The first BlackBerry-wielding president is pro-technology but also pro-privacy, and he’s backed by a strong Democratic majority in Congress. That means Washington could have a big impact on online retailers in the coming years.
By Don Davis
Online retailing came of age during the White House tenure of George W. Bush whose hands-off approach to business meant Washington’s policies had little effect on e-commerce. That’s likely to change with Barack Obama as president.
In part that’s because Obama has pledged action on several issues affecting e-commerce, including online privacy and extending broadband Internet access. But the bigger reason is that the economic crisis has led government, even before Bush left office, to take a more activist role.
The commitment to jump-start the economy prompted the passage within weeks of Obama’s inauguration of stimulus legislation that includes billions to push broadband web access to parts of the country where it’s not available. And the need of cash-starved state governments for new revenue sources will be a big part of the upcoming debate on legislation to allow states to require e-retailers to collect sales taxes.
The sales tax proposal has e-commerce executives worried. And some were concerned by Obama’s most significant Internet-related move to date, the appointment of a vocal privacy advocate, Jonathan Leibowitz, to head the Federal Trade Commission.
That’s prompted fears the FTC will put new restrictions on how online marketers can use data to target consumers with ads and offers. But Jordan Cohen, senior director of industry relations at e-mail service certification provider Goodmail Systems Inc., says the administration is unlikely to do anything to stifle Internet investment and growth.
“We have a tech-savvy president who’s interested in technology and wants to promote innovation,” Cohen says. “While he has an interest in consumer protection, it will be balanced. The government wants to make sure businesses can grow.”
Online sales tax
But Obama also wants to make sure the states can pay their bills. And that is likely to bring to the fore in the coming months the issue most likely to change Internet retailing: an online sales tax.
While Obama has not addressed the issue directly, many e-commerce executives are fearful there may be more bipartisan support than in the past for a bill that would allow states to require all e-retailers, not just those with operations in a given state, to collect sales tax.
This legislation is more likely to pass because of the economy, says Daniel Schibley, senior analyst at CCH Inc., a unit of Wolters Kluwer that provides tax and business law information and software.
“While it’s not a partisan issue, Democrats generally are more likely to be supportive than Republicans, and the increased Democratic majorities will probably help,” Schibley says. “Probably more important given the economic situation, it’s a way the federal government could help states raise more revenue without apportioning money from the federal budget.”
Advocates of online sales tax are optimistic. “We have a better scenario with the current leadership in the House and Senate and the White House, coupled by the fact that state and local governments are suffering significant budget shortfalls,” says Maureen Riehl, vice president and government and industry relations counsel for the National Retail Federation. “President Obama and the congressional leadership have indicated a desire to be helpful to state government.”
NRF, whose membership includes big retail chains, supports the sales tax legislation as a way to eliminate the price advantage online retailers enjoy when consumers don’t pay sales taxes on online purchases. Although consumers technically are supposed to pay sales tax on online purchases to their home states, few do, making the unpaid sales tax a discount off of the price that would be paid in a store.
Riehl says legislation to be introduced this spring would enable states to require out-of-state web merchants to collect sales tax once the states bring their sales tax laws into compliance with a set of rules called the Streamlined Sales Tax Agreement. Those SST rules were developed in response to retailer complaints that it would be too difficult to know how much to charge each consumer when thousands of state and local jurisdictions have their own sales tax rules. For instance, some charge tax on clothing and food, while others do not.
To date, 22 of the 45 states that charge sales tax have brought their rules into compliance with SST, with Wisconsin applying to become the 23rd, Riehl says. Most SST-compliant states would have to make minor modifications to meet the requirements of the federal bill, but then could start requiring tax collection immediately if the bill were to pass, Riehl says. The average state sales tax is 6%, and several states are in the process of raising that tax in response to the recession.
Having to charge sales tax would hurt Internet retailers, says Ken Burke, chairman of e-commerce technology provider MarketLive. “Saving the tax made it cost-neutral for the consumer to pay for shipping,” Burke says. “It will hurt online retailing and make it harder to compete.”
Target: behavioral targeting
Obama, while not yet addressing the sales tax message publicly, sent a clear message on privacy by appointing Leibowitz to chair the Federal Trade Commission, which oversees rules on how online marketers can use data collected from web users.
Leibowitz, an FTC commissioner since 2004, reiterated his support for strong privacy policies in February, just weeks before Obama promoted him to chairman.
In commenting on the FTC’s latest report on online advertising, Leibowitz said, “Industry needs to do a better job of meaningful, rigorous self-regulation or it will certainly invite legislation by Congress and a more regulatory approach by our commission. Put simply, this could be the last clear chance to show that self-regulation can—and will—effectively protect consumers’ privacy in a dynamic online marketplace.”
Online marketers took heart from the fact Leibowitz emphasized self-regulation, instead of new legislation. “While it’s true he’s a privacy advocate, he’s also realistic about the Internet, that it’s changing constantly and needs to be kept free and open,” says Linda Woolley, executive vice president for government affairs at the Direct Marketing Association.
A key issue in the online privacy debate is behavioral targeting, the practice of showing ads or making offers to online consumers based on their behavior on web sites. For instance, a retailer might place a cookie on the computer of a visitor who views a flat-screen TV product page, so that an advertising network can present that consumer the retailer’s ad for TVs on another web site.
That involves the retailer sharing consumer data with an outside company, the ad network, and the FTC made clear that’s the kind of data-sharing that most concerns it. The FTC report said it was not concerned with a retailer using its own data about consumer behavior to present offers on the retailer’s own site.
While that first-party exemption is helpful, there remains the question of how the FTC defines a third party. Depending on that definition, large companies may be limited in how they can share consumer data among their subsidiaries, says Dennis Dayman, chief privacy officer at online marketing automation company Eloqua. Industry executives also have varying opinions about whether an analytics vendor or other technology provider that collects data on behalf of a retailer would be considered a third party; counting those as third parties would greatly extend the reach of any new regulation.
