Information Services Executive Council
ISEC in the Press

Restrictive Privacy Legislation Could Cost US Catalog and Internet Apparel Shoppers in Excess of $1.4 billion Annually: Would be a Regressive Tax

by Drew Clark, National Journal's Technology Daily,

December 8, 2000

NEW YORK -- In a forthcoming study jointly sponsored by The Direct Marketing Association's (The DMA's) Information Services Executive Council (ISEC) and the Privacy Leadership Initiative (PLI), preliminary results indicate that a national "opt-in" privacy law would increase costs to catalog apparel retailers and Internet "e-tailers" between 3.5 percent and 11 percent, depending on the nature of the law.

These additional costs are largely the result of a significantly reduced ability to engage in market segmentation and target marketing. For this $13 billion industry just to preserve current revenues and profit margins, it would potentially need to pass $1.43 billion in additional costs on to American consumers. "This is a tremendous deadweight loss to society," noted ISEC's Director Michael Turner, "one that, tragically, will hit inner-city shoppers and small businesses the hardest."

According to a recent study done by PricewaterhouseCoopers and the Initiative for a Competitive Inner-City, inner-city African-American's rely on catalogs as their primary source of women's apparel at a rate 71 percent above the national average. This is not surprising, as inner-city markets are radically under-served by retailers, while those retailers in the inner-city are usually low quality and charge high prices. The same study also shows that inner-city residents earn significantly less, value "unique" and "fashionable" clothing more, and spend roughly 20 percent more than the average US household on women's apparel. "Taken together," Turner argued, "inner-city residents will have less choice because catalog retailers won't be able to reach them, and will have to pay more because of increased marketing costs and reduced competition. The ultimate effect would be to impose and outrageous regressive privacy tax on inner-city shoppers."

The ISEC/PLI apparel study also indicates that small and fledgling companies would suffer unduly from a national opt-in privacy law. In general, smaller and newer companies rely heavily on external information -- lists of potential customers -- to market their product. This stems from the fact that these firms aren't household names, haven't established a customer base, and don't have enormous budgets for alternative means of marketing such as advertising on television. In addition, firms of this type don't enjoy the economies of scale characteristic of larger companies, and therefore tend to operate with higher than average cost structures.

The foreclosure of external information would severely hamper the reach of small and infant firms, an impact that would be particularly acute in the apparel retail industry; where most small firms are niche or boutique retailers with a very narrow potential customer base. "Such a result would be contrary to what America is all about," argued PLI Executive Director Wally O'Brien, "new and smaller apparel catalog retailers would confront additional costs that could inhibit their growth, or even cause bankruptcy. With the increased costs, these same firms will also have a harder time finding critical start-up capital in a tightening market as they become higher risk investments," O'Brien added.

ISEC and the PLI are expected to release the final report in early January, 2001. The two organizations are also currently exploring a follow-up study that would estimate the impact of privacy legislation on the domestic apparel and textile industry, given the price increases on the retail side. In addition, the PLI and ISEC have launched the most significant national privacy research effort to date, designed to quantify the economic benefits to American consumers and the US economy resulting from the free flow of consumer information. This effort, which includes a sizeable number of firm-level case studies from a broad array of industries, should be completed by early Spring 2001.

ISEC is a segment council of The DMA. Its members are the largest and leading information service providers in the United States. For more information about ISEC, visit its home page at www.the-dma.org/isec. The PLI is a 501(c)6 dedicated to providing solutions to legitimate privacy concerns, as well as educating the media and consumers about the benefits resulting from the free flow of information and industry efforts to protect an individual's privacy. For additional information about the PLI, contact Wally O'Brien at (212) 626-6624, extension 8618.

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