Statement before the Senate Judiciary Committee On Cambridge Analytica and the Future of Data Privacy Politics and Business in Social Media Regulatory Responses to the Cambridge Analytica Revelations Mark A Jamison Ph D Visiting Scholar May 16 2018 The American Enterprise Institute AEI is a nonpartisan nonprofit 501 c 3 educational organization and does not take institutional positions on any issues The views expressed in this testimony are those of the author MARK A JAMISON PH D BEFORE THE JUDICIARY COMMITTEE UNITED STATES SENATE May 16 2018 Chairman Grassley Ranking Member Feinstein and members of the committee thank you for the opportunity to appear before you at today’s hearing on Cambridge Analytica and the Future of Data Privacy I have had the opportunity to study communications media and internet policy issues over the course of many years and in several capacities including in my current positions as the director and Gunter Professor of the Public Utility Research Center at the University of Florida and as a visiting scholar at the American Enterprise Institute While I am proud to be affiliated with these organizations I am appearing today solely on my own behalf and the views and opinions I express should not be attributed to any of the organizations with which I am or have been affiliated I can summarize my testimony in three sentences First the activity that led to this hearing and current controversy—using Facebook and other social media data in ways that are not transparent to users—is not unusual in modern political activity Second Facebook’s problems appear to result from a rapidly changing company allowing its business model to drift from forming communities to serving advertisers and developers not from a lack of regulation Third new regulations aimed at Facebook’s errors are more likely to protect the business from competition than benefit consumers Let me address each in turn Political Campaigns and Facebook The Cambridge Analytica revelations triggered alarm as if using Facebook data was something new in presidential campaigns It is not That is not to say that it was appropriate for Cambridge Analytica to use data that it apparently was not 2 supposed to have Rather it is important to put the data use in context The masters at integrating politics and social media were President Barak Obama’s national campaigns but they were not the first to do so George W Bush’s presidential campaigns are noted for outclassing opposing campaigns in terms of microtargeting voters and using statistical modeling 1 but the Democrats caught up by 2006 and President Obama’s 2008 campaign was unprecedented in the sophistication in using social media and data analytics 2 His 2012 reelection campaign was at an even higher level For this reason and because more has been written about President Obama’s campaigns than on others I will focus on his campaigns From the start President Obama’s campaigns for national office were uniquely capable at obtaining and leveraging Facebook data and tools Facebook cofounder Chris Hughes helped put together the new media strategy for Obama’s US Senate and then 2008 presidential campaigns 3 But as Tim Murphy of Mother Jones wrote there was a problem “Facebook’s terms of use limited the extent to which outside groups can mine the site But the Obama campaign has found ways around those barriers too sic ”4 More specifically supporters were encouraged to log into My BarackObama com—a website where supporters could join local groups create events get updates and engage in fundraising5—using their Facebook accounts This gave the campaign access to their Facebook data which the campaign then used for microtargeting 6 The 2012 campaign’s use of social media and other data eclipsed by a wide margin all other political campaigns before 2012 Its strategic approach was based in part on advice from Eric Schmidt then chairman of Google and executives from Apple Facebook Zynga Microsoft DreamWorks and Salesforce The campaign hired experts in the use of big data for retail social media and data mining who combined the 2008 data and data-gathering approach with data from numerous other sources including information on people’s media viewing habits use of frequent-buyer cards from supermarkets and pharmacies hunting and fishing licenses magazine subscriptions interests expressed on other social media sites and membership rolls from labor unions professional associations and web browsing histories All this was used for fundraising developing volunteer networks and messaging Facebook’s rapid growth led to it becoming a major source of information and an important communication channel for the Obama campaigns Using the 2012 campaign’s 25 million Facebook likes the campaign matched Facebook profiles 3 with other data to develop granular voter profiles 7 The campaign’s tech team was reputed to be able to exploit Facebook capabilities before even Facebook knew they existed The team customized a Facebook app so that “if an Obama supporter had say one thousand Facebook friends the campaign could determine that nine hundred of them were already for Obama focus on one hundred who were persuadable and ideally zero in on six or so who lived in battleground states and were in regular enough contact to be considered real friends not just Facebook friends ”8 An opt-in Facebook outreach program sent supporters messages regarding for example whether their friends had