The Threat of an Online Privacy Bill

Some big and far-reaching issues clutter America's legislative docket today—a cap-and-trade approach to carbon emissions, a wholesale revamp of health care. But a key subset of advertising and media executives are focusing elsewhere. They're worried about the threat an online privacy bill, or any similar federal regulation, could pose to their businesses. One proviso they fear would mandate that Web surfers "opt in" before companies could track their online behavior across multiple sites with what are known as third-party cookies—a cookie being the morsel of computer code that sites can affix to your PC to gather data on your habits. ("First-party" cookies, which wouldn't be affected, gather data on you for use on a specific site. They're how (AMZN) powers its recommendations.) A better understanding of surfers' online likes and dislikes enables the deployment of better-targeted ads, which win Web companies higher ad rates. Without these ads, one wonders, what's online got?

A bill hasn't been introduced yet, although high-profile congressional hearings were held in mid-June. And, obviously, one cannot describe the contours of a law that hasn't yet made it through the legislative digestive process. Still, high-profile executives expect privacy concerns will persist. "Most experts who really follow Washington would say [some regulation] is coming," says Dave Morgan, who testified at last month's hearings.

Morgan is the former CEO of Tacoda, an online ad network bought by AOL (TWX) in 2007. It used third-party cookies to zero in on consumers through a process called "behavioral targeting." You see countless targeted ads as you Web-surf each day. This kind of business would face significant challenges should such regulation be enacted, and effects would ripple throughout the Net. "Most Web sites [use] a range of ad networks and offer additional behavioral targeting," says Fernando Ruarte, co-founder of ad network Glam Media, which does some behavioral targeting. "An opt-in system could cripple the Web as users could be asked for opt-in for every [targeted] ad on a page."

Presumably, opting in would work in a less clunky fashion than that. But an online ad world without data would lack almost everything that makes the Web interesting to advertisers. (Sighted: an upside for traditional media in a grievous ad environment!) Data-targeted ads would fade away, as would the feedback on users that advertisers are accustomed to receiving from online campaigns.

Paradoxically, some online players could benefit. Google's search ads, which accounted for two-thirds of its $21.8 billion in revenue last year, would be unaffected: No cookies are involved when companies bid to place relevant ads next to search terms. "If you have no cookies and no data, in many ways it will make search engines more valuable and, potentially, make Google (GOOG) even more valuable," says Rishad Tobaccowala, CEO of the Chicago marketing consultancy Denuo. Other advantages would accrue to companies that have already amassed much data on their customers and potential customers. This includes both major advertisers like Procter & Gamble (PG) and online giants along the lines of Yahoo! (YHOO) and Microsoft (MSFT). It would be harder for new market entrants to build, or buy, impressive databases in a cookie-restricted world.

In a bid to preempt regulation, at press time several media and ad trade groups were readying new guidelines governing the use of data, to go into effect in early 2010. But journalist Peter Kafka of All Things Digital proposed giving consumers something for letting advertisers harvest their data, perhaps "privacy points" redeemable for small rewards such as "a bag of Cheetos."

His jest illuminates a larger point: In the offline world, collecting data from consumers goes hand in hand with giving them rewards. (For proof, look no further than a frequent-flyer statement.) There is no such benefit for targeted online ads. "No one opens up a Web page and says, 'Wow! I love these ads!' " says Morgan. "We haven't improved the consumer experience." Had online marketers done so, they might not be facing regulation that could so swiftly and radically alter their businesses.

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