Effects of Banning Targeted Advertising
Balancing user privacy and mobile app innovation
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This blog is written by Tobias Kircher and Jens Foerderer.
When using apps on your smartphone, how often do you encounter advertisements suggesting products that you’ve recently viewed online? It’s a bit spooky, isn’t it?
This is known as targeted advertising, a strategy that customizes ads to individual users based on a variety of factors, including their demographic information, browsing behavior, and geographical location. The data is obtained from apps on users’ smartphones and it is often aggregated by third-parties into user profiles.
“[B]anning targeted advertising could deprive developers of an important revenue model, lead to higher prices, less innovation, and, thus, perhaps do more harm than good for consumers.”
People have expressed growing privacy concerns over targeted advertising. Critics have dubbed it “surveillance advertising,” citing its invasive nature, as it often involves extensive data collection without users’ full awareness. Recently, there has been mounting pressure on legislators to ban ad targeting, and policy changes have been put into place to regulate the use of targeted advertisement on platforms, such as the Digital Services Act in the EU. However, developers of apps argue that banning targeted advertising would deprive them of crucial ad revenues necessary for app development. They claim that targeted ads are needed due to users’ reluctance to pay for apps. If true, banning targeted advertising could deprive developers of an important revenue model, lead to higher prices, less innovation, and, thus, perhaps do more harm than good for consumers.
The core issue is that we currently know very little about the consequences that a ban of targeted advertisement would have for developers of mobile apps.
Google’s ban on targeted advertising in mobile games for children
In a recent article published in Management Science, we seek to estimate the app development consequences of a ban on targeted advertising. We were especially interested in understanding whether such a ban will indeed curb developers’ innovation and which developers are more affected and which ones less.
From an empirical perspective, this is quite challenging to do because neither the EU nor the US has rolled out a comprehensive ban on targeted advertising. To surmount this obstacle, we adopted a nuanced approach by scrutinizing a smaller-scale scenario where a ban on targeted advertising was implemented. Specifically, in 2019, Google made the decision to restrict targeted advertising in children’s games on Google Android (i.e., for games that primarily target users younger than 13 years of age). Leveraging this as a case study, we conducted a difference-in-differences analysis to examine the effects of the ban. This involved comparing games affected by the ban (the treatment group) with unaffected games (the control group). To ensure that affected and unaffected games are similar, we compared games that were just forced to comply (i.e., games rated to be suitable for ages 10 and above) to games just not forced to comply (i.e., games rated to be suitable for ages 13 and above).
[W]e consistently observed a decrease in both the likelihood of developers shipping new features to their apps (-16.7%) and the introduction of new games subsequent to the ban’s enforcement (-36.3%).
Our investigation yielded compelling insights into the impact of Google’s ban on children's game development, revealing a notable downturn in app innovation. Notably, we consistently observed a decrease in both the likelihood of developers shipping new features to their apps (-16.7%) and the introduction of new games subsequent to the ban’s enforcement (-36.3%). These estimates are of considerable magnitude. This decline can primarily be attributed to the diminishing advertising revenues experienced by developers following the ban.
The targeted advertising ban has generally had adverse effects, especially for games of undiversified, young, and advertisement-dependent developers. Arguably, these developers were more dependent on ad-based revenue streams and thus incurred the greatest drawbacks. One exception are top-tier games, which experienced positive outcomes. This suggests that highly rated and sought-after games may have benefited from the ban, possibly due to improved monetization opportunities or reduced competition.
Implications for platforms and policy makers
Our paper has unearthed a crucial insight: while banning targeted advertising bolsters user privacy, it leads to a downstream reduction in mobile app development, and thus, app innovation. Targeted advertising serves as a linchpin in both the advertising revenue model and app development landscape. For app developers, generating adequate ad revenues sans targeted advertising proves challenging. From our conversations with app developers we have learned that transitioning to a paid revenue model is often not feasible. Hence, targeted advertising appears to be a vital component of the advertising revenue model and an incentive to develop mobile apps.
“The quest to strengthen user privacy in digital advertising may clash with the fundamental goal of platform firms: providing a diverse range of innovative apps tailored to individual needs.”
For platform firms, our findings suggest a dilemma. Balancing user growth and app innovation is paramount for the success of a two-sided development platform. In light of the rising privacy consciousness among users and the escalating competition for privacy-focused individuals, platform firms have become increasingly interested in controlling the use of user data on their platforms. While a ban on targeted ads may address users’ privacy concerns, it poses a dilemma by conflicting with platform firms’ objective of fostering app innovation. The quest to strengthen user privacy in digital advertising may clash with the fundamental goal of platform firms: providing a diverse range of innovative apps tailored to individual needs.
Likewise, before opting for a ban on targeted advertising, our findings support policymakers to take into account the value that targeting contributes to digital markets, as well as the potential consequences for consumers. While targeted ads have garnered criticism for their privacy implications, they currently serve an essential function in sustaining the diversity of mobile apps. Implementing a ban on targeted ads could significantly limit consumers’ choices in mobile apps, particularly affecting startups. Policymakers must carefully weigh these considerations to ensure that any regulatory measures strike an appropriate balance between protecting user privacy and maintaining a vibrant and diverse digital landscape for consumers.
This blog is based on Tobias and Jens’ research, which is published in Management Science and is included in the Platform Papers references dashboard:
Kircher, T., & Foerderer, J. (2024). Ban Targeted Advertising? An Empirical Investigation of the Consequences for App Development. Management Science, 70(2), 1070-1092.
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