And while the focus has been on Obama moving into the White House, the new Congress that was seated in January put many congressmen in new and influential positions. Among them is Rep. Rick Boucher, D-Va., chairman of the House Energy Subcommittee on Communications, Technology and the Internet, a key body on Internet issues.
Boucher has expressed concerns about online privacy and is said to be drafting a bill that would allow marketing based on behavior only to consumers who opt in to have their web activity tracked, a move that could cripple behavioral targeting.
“We strongly believe that would be death to online marketers,” says the DMA’s Woolley. “Most people wouldn’t have any clue what they’re opting into, so if you gave people a choice most would say, ‘I don’t know what this means, so no.’”
Best behavior
In addition to behavioral targeting, the FTC report in February also addressed web site privacy policies. The commission made clear that privacy policies should be prominent, clearly written and provide an easy way for consumers to choose not to have their online activity tracked.
Given that the FTC is clearly watching how the industry acts, online retailers should follow that advice on presenting their privacy policies clearly, and make sure they adhere to their promises, Goodmail’s Cohen says. “If you say you can opt out, make sure they can,” he says. “If you say you don’t share information, make sure you’re not sharing information.”
Industry executives are encouraged that the FTC is giving the industry a chance to regulate itself, rather than leaping to impose new rules. And some major Internet players are addressing consumer privacy concerns by being more open about their ad policies, says Mike Zaneis, vice president for public policy at the Interactive Advertising Bureau, one of several organizations working together on voluntary online privacy guidelines.
For instance, ads on eBay now have an “about” link that explains that eBay “may use information we have about you to make sure that the ads you see, on the eBay site or elsewhere, are as relevant to you as we can make them.” It adds that eBay sends Yahoo, its ad network partner, anonymous information about a user’s eBay search terms, demographics and categories of interest, which Yahoo uses to present relevant ads. The eBay AdChoice program allows consumers to opt out of being targeted with ads in that way.
Zaneis is also encouraged by the Obama team’s understanding of online marketing. He notes Obama was the first presidential candidate whose campaign used behavioral targeting, retargeting visitors to the Obama campaign site when they went to other web sites.
“You have a president and people close to him who understand the power of relevant marketing and spent a lot of money in this area,” Zaneis says. “They have to understand it can be done in a consumer-friendly way, just as they did it.”
More broadband
While sales tax and behavioral targeting are issues of concern for online retailers, they figure to benefit from Obama’s promise to extend high-speed Internet access.
Obama’s economic stimulus package, which he signed into law in February, allocates $7.2 billion to be spent by the end of 2010 to extend broadband Internet access, especially to rural areas.
That can only help e-commerce, as shopping online becomes more appealing at broadband speeds. But the impact is likely to be limited, as 93.1% of the nearly 167 million U.S. Internet users already have broadband at home, according to research firm Nielsen Online. Moving that percentage to 100% would add about 11.7 million new broadband users.
The act is largely aimed at rural areas not reached by broadband. Only 16% of the U.S. broadband homes are in rural areas, whereas 21% of the population is rural, according to Netpop, a research firm that tracks broadband Internet trends. With the average rural user of broadband spending $86 per month shopping online, bringing rural broadband penetration up to the level of U.S. cities and suburbs could mean an additional $4.5 billion per year in e-commerce sales, says Netpop president Josh Crandall. That would add 3.4% to the $133.6 billion U.S. consumers spent online last year.
Bringing broadband to more homes would mostly benefit online retailers like Amazon with a reputation for low prices, says analyst Sucharita Mulpuru of Forrester Research Inc. “The consumers who don’t have broadband now tend to be later adopters and are unlikely to be big spenders,” she says.
Only 55% of U.S. homes now have broadband access, according to the Pew Internet and American Life Project, and the Obama administration has taken another step, beyond the stimulus package, to expand high-speed Internet access. The stimulus plan also mandates that the Federal Communications Commission come up with a plan by February 2010 for faster Internet service and access to more Americans. The FCC began taking comments on that subject last month.
Sending a message
Other issues of interest to online retailers are starting to bubble up in Washington.
Obama’s campaign platform favored patent reform that would reduce unnecessary litigation, and online retailers would be glad to get relief from the frequent suits by patent holders over the use of the many technologies that go into an e-commerce site. However, a bill introduced by Sen. Patrick Leahy, D-Vt., was heavily amended in the Senate Judiciary Committee to eliminate some controversial sections, including one that would have limited damages and benefited e-retailers.
The security of consumer data was the subject of a hearing in the House in March, and Democratic congressmen warned of the risk of legislation mandating data-protection policies if industry rules such as the Payment Card Industry Data Security Standard prove inadequate. Meanwhile, Sen. Herb Kohl, D-Wisc., has reintroduced a bill he pushed last year that would roll back a U.S. Supreme Court decision giving manufacturers more power to prevent discounting of their products by retailers, a controversial question on which Internet retailers are divided.
However, these issues are not likely to be among Obama’s top priorities until the economy recovers. “The administration is too busy focusing on automakers and banks,” says Dayman of Eloqua.
But while Obama tries to fix the economy, he has made clear he will be using Internet-based technology to communicate, such as the BlackBerry he successfully fought to keep and the online town hall meeting he conducted in March in which he responded live to questions sent by e-mail.
Obama’s personal penchant for web technology sends a message that the Internet is a positive force, Dayman says.
“Watching Obama and his administration embrace these technologies will make it easier for the average citizen to say, ‘If he’s doing it, it can’t be that bad,’” Dayman says. “It will help the market.”
don@verticalwebmedia.com
