May 21, 2024

Economics of Eavesdropping For Pay

Following up on Andrew’s post about eavesdropping as a profit center for telecom companies, let’s take a quick look at the economics of eavesdropping for money. We’ll assume for the sake of argument that (1) telecom (i.e. transporting bits) is a commodity so competition forces providers to sell it essentially at cost, (2) the government wants to engage in certain eavesdropping and/or data mining that requires cooperation from telecom providers, (3) cooperation is optional for each provider, and (4) the government is willing to pay providers to cooperate.

A few caveats are in order. First, we’re not talking about situations, such as traditional law enforcement eavesdropping pursuant to a warrant, where the provider is compelled to cooperate. Providers will cooperate in those situations, as they should. We’re only talking about additional eavesdropping where the providers can choose whether to cooperate. Second, we don’t care whether the government pays for cooperation or threatens retaliation for non-cooperation – either way the provider ends up with more money if it cooperates. Finally, we’re assuming that the hypothetical surveillance or data mining program, and the providers’ participation in it, is lawful; otherwise the law will (eventually) stop it. With those caveats out of the way, let the analysis begin.

Suppose a provider charges each customer an amount P for telecom service. The provider makes minimal profit at price P, because by assumption telecom is a commodity. The government offers to pay the provider an amount E per customer if the provider allows surveillance. The provider has two choices: accept the payment and offer service with surveillance at a price of P-E, or refuse the payment and offer reduced-surveillance service at price P. A rational provider will do whatever it thinks its customers prefer: Would typical customers rather save E, or would they rather avoid surveillance?

In this scenario, surveillance isn’t actually a profit center for the provider – the payment, if accepted, gets passed on to customers as a price discount. The provider is just an intermediary; the customers are actually deciding.

But of course the government won’t allow each customer to make an individual decision whether to allow surveillance – then the bad guys could pay extra to avoid being watched. If enough customers prefer for whatever reason to avoid surveillance (at a cost of E), then some provider will emerge to serve them. So the government will have to set E large enough that the number of customers who would refuse the payment is not large enough to support even one provider. This implies a decent-sized value for E.

But there’s another possibility. Suppose a provider claims to be refusing the payment, but secretly accepts the payment and allows surveillance of its customers. If customers fall for the lie, then the provider can change P while pocketing the government payment E. Now surveillance is a profit center for the provider, as long as customers don’t catch on.

If customers know that producers might be lying, savvy customers will discount a producer’s claim to be refusing the payments. So the premium customers are willing to pay for (claims of) avoiding surveillance will be smaller, and government can buy more surveillance more cheaply.

The incentives here get pretty interesting. Government benefits by undermining providers’ credibility, as that lowers the price government has to pay for surveillance. Providers who are cooperating with the government want to undermine their fellow providers’ credibility, thereby making customers less likely to buy from surveillance-resisting providers. Providers who claim, truthfully or not, to be be refusing surveillance want to pick fights with the government, making it look less likely that they’re cooperating with the government on surveillance.

If government wants to use surveillance, why doesn’t it require providers to cooperate? That’s a political question that deserves a post of its own.


  1. Mitch Golden says

    I think you’re going to wind up in the cell next next to Prof. Appel in Gitmo.

  2. I agree with Paul and swhx7, to some degree, as you are assuming a competitive and transparent market, in your original assumptions, and than start discussing all the reasons everyone has to make the market less transparent.

    Of course, as Eric noted above, their may be many handlers of the bits on their way from point A to point B.

    It is clear the problem of this abundance of information creates problems all its own–recall a recent Ars-iticle which discussed a terrorist watch list that had 750,000 names on it.

    Having the ability to tap those phones does not magically produce the analytical tools necessary to actually use that avalanche of information, and the government may have been better of with information that was more difficult to get–meaning they had to think about what information they wanted and design and prioritize their information gathering activities.

    Less is, sometimes, really more.