voted and then encouraged the supporters to contact those friends who had not voted 9 This required intimate knowledge of Obama supporters’ Facebook friends and the nature of their relationships Another innovation was a program called Dreamcatcher a tool that analyzed what people wrote on campaign websites to assess sentiments and shape wording for messages 10 The campaign gathered people’s writings by asking them to make notes or tell stories For example the Pennsylvania campaign website asked people to tell why they wanted to be involved in the campaign and what President Obama had done that benefited them The campaign’s tech teams then analyzed the text— looking for emotions expressed sentiments priorities etc —for purposes of targeted voter engagement and customized messages 11 President Obama’s campaign also surpassed Mitt Romney’s in terms of analyzing TV viewing habits in detail enabling the Obama campaign to narrowly focus TV ads According to articles in the Atlantic and ProPublica the campaign matched lists of voters to the names and addresses of cable subscribers 12 The campaign team built a tool called “the optimizer” that correlated set-top box data with the campaign’s own data This gave the campaign information on which households had for example watched the first presidential debate 13 Other campaigns have engaged in similar microtargeting and analytical efforts including Mitt Romney’s presidential campaign But President Obama’s campaigns were noteworthy for their unique access to Silicon Valley talent and their sophisticated use of Facebook and other social media information Facebook’s Business Failings I now turn my attention to the nature of Facebook’s failings The company’s primary failure is not being clear and candid with its users I distinguish between Facebook’s users who are the subscribers and the company’s customers who are 4 the entities that buy ads and other services because of the company’s user base For markets to perform well users should have complete and understandable information on the nature of the services they are using even those that have a zero monetary price as in the case of Facebook This isn’t happening The company has changed how it serves and uses its subscribers without ensuring that they fully understand Facebook’s evolving roles in their lives Facebook’s mission statement is “Founded in 2004 Facebook’s mission is to give people the power to build community and bring the world closer together People use Facebook to stay connected with friends and family to discover what’s going on in the world and to share and express what matters to them ” This appears to have been true in 2004 14 but things changed when growth and monetizing users became the company’s primary metrics of success In summary Facebook morphed from a connector of communities to someone that investigates people’s lives filters their Facebook communications and annexes nearby communities such as Instagram and WhatsApp Facebook’s rapid growth stalled in 2007 prompting the company to hire specialists whose primary purpose was to increase the number of regular users 15 These experts with backgrounds in internet marketing and building large customer bases had direct access to Facebook CEO Mark Zuckerberg and provided a laser focus on growing the user base The head of the first team Chamath Palihapitiya has expressed regret over what he appears to view as psychological manipulation that the company used to accelerate growth 16 A former Facebook product manager has also lamented his role in “turning Facebook data into money by any legal means ”17 These emphases led the company to begin developing ways for third parties to study users for retailing scientific and political purposes It seems fair to describe the company’s activity as gathering people into a context in which they reveal information about themselves so that others can use that information for marketing products and ideas In a sense Facebook’s users are its product Facebook’s shift in focus from creating community to growing numbers and serving marketers appears to be a case of a company allowing itself to drift Each step over the years probably made sense by itself but taken as a whole they constitute a change in who the company is At one time Facebook was a place where friends could share with little thought about who might be watching Reality changed long ago but only now are some users catching on They must feel like they have been in “The Truman Show”—a movie starring Jim Carrey in which the main character is living a seemingly ideal life in a friendly community until it is revealed that every aspect of his life has been captured by hidden cameras and 5 broadcast to strangers Many companies have gone down this road—taking their current customers for granted in some sense and focusing on monetizing them rather than respecting the relationships For example once it developed Windows Microsoft knew it would be costly for people to switch to other PC-operating systems and applications because they would lose access to old files and struggle to share files with others The company leveraged this for years by producing and charging customers for less than stellar versions of Windows Customers felt compelled to “upgrade” because failure to do so could result in their being unable to share files with people who used the newer version This gave Microsoft large profits for a while but the profits became