October 18, 2005
Galster on Infomediaries and Bonded Sender Programs
By Eric Goldman
In late March, I posted a blog post entitled "Infomediaries--Where Are They?" In that post, I explained why infomediaries have the potential to improve social welfare compared to our existing marketing system, but I noted that no infomediaries have emerged in the marketplace for reasons not entirely clear to me.
In response to that post, one of my students, Garet K. Galster, wrote a thoughtful reply, which I reproduce here (with his permission):
As noted in Professor Goldman's previous post, it appears that at least two social benefits arise in response to infomediary usage. One social benefit is that consumers receive information only on subjects with which they have an interest. Also, the marketing is directed at the most likely consumer of the service being provided. Sounds like a win-win proposition. What is the problem?
In my opinion, the problem with infomediaries appears to be twofold. First, it's all about the Benjamins. The monetization of customer information may be both a temptation for infomediaries and a deterrent for consumers. Also, the cost of administration may be such that the model is not economically feasible, which may flow from the second problem.
Second, there might be a market failure in the technology of the internet as it now stands, which prevents companies from entering the market.
With relation to monetization, government regulation of what an infomediary can do with the information held is likely the only way to prevent such inevitable profit searching. The administration cost of an infomediary would also likely be a stumbling block because of the existing internet technology and lack of internet regulation. The likely administrator for such an infomediary scheme seems to be the delivery service, or rather receipt service, of the marketing materials. Some payment mechanism would need to be developed so as to pass payment along to the receipt service. Also, the marketing communication methods may affect such cost.
Relating to the technology of the internet, following is a skeleton of a proposed system that could be used by internet access providers (IAPs) or e-mail providers in internet marketing mediation.
Members of an IAP or e-mail provider would be able to select items of interest. A list of items of interest could be generated from marketers wishing to market to such members. The system could be designed as an opt-in or opt-out system. Many details could be discussed regarding the least cost implementation of such a system, but that can be saved for comment responses, or another post.
To market to an IAP's members, the marketer would be required to pay a "delivery charge." Consumers would have to pay some fee to block anything other than obscene materials, i.e., materials rated a certain way, maybe in accordance with current movie or music rating systems.
Therefore, all marketing e-mail would be filtered, at a cost to marketers and consumers alike. This would result in an efficient amount of marketing e-mail because the marketer will only partake if his expected return is greater than the amount required by the IAP, and, in turn, consumers will pay to block any e-mail they perceive as not worthy of their time. In other words, an entitlement may not have to be provided completely to the consumer or the marketer, but rather the value of the marketing can ultimately be decided by the parties involved.
One option on the market today is a bonded sender program (BSP). However, the proposed system is different from BSPs in at least three aspects.
First, a bonded sender pays only if sufficient complaints are received from consumers. See Scott Banister, IronPort Systems Inc. White Paper: Bonded Sender Program Overview 3 (July 2002). Indeed, the marketing cost is unknown in a BSP system, and essentially is a function of the consumers' whims.
Second, in a BSP system, the entire expense of marketing, or avoidance thereof, falls upon the shoulders of the marketers. This may not yield the most efficient results.
Finally, the BSP could be considered a deterrent that reaches too far. Indeed, under the BSP model, "[u]nscrupulous spammers suffer from the program, since they could never afford to post the bond - their high complaint rates would put them out of business." Id. Therefore, the ultimate effect of a BSP might be to remove the most valuable marketing tool, i.e. e-mail, from the repertoire of small start-ups and others who need to build a brand or notoriety.
In conclusion on BSPs, they seem purportedly to allow only "legitimate" marketing messages pass through to consumers. However, where there is responsibility on the consumer's part to report perceived illegitimate use of e-mail marketing, it seems the system has already failed. In other words, if unwanted marketing arrives in the consumer's inbox, the desirable cost avoidance feature of an e-mail marketing control has minimal effect.
The proposed system, however, offers pricing predictability, efficient passthrough of marketing e-mail, and allows equal access to the marketing tool while achieving the cost savings desired.
Two observations about Garet's comments:
First, I'm not convinced that an infomediary needs government regulation to avoid selling out to advertisers. We have some institutions that successfully cater to both consumers and advertisers simultaneously--print publishers are the most obvious example. In the end, an infomediary will live or die based on consumer trust in it. If the infomediary sells out for short term gain, it should result in a death sentence for the business.
Second, there have been a lot of different proposals to broker a payment system between marketers and consumers. See, e.g., Laudon, Kraut et al, Loder et al and Ayres/Funk. I will have a lot more to say about these proposals in my next big paper.
For now, I think it's interesting that Garet proposes to put some of the onus on consumers to pay something if they want to avoid some marketing. None of the articles I cite above consider this option. Indeed, all start from the premise that consumers have the right to be free from marketing and therefore any financial burdens should rest solely on the marketer. In contrast, Garet expects consumers to pay some money as a way to express some of their otherwise-undisclosed preferences. Does it make more sense that consumers have some responsibility to avoid unwanted marketing, just as marketers should have some responsibility to avoid uninterested consumers? I'd be interested in your thoughts on this.
Thanks, Garet, for an interesting response.
Posted by Eric at October 18, 2005 07:30 AM | Marketing
An interesting concept. I agree that making a customer pay to not receive doesn't make sense.
What might work is a membership style program.
While not the free service we've come to expect in the internet world, the threat of canceling your account with an infomediary could be the incentive to not sell the collected information. Marketers would pay for sending their ads, based on how targeted they want to be (not by how many they wish to reach, since e-mail is cheap, verging on free). The largest informediaries could command the highest prices since they have the largest subscriber base. You would base your price to marketers on your administration and overhead costs plus markup for profit. The people that can do this efficiently would make it work and those that cannot would fail, like in any business. The public has a one stop shop for all the ads, promotions, and new deals that currently cover newspaper flyers, TV and radio ads, store adverts, etc. Marketers don't have to waste money and paper on all the bulk mailing. Postal service just makes money on Netflix, Amazon and eBay shipping, plus any other shop from home that takes off.
Posted by: Karl at October 18, 2005 11:26 AM
A similar system already exists on a small scale with lots of infomediaries, and it is generally called incentivized marketing.
In this system, consumers are paid a small amount (though generally points or something similar, rather than money) to view advertisements from marketers, and are paid more to actually make a purchase. Some incentivized sites might only compensate customers who make a purchase. The infomediary in turn is compensated on a per sale basis by the marketer.
In any case, this system essentially performs the same functions, with consumers choosing which kinds of offers they want from the infomediary, with marketers getting access to consumers who choose particular categories of interest, and with a pricing function built into the system for both parties.
Posted by: Jared at October 18, 2005 07:38 PM
I just participated in a day-long identity conference where infomediaries were discussed in detail. There was a great presentation by Dick Hardt:
I did a presentation on some of the problems of pursuing such systems without consumer protection regulation (as you may have guessed ;) ).
Posted by: Chris Hoofnagle at October 19, 2005 01:19 AM