A ban on the use of apps to collect data for personalized advertising would significantly reduce the range of apps available and the number of updates, according to a study by Professor Dr. Jens Foerderer and Tobias Kircher from the TUM School of Management based on the ban on Android apps for children. The findings can help companies define their business models and help policymakers regulate targeted advertising.

Most smartphone applications are free. They are paid for by advertisers, often through so-called targeted advertising: The apps analyze data such as a user's usage patterns and location, and even photos and messages, to display ads tailored to the individual user. This practice has been criticized as an invasion of privacy, and there have been many calls to ban it. The EU's Digital Services Act will tighten regulations on targeted advertising from 2024, and there are similar plans in the US. Companies oppose restrictions, arguing that without revenue from personalized advertising, it would be impossible to continue offering many apps and there would be no incentive to develop new products.

Prof. Jens Foerderer and Tobias Kircher of the Chair for Innovation and Digitalization at the TUM Campus Heilbronn have conducted the first empirical study of how the disappearance of personalized advertising would affect the range of available apps. In their study, they analyzed the impact of a 2019 ban on targeted advertising introduced by Google in its Play Store, which affects Android apps for children. The researchers compared the situation one year before and ten months after the ban.

Number of new apps down by a third

The study shows that after the ban on personalized advertising, fewer new apps were launched, more apps were abandoned than before, and fewer updates to existing apps were offered than before:

• The number of new apps released per publisher dropped by more than a third.
• The likelihood of an app being removed from the market increased by more than 10 percent.
• Providers released 17 percent fewer updates. This figure includes not only app enhancements, but also maintenance and security updates.

The researchers found this trend across nearly all vendors. The trend was particularly pronounced among small and young companies, primarily startups. The only exceptions were extremely popular apps, on which the companies apparently focused their development efforts. The researchers suggest that a similar decline in the number of available apps would follow a ban on targeted advertising for adult apps.

"Find out what users are willing to pay for"

"Better privacy protection for smartphone apps is an important step, especially for children," says Jens Foerderer. "The question is: how do we get out of the trap where consumers are used to using apps for free and companies base their business models on personalized advertising? And how can we do this without reducing the number of innovative apps available that can be very useful to consumers? Our findings can serve as a basis for decision-making for both policymakers and companies.

Businesses should prepare for possible regulation. "Companies will have to expect a serious impact on their revenues if targeted advertising is banned," says Tobias Kircher. "They should therefore find out as soon as possible which of their app features users would be willing to pay for. And more: They should develop strategies to increase consumers' willingness to pay."

Publication

Tobias Kircher, Jens Foerderer (2023) Ban Targeted Advertising? An Empirical Investigation of the Consequences for App Development. Management Science 0(0). DOI: 10.1287/mnsc.2023.4726

Further information and links

At the TUM Campus Heilbronn scientists from the fields of management and computer sciences research and teach on digital transformation and on family-owned companies.