opportunities for Apple Google and others who have given customers great alternatives to Windows Windows’ loss of prominence led Microsoft to recently announce that it will no longer have a Windows division 18 One of Facebook’s methods for expanding its reach was developing News Feed which sends content to users based on Facebook’s algorithms News Feed has been profitable for Facebook 19 but it has changed the company’s relationships with its users Now Facebook effectively chooses what people see and it favors particular types of content A recent and perhaps most famous episode is the suppression of content from Diamond and Silk It seems fair to say that Facebook has become a discussion monitor determining who is allowed a voice and who hears what voices on the platform This is different from being a builder of community where everyone is connected and free to express him or herself The qualities of Facebook’s advertising algorithms made the site popular with persons who want to communicate political messages Indeed Facebook encouraged this by allowing politicians to make profile pages before it allowed others One of its first customers was Sen Barack Obama D-IL in 2006 20 But great targeting algorithms are valuable to good people and troublemakers alike making Facebook a great place for Russians to disrupt political relationships in the US The revelation that content on Facebook—some from fictitious persons—is not as trustworthy as people thought diminished the value of the network and created a political backlash The company responded by engaging in further clampdowns which only served to emphasize that the company is a filter rather than an open channel for communications Regulatory Response I now turn my attention to my last point—namely that any new regulations 6 intended to address Facebook’s challenges are likely to harm Facebook users There are two reasons One is that the problems are business problems that commonly occur What makes this instance notable is that it has happened in a company that has about half the world’s internet users as its base 21 The second reason is that new regulations would likely serve to protect Facebook and other large internet companies from competition I have already described what I understand to be the nature of Facebook’s problems These show a company losing its focus and creating conflicting roles for itself with respect to its users These problems are not unique to business Government institutions nonprofit organizations universities and religious institutions all commit similar errors 22 Losing focus should not be illegal Such mistakes are natural results of innovation and change and an opportunity for competitors so restricting them would be futile and would damage a dynamic tech economy It is beyond my expertise to say if the company behaved fraudulently or broke agreements with users—and I have no information that would lead me to believe that either has happened—but if it has done either existing laws can address the situations Furthermore any attempt to make such business mistakes illegal would likely make things worse since regulators would be making judgments on business models and strategy Experience has shown that customers and businesses have better information on what customers value than do government regulators making the free market the better disciplinarian than a less-informed regulator Another consequence of new regulations would be less competition for large tech companies such as Facebook The European Union’s new regulations on data collecting storage and use called the General Data Protection Regulation GDPR provide an excellent case in point As my colleague at the American Enterprise Institute Shane Tews recently explained The GDPR requires companies that collect or use personal data to ask for consent from their European users or customers To comply with the GDPR a company must protect information such as users’ internet protocol IP addresses and cookie histories in addition to data such as names addresses government ID numbers biometrics race or ethnicity sexual orientation political opinions and tagged photos All organizations that collect personal information including third-party vendors are considered data controllers and are accountable for any data collected processed or 7 disseminated on an EU citizen This includes companies that maintain databases containing personal data even if they do not have a physical presence in the EU They also have to be prepared for requests from EU citizens who can ask for their information to be corrected updated or deleted by the organization holding the data According to a recent PricewaterhouseCoopers survey 77 percent of US companies expect to spend about $1 million or more to comply with the GDPR Companies with the capability to separate and migrate data are moving quickly to transfer customers’ data physically located in the EU onto servers in the US 23 These regulations put governments in a troubling role of setting boundaries on what people can know and how they can use what they know when the information is legitimately obtained While narrowly targeted restrictions on data retention and use might make sense in the well-defined context of physician-patient relationships for example broad application impedes freedom stifles innovation and raises costs These effects on innovation and costs will lessen competition resulting in harm to customers Innovation