Posted by on October 16, 2020 11:47 am
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Categories: Competition & Regulation


By Caroline Wang, American Consumer Institute

 

The tech sector has been the lifeblood of California for the past two decades, employing approximately 2 million people in the state and adding $2.3 trillion to the nation’s economy. Any attempt to squash this growth raises significant concerns for consumers and legislators.   

 

Proposition 24 is a ballot initiative that California’s voters will decide on in November, and it seeks to expand the previously passed California Consumer Privacy Act of 2018. If passed, Prop. 24 would limit the information that technology companies can collect by imposing onerous new regulations, such as forcing companies to openly disclose what information is being collected as users sign up for a service, while increasing penalties for privacy law violations. The fight for privacy rights may have good intentions, but the consequences of Prop. 24 will ultimately not benefit consumers.

 

Prop. 24 seeks to specifically limit businesses’ use of “sensitive personal information”—including geolocation; race; ethnicity; religion; genetic data; private communications; sexual orientation; and specified health information. To enforce these new provisions, Prop. 24 would establish the California Privacy Protection Agency (CPPA), a regulatory body that would have unprecedented power over private businesses. As a regulatory body, the CPPA would have significant power while being unaccountable to the general public.

 

Prop. 24 will only enhance government control over new and existing businesses which need the freedom to grow. This is most evident in how the legislation creates a “pay-for-privacy scheme” and would grant an exemption from data-collection rules for small businesses that collect information from fewer than 100,000 customers. This number seems illogical and arbitrary since, in theory, smaller businesses have the same potential as larger businesses to use consumer data for malicious purposes. Herein, the proposition seems to be built out of an irrational fear of big businesses than a genuine focus on consumer welfare.

 

In reality, this proposition will damage small and growing companies and hamper the services that Californians rely on every day. To see how quickly this can become problematic, imagine a social media platform startup that quickly accumulates over 100,000 customers in the course of a night. They may have not anticipated the high growth and therefore may have thought they were exempt from Prop. 24. However, after unexpected growth and an inability to adhere to the regulations imposed, they could face significant fines.

 

Arbitrary thresholds of this nature will disincentive companies from going into business and discourage successful business models.

 

Every day, millions of Americans use Facebook, Google, Twitter, and dozens of other social media and communications platforms for their zero-cost benefit. These services can be supplied so efficiently due to the highly profitable business model that relies on data collection and targeted advertisements.

 

If the state of California limits what data can be collected and sold, lost revenues will have to be recuperated in other ways, such as adding a fee for the services. This is a reality that the legislation notes, as it contains a clause that will allow a price increase on consumers who choose to share less data. This will effectively force lower-income consumers to disclose more information to maintain their use of the services when compared to wealthier users.

 

To be noted, consumers have ideas and opinions of their own, and they are capable of making decisions about what data they are willing to share to access a site’s services without having that interaction regulated for them.

 

The implementation of a fee may lead to a decline in overall users for these services, and consequently, the wider value that consumers derive from social media could be impacted through a reduction in network effects. For example, Facebook’s value as a communication tool derives from the vast number of people having Facebook accounts—69% of Americans have an account. If only a small percentage of people had an account, the service would be much less valuable. The risk of this proposition to demand-side economies of scale will outweigh the perceived benefits.

 

There will be no tangible benefits for consumers or private industries from expanding privacy laws in the manner California proposes. What will happen, instead, is significant harm to tech companies who want to expand and grow and consumers deriving less value from utilizing technology, with lower-income Americans being forced to give up data protections to receive a free service.

 


Caroline Wang is a policy intern at the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.org or follow us on Twitter @ConsumerPal.