Watching Your Every Online Move

Even if Phorm can placate privacy concerns, will its ultratargeted ads creep us out?
Ertugrul's Phorm is about to launch a large-scale test run with British Telecom Graham Trott

I could start by saying Kent Ertugrul runs a new kind of online ad firm called Phorm. He does, but that's an awfully dull way of putting it. Because Phorm, which is based in Britain, is animated by an insanely ambitious notion. I Ertugrul's big idea is to remake the world of online ads. Phorm promises to do this by working alongside Internet service providers--think Comcast (CMCSA). (It's days away from launching its first large-scale test, with British Telecom.) From that perch, it extrapolates from the sites people visit to determine what products they're likely interested in, then beams them ads based on that data. Users can opt out. Web sites can set minimum prices for Phorm ads. Many sensitive categories, including alcohol and pornography, are excluded.

Thus, from the moment you go online, Phorm and similar players like NebuAd will "see" everything you do. The Yahoos (YHOO) and Google (GOOG)s of the world have server farms full of data on their users, which they use to target ads, but they only know what happens on their searches and pages. Phorm will know everything. It does shield individuals: They're assigned random 16-digit numbers, are otherwise unidentified, and Phorm does not store users' browsing histories--instead it assigns characteristics to the sites they visit, says Ertugrul.

Still, Phorm's plans make some Britons very nervous, as a simple Web search shows, and in the U.S. both the House and the Senate held hearings this month about Phorm-like technologies. Also, key members of Phorm's programming and executive team, including Ertugrul, worked for Phorm's predecessor company, which dealt in what Ertugrul calls "adware" and what everyone else calls "spyware." This does not reassure those prone to freaking out over privacy issues, although Ertugrul dismisses the notion that his past makes him an imperfect messenger. "When the reputation of adware became tainted, we unilaterally pulled out of that business," he says.

Phorm's implications are pretty vast. It slices off a chunk of the ad pie for ISPs, who, after all, maintain some circulatory systems for Web traffic. Phorm could present strong competition for the ad-serving platforms purveyed by the likes of Google and Microsoft (MSFT). Ertugrul is especially keen on the upside for the money-strapped sites producing the content that nourishes the online food chain: News sites, for instance, could mint more cash from their traffic by showing Phorm's highly targeted ads, which generally command higher premiums than run-of-the-mill advertising. Small but significant blogs could open a new avenue for income. Still, leading British dailies the Financial Times and the Guardian ruled out participating in Phorm's trial, despite previous discussions, the latter citing consumer concerns as one reason. And ad executives I contacted expressed wonderment at Phorm, and then immediately issued caveats--or the other way around. "If people can get over the privacy concerns, the premise is great," says Woody Harford, the U.S.-based senior vice-president for commercial at British Airways.

Savvy Web users are nonchalant about privacy online, or rather the lack thereof, but the average consumer is a less cynical beast. "We imagine we have a degree of control [over online privacy] because we haven't yet seen very elaborate targeting," says Karin von Abrams, a Britain-based senior analyst at eMarketer. "We're only just moving into that phase." Technological progress, argues Ertugrul, make "possible all sorts of advances that sometimes take getting used to. This is no exception." He stresses that "transparency" in Phorm's approach will ease consumer concerns.

Should Phorm prevail over the privacy anxieties, a more interesting question may emerge: Just how targeted can advertising get before it turns creepy? One theory about artificial intelligence, known as the "uncanny valley," asserts that humanlike forms are tolerated, even welcomed, up to a point. But once they get very realistic, any imperfections repulse. A fully Phormed (sorry) world of online advertising may target your product lusts with uncanny accuracy. But Phorm could face a novel pitfall: Advertising that knows you almost too well.

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