is important to the competitive process Economist Joseph Schumpeter called this creative destruction and explained that it is essential to well-functioning markets Numerous economic studies have demonstrated that regulations create costs that favor large incumbents As economists James Bailey and Diana Thomas recently wrote Regulation represents a significant barrier to entry for new firms that seek to enter a market Knowing the ins and outs of a specific regulatory framework that governs a particular industry represents a fixed cost of doing business that can be difficult for new entrants to an industry to overcome It also leads existing firms to engage in less risky and innovative behavior And regulatory compliance costs represent a differential burden for small versus large firms 24 Their study of the US economy found that increased regulation leads to fewer new businesses less small business creation and fewer large firms being replaced by 8 new competitors Earlier studies also support these conclusions 25 Chairman Grassley Ranking Member Feinstein and members of the committee this completes my written testimony I look forward to answering any questions you may have 1 Microtargeting is identifying voter interests and propensities at a granular level so that a campaign can tailor messages leverage relationships and personalize interactions Statistical modeling is applying advanced statistical methods to massive amounts of data to discover patterns in voter behavior that would be missed by more casual observations and conventional wisdom 2 Sasha Issenberg “A Vast Left-Wing Competency How Democrats Became the Party of Effective Campaigning— and Why the GOP Isn’t Catching Up Anytime Soon ” Slate November 7 2012 3 Tim Murphy “Inside the Obama Campaign’s Hard Drive ” Mother Jones September October 2012 4 Murphy “Inside the Obama Campaign’s Hard Drive ” 5 Brian Stelter “The Facebooker Who Friended Obama ” New York Times July 7 2008 6 Henry Blodget “How Facebook Co-Founder Chris Hughes Got Barack Obama Elected ” Business Insider June 2 2009 7 Jonathan Alter “Did Hipster Tech Really Save the Obama Campaign ” Wired June 4 2013 8 Alter “Did Hipster Tech Really Save the Obama Campaign ” 9 Alexis C Madrigal “When the Nerds Go Marching In How a Dream Team of Engineers from Facebook Twitter and Google Built the Software That Drove Barack Obama’s Reelection ” Atlantic November 16 2012 10 Sean Gallagher “Built to Win Deep Inside Obama’s Campaign Tech ” Ars Technica November 14 2012 11 Sasha Issenberg “Project Dreamcatcher How Cutting-Edge Text Analytics Can Help the Obama Campaign Determine Voters’ Hopes and Dreams ” Slate January 13 2012 12 Madrigal “When the Nerds Go Marching In” and Lois Beckett “A New Look at What the Obama Campaign Did with Its Much-Heralded Data Operation ” ProPublica November 29 2012 13 Spencer Ackerman “Wrath of the Math Obama Wins Nerdiest Election Ever ” Wired November 6 2012 14 Ben Mezrich The Accidental Billionaires The Founding of Facebook a Tale of Sex Money Genius and Betrayal New York Doubleday 2009 15 Mike Hoefflinger Becoming Facebook The 10 Challenges That Defined the Company That’s Disrupting the World New York HarperCollins Publishing 2017 16 James Vincent “Former Facebook Exec Says Social Media Is Ripping Apart Society ” Verge December 11 2017 17 Antonio Garcia-Martinez “I’m an Ex-Facebook Exec Don’t Believe What They Tell You About Ads ” Guardian May 2 2017 18 Tom Warren “Microsoft Is Ready for a World Beyond Windows ” Verge March 30 2018 19 Hoefflinger Becoming Facebook 20 Blodget “How Facebook Co-Founder Chris Hughes Got Barack Obama Elected ” 21 According to Statista the number of internet users worldwide was 3 6 billion in 2017 while the number of monthly active Facebook users was 2 2 billion See Statista “Number of Internet Users Worldwide from 2005 to 2017 in Millions ” accessed May 12 2018 https www statista com statistics 273018 number-of-internet-usersworldwide and Statista “Number of Monthly Active Facebook Users Worldwide as of 1st Quarter 2018 in Millions ” accessed May 12 2018 https www statista com statistics 264810 number-of-monthly-activefacebook-users-worldwide Internet World Stats estimates the number of internet users worldwide to be 4 2 billion See Internet World Stats “Usage and Population Statistics ” accessed May 12 2018 https www internetworldstats com stats htm 22 Marketing experts Al Ries Jack Trout and Philip Kotler have documented numerous instances in business See Al Ries Jack Trout and Philip Kotler Positioning The Battle for Your Mind New York McGraw-Hill Education 2001 9 23 Shane Tews “Privacy and Europe’s Data Protection Law Problems and Implications for the US ” AEIdeas May 8 2018 http www aei org publication privacy-and-europes-data-protection-law-problems-and-implications-forthe-us utm_source newsletter utm_medium paramount utm_campaign cict 24 James Bailey and Diana Thomas “Regulating Away Competition The Effect of Regulation on Entrepreneurship and Employment ” Journal of Regulatory Economics 52 no 3 December 2017 237–54 25 See for example S Djankov et al “The Regulation of Entry ” Quarterly Journal of Economics 117 no 1 2002 1–37 L Klapper L Laeven and R Raghuram “Entry Regulation as a Barrier to Entrepreneurship ” Journal of Financial Economics 82 2006 591–629 and K Nystrom “The Institutions of Economic Freedom and Entrepreneurship Evidence from Panel Data ” Public Choice 136 no 3 4 2008 269–82 10