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The Stage Seems Set for Net Privacy Rules This Year

High-tech executives were elated when the pro-business Bush Administration took office in January. But that joy is being tempered as a new reality sets in: Even with a Republican in the White House, this may well be the year that Congress enacts federal protections for privacy on the Internet, a move the tech set has strongly opposed.

Uncertain how to regulate privacy and fearful of offending Silicon Valley contributors, lawmakers in both parties punted on the issue last year. But now, GOP leaders see Internet privacy as a vote-getter. "We need to have some sort of standard rules that apply across jurisdictional boundaries," says House Energy & Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.), a defender of industry self-policing last year. And the business community, once monolithic in its defense of self-regulation, is splintering.

The political landscape started to shift last May when the Federal Trade Commission asked Congress to pass new protections. Meanwhile, consumer anger about online snooping has grown. Last fall, a Gallup poll of 573 Internet users found that 82% were concerned about the privacy of their personal data on the Net. Those fears have been stoked by a string of revelations about privacy abuses. In February, for instance, the Privacy Foundation, a watchdog group, uncovered a way to eavesdrop on certain types of e-mail messages.

INEVITABLE. But the biggest about-face has come from business. Companies like Intel, Hewlett-Packard, Disney, and AOL Time Warner, as well as trade groups including the AeA (formerly the American Electronics Assn.), now back modest protections. Says Jill Lesser, a lobbyist for AOL Time Warner: "The dynamics of the debate have changed substantially." In fact, industry sources think legislation is inevitable. Otherwise, some worry, a consumer backlash could cripple e-commerce.

The threat of tough state laws is also playing a key role. Many tech execs are reluctantly concluding that federal rules may be the only way to fend off a patchwork of conflicting state laws. Currently, more than 100 privacy bills are pending in 33 states. "I'm a little nervous about [federal] legislation," says Scott G. McNealy, chairman of Sun Microsystems Inc. "But I also don't want the states running around [generating] different sets of rules."

Indeed, federal preemption is fast becoming a must-have for business. But to states' rights conservatives and privacy advocates who look to the states to enact stiffer curbs, preemption is unacceptable. "Virtually every federal privacy bill in this countryhas allowed states to legislate upward," says Marc Rotenberg, executive director of the nonpartisan Electronic Privacy Information Center.

Crafting a bill that can win wide support will be a daunting task. Many companies are likely to coalesce behind a bill soon to be introduced by Senators John McCain (R-Ariz.) and John F. Kerry (D-Mass.) that will require Web sites to tell users what personal data they collect and let them opt out of information-sharing. But to privacy advocates and some Democrats on Capitol Hill, that's not enough.

Instead, privacy hawks will push for so-called "opt-in" rules that require companies to get users' prior consent before collecting or sharing personal info. Opt-in is a far higher hurdle than opt-out, which allows a company to gather data until a consumer orders it to stop.

Privacy gurus hope President Bush will be their strongest ally. As a candidate, Bush said customers "should be allowed to opt in" to information sharing. Says Rotenberg: "This is one campaign promise we're not going to forget." Despite President Bush's insistence that his $1.6 trillion tax cut be passed without adornments, Texas lawmakers are spearheading a drive to give taxpayers a choice of deducting state sales taxes or state income taxes from their federal income taxes. GOP Senators Phil Gramm and Kay Bailey Hutchison have teamed up with Tennessee GOP Senator Fred Thompson to sponsor the legislation, which would benefit citizens of Texas, Tennessee, Florida, Washington, Nevada, South Dakota, Wyoming, New Hampshire, and Alaska--states without income taxes on wages. Cost of the provision over 10 years: $18 billion. The bill's sponsors are jawboning White House economist Lawrence B. Lindsey--but so far, Lindsey is noncommittal. A battle is brewing on Capitol Hill over the song-swapping Web site Napster. On Napster's side is Senator Orrin G. Hatch (R-Utah), with allies such as Representative Rick Boucher (D-Va). So far, only BMG Entertainment has agreed to license its recordings to Napster, which on Feb. 20 offered the five major record labels $1 billion over five years in an 11th-hour bid to stay open. A federal court has ordered Napster shut down if it continues to provide copyrighted music for free. Songwriter Hatch believes Napster helps musicians who don't have a record contract. He wants other labels to sign deals similar to BMG's and is threatening compulsory licensing if they don't. The Recording Industry Association of America has enlisted former Senate Majority Leader Bob Dole to fight the idea.

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