  3. Paul is right, you’re implicitly assuming a competitive market. I don’t see any real-world basis for the idea that a telco would pass on any savings to the customer. The whole history of telecom in USA is to the contrary – the telcos have always relied on monopoly or oligopoly and charged as much as they could get away with, regardless of costs, and finessing or subverting any attempted regulations. And still today in the broadband business, the vast majority of US Americans have no more than two providers to choose from (local monopoly telco and local monopoly cable company) if they’re lucky.

    So the analysis is, collect P without spying, or P + E with spying, and the customers pay the same either way. It’s a gain, not avoidance of a loss.

    And mass surveillance is a political problem – the economics of it is only a consequence. The real problem is the Bush administration’s departure from the Constitution.

  4. One point is that if the company claims not to be allowing eavesdropping, but then it comes out that it is doing so, it should be able to be sued by the customers, or even prosecuted by (a different part of) the government for fraud. This should reduce the incentive to secretly receive payments for eavesdropping while claiming not to. As we have seen, it is hard to keep this kind of thing secret. As long as everything is visible then it seems like the incentives are OK.

  5. Ed,

    I think you’ve missed the most important part: secure transmission is also commodity. If you want to transmit a secret, whether personal, corporate or nefarious, why trust your bit shipper? Why not pgp it yourself and let the government sniff your packets to its hearts content?

    In the end, these blanket programs can catch a few stupid criminals and boatload of innocent citizens.


  6. The problem I see with this are that the government has a significant interest in the public believing that they are not being monitored. Otherwise folks will change their behavior.

    The government isn’t likely to want to pay for it for very long, it would be much easier to force this out of them by making it law. I see the telecom immunity as a give and take — “Make us immune, and we will give it to you (cheaper?)”

  7. Consider the information asymmetry which undoubtedly is at work.

    The government pays E for surveillance which it knows, and the telco knows, is quite privacy-invasive. Since this involves national security, the customers are not told the details (they are told it is “providing an anti-terrorism service to the government, in exchange for a discount”).

    Customers migrate to the telco which implements eavesdropping, because it is cheaper.

    All other telcos follow the leader (to compete on price) and everyone is now under surveillance.

    To the extent that a telco with state surveillance is considered of lesser quality than a privacy-respecting telco, this is a classic lemons market, with the information asymmetry occurring by government fiat.

    If one telco holds out, its customers will be paying P (not P-E). Obviously, they have something to hide, and will be rounded up by a posse of the TSA and the Boston police department :^)

  8. You’re also assuming a transparent, competitive market here. The companies don’t have to disclose their payments from the government on a timely basis, nor do they have to allocate them to particular (classes of) customers. And although price is one aspect of utility for telecom customers, it’s not nearly the whole deal in most parts of the country. (My state is currently fairly close to a duopoly in wired and wireless communications, with business deals pending that would make it a de facto monopoly state, for example.) Furthermore, even where price is a big deal, the actual cost of carrying the bits is something like a quarter of the cost structure, so there’s plenty of room to bury things like eavesdropping fees.

    I think the original observation that this is something for which companies can get cost-plus contracts from the government is much more on the mark.

  9. I have enjoyed this series, but it seems to follow an assumption I’m not sure is correct: When you purchase telecom service from a company, your bits only flow through that one company’s hardware.

    I was under the impression that when we bought telecom service from company A, that company billed us for the service, and then bought the right to use of any necessary or desirable infrastructure owned by other companies. For instance, I can buy telephone service or DSL from anyone, but my physical line goes from my house to a Verizon building. No matter what I do, my data is going through Verizon controlled infrastructure. Similarly, if I want to send my bits to Australia, there may be only one company who provides a trunk line to that continent, and then simply charges other carriers for the bits they push through that pipe.

    I don’t have a firm understanding of the way telecom services are distributed, so this may be incorrect, or partially correct. But if it is close to the truth, it would seem that penetration by the government of only a handful of the major companies could potentially gather every communication. Anotherwords, there might be an even lower incentive for companies not to comply with any surveillance, because it wouldn’t have any discernible impact on the public.