendency to harvest private information from subscribers to bolster its foray into online advertising.” Last year, privacy advocates found that Verizon was using a tracking identifier, called a “SuperCookie,” to track users without their consent and potentially expose subscriber information to third parties, he said. “Only after significant public pressure did Verizon modify its subscriber tracking program to allow users to ‘opt out’ of having the tracking I.D. inserted into their bitstream.”

But privacy concerns are better left to the FTC because of its history of “applying more rigorous economic analysis to its work," said Free State Foundation President Randolph May. "It can also examine these issues in the context of the entire Internet environment, not just focusing on providers which the FCC classifies as telecommunications providers.” Before "anyone gets too excited about Public Knowledge's claims regarding any combination involving AOL, they should travel back in time and read the apocalyptic doomsday predictions of PK and its allies opposing" AOL/Time Warner, May said. "AOL is now worth a small fraction of what it was then and Time Warner doesn't provide Internet service. The dynamism and competitiveness that characterize the Internet environment should caution against regulatory overzealousness."

"At the heart of the privacy protection issue is: what are consumers' reasonable expectations regarding what should remain private,” said former FCC Commissioner Robert McDowell, now at Wiley Rein. “Studies reveal that consumers differ on that point based on which generational cohort they belong to. Nonetheless, privacy is a vitally important issue that cuts across ​the entire Internet ecosystem. Having different standards for different segments of the Internet marketplace would neither make constructive public policy nor benefit consumers."

An NPRM isn't the worst possibility, said TechFreedom President Berin Szoka. “Unfortunately, the alternative is that the FCC will simply regulate informally, through the kind of pseudo-common law of unadjudicated settlements that the FTC has used to regulate privacy and data security,” he said. “The best we could hope for would be a rulemaking to develop meaningful standards that will be applied case by case in actual litigation. To that end, the enforcement process matters at least as much as the substance of any new rules.”

Free Press Raises Concerns

Free Press slammed the deal in general. It's "another example of how Wall Street's short-term mindset shortchanges competition and investment,” said Research Director Derek Turner. “For the price it's paying for AOL, Verizon could deploy its FiOS broadband service across the rest of its service area.”

Mobile advertising is a new industry and “it is not yet clear which stakeholder in the Internet ecosystem is best positioned to deliver relevant ads to users,” said Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. "Carriers may well be able to provide a valuable advertising service while better protecting the privacy of users than other potential industry configurations," he said. "This is a nascent sector that we should not rush headlong to regulate away.” Instead, the sector should have flexibility to grow “with new uses of data, provided customers baseline expectation of privacy is protected,” he said. “If anything, bringing ... AOL’s advertising platform in house would presumably reduce the number of partners Verizon would be sharing information with, ultimately increasing customer privacy.”

The valuation of AOL fell dramatically since its glory days during the first high-tech bubble. In 2000, AOL bought Time Warner in a $150 billion deal that Time Warner CEO Jeff Bewkes acknowledged was “the biggest mistake in corporate history,” according to the London Telegraph. After the burst of the dot.com bubble, AOL took a write-off of almost $99 billion in 2002. Time Warner spun off the AOL properties as a stand-alone company in 2009. AOL subsequently bought several content companies, including TechCrunch in 2010 and The Huffington Post the following year. Time Warner Cable, which used to be part of Time Warner and was briefly under the AOL umbrella, now is a separate company that Charter Communications may buy now that Comcast's deal for TWC has been abandoned (see 1505060057).