Hard Analysis Needed Before Regulating the Internet of Things

May 21, 2015


FTC Commissioner Joshua Wright speaks about the Internet of Things at an event hosted by the U.S. Chamber of Commerce Foundation and the U.S. Chamber of Commerce's Center for Advanced Technology and Innovation. May 21, 2015. Photo by Ian Wagreich.

Regulators should rely on evidence, not anecdotes, when examining policies regarding the Internet of Things (IoT), a commissioner from the Federal Trade Commission (FTC) said Thursday.

In remarks at an event hosted by the U.S. Chamber of Commerce Foundation and the Chamber’s Center for Advanced Technology and Innovation, FTC Commissioner Josh Wright said evidence suggests consumers benefit from the free flow and exchange of data, and he outlined five basic principles for this sort of rulemaking.

The Internet of Things is essentially a network of physical objects exchanging data. While the term itself is some 15 years old, it has only come to prominence in the past two years.

“It is no wonder,” Wright said, “that interest in this topic—and its future—has never been higher or more relevant to the business community, policy makers, academics, and consumers.”

Wright argued that the FTC must be rigorous and analytical in conducting oversight, in contrast to the “narrow and anecdotal” approach he believes the Commission has taken recently. The FTC’s latest Data Broker and Internet of Things reports, for instance, are marked by a general suspicion of data, he said, rather than by empirical analysis or a “wait-and-see” approach. Indeed, the government appears to have a “nearly crippling fear” of how the sharing of data could go wrong.

“It is my view the Commission has, while fully intending to protect consumers, reacted prematurely and with an unwarranted general suspicion of data, rather than grounding decisions and recommendations in economic and empirical analysis,” Wright said.

Evidence-based policymaking depends on conducting rigorous cost-benefit analyses. The economic value from a connected device is more than the sum of what was paid for it, but necessarily involves the consumer surplus it generates. How much a consumer would have to be paid to not use a smartphone, for instance, says a lot about how much benefit he or she derives from that device. Few studies, particularly from the FTC, take a hard look at these sorts of economic benefits, not just to consumers but to businesses and society alike. 

These consumer benefits must be weighed against any tangible harm that may result from emerging technologies. The degree to which these costs are taken into account must be weighted according to how it benefits consumers on the margin. “An economic and evidence-based approach sensitive to those tradeoffs,” the commissioner said, “is much more likely to result in consumer-welfare enhancing consumer protection regulation.”

In order to inform the FTC’s regulatory decision-making, Wright proposed five basic principles:

1)    Don't regulate by anecdote or speculation. Wright explained that “regulators can sometimes be tempted merely to explore anecdotal and other hypothetical examples and end up just offering speculations about the possibility of harm.” The FTC’s Data Broker Report, for instance, proposes legislation it does not know will work in order to address activity that it has no evidence is happening. Reports such as these require serious analysis. 

2)    Don't regulate by slogan. Recent reports include terms that the Commission has not consistently defined, such as “privacy by design” and “data minimization.” Worse yet, such slogans lack meaningful content. Such language acts as a substitute, Wright says, for the precision that an evidence-based approach would require in order to inform consumers and enhance their welfare. Endorsing these terms at any cost will ensure those costs are indeed realized—without any of the countervailing benefit.

3)    Perform a proper cost-benefit analysis. The FTC is often hesitant to incorporate economic tools in its work protecting consumers. Failing to be economically rigorous can lead to serious policy errors, squelch innovation, and deprive consumers of real benefits from emerging technologies. The commissioner encouraged a “deeper integration of economics and cost-benefit analysis into the consumer protection framework at the Commission.”

4)    Don't issue recommendations or best practices without doing the necessary work. The FTC has a long history of reporting on novel or emerging issues, as is its duty. It has the capacity to gather information under Section 6(b) of the Federal Trade Commission Act, and for the FTC’s highly-equipped team of economists and issue experts to subject these submissions to a thorough and rigorous investigation. But all too often the FTC issues recommendations and policy guidance based on what it heard at a workshop rather than on serious research. This approach is misguided, Wright said. The FTC should issue reports built on a solid foundation.

5)    Do articulate a cognizable harm. The commissioner admitted that regulating the Internet of Things will be difficult. For far-ranging technologies even the experts sometimes at a loss. The commissioner’s dissent in the Nomi case, for instance, came from a concern that the FTC’s core focus on protecting consumers against deception and unfairness was becoming untethered from actual consumer injury. That is why the Commission, in his view, should exercise restraint. The FTC’s reports and enforcement actions on these matters should be limited to addressing actual, recognizable instances of harm to consumers.