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Thursday, February 10, 2011

Advertising Industry in the Digital Age

Suzanne M. Kirchhoff
Analyst in Industrial Organization and Business

The U.S. advertising industry is under growing scrutiny from Congress and federal regulators, who are considering tighter oversight in areas ranging from Internet privacy to environmental claims on packaging to marketing aimed at children.

Lawmakers have been active on advertising issues. In the 111
th Congress, Members introduced legislation to limit the tax deductibility of advertising for pharmaceutical marketing and circulated proposals to give consumers more ability to block technology that tracks individuals’ activities online so that marketers may tailor advertising accordingly. House and Senate committees held hearings on privacy issues; advertising and marketing directed at children; and the state of the newspaper industry, which is in financial distress as advertising moves to the Internet and away from the print product. The Senate Committee on Commerce, Science, and Transportation held a hearing on potentially deceptive advertising practices, including false testimonial advertising, blogging, and other areas. Congress passed and President Obama signed legislation to regulate the volume of commercials on television (P.L. 111-311).

On the regulatory front, the Federal Trade Commission (FTC) released guidelines calling on bloggers to disclose paid product reviews, and in December 2010 recommended a Do Not Track function to allow consumers to prevent advertising and other firms from collecting data about individuals’ online activities. The U.S. Food and Drug Administration (FDA) is examining pharmaceutical marketing in social networks and could propose guidance for online marketing early in 2011. In December 2010, the Department of Commerce Internet Policy Task Force released a paper on commercial privacy issues.

Much of this activity is in response to the rapid growth of advertising on the Internet. Online ad spending has jumped more than 400% during the past decade, to more than $20 billion. The online market is dominated by a small number of firms, with the top 10 digital ad firms garnering more than 70% of all online ad revenues, a level that has remained relatively constant in recent years. “Search” advertising—where companies sell ads as part of consumer-initiated information queries on web browsers—accounted for nearly half of digital ad revenues in 2009, with Google, Microsoft, and Yahoo getting most of the online search traffic.

The key issue for lawmakers and regulators is how to protect consumers without stifling innovation. Rapid technological change is leading to new forms of advertising and to issues that were unknown only a few years ago, from competition in search advertising to fraudulent marketing over social networks. It is likely that regulators, and Congress, will continue to struggle to keep pace as they consider how to craft a workable system to oversee advertising in the rapidly changing digital world.

Date of Report: February 1, 2011
Number of Pages: 24
Order Number: R40908
Price: $29.95

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