The FTC Takes On Targeted Web Ads

On a side table in his Washington offices, Federal Trade Commission Chairman Jon Leibowitz keeps a framed image of Arnold Schwarzenegger from the 1984 film The Terminator. It was given to Leibowitz a couple of years ago by one of the FTC's regional offices, an homage to his crackdown on spyware that surreptitiously gathers information on Web users' surfing habits.

Now, Leibowitz wants to terminate—or at least rein in—a different practice he finds no less harmful to consumers: delivering ads to individuals based on the Web pages they visit and searches they carry out. Appointed by President Barack Obama in February to run the country's top consumer watchdog, Leibowitz has made so-called behavioral targeting a top priority.

How far he goes in regulating the practice could have big implications for a host of companies that depend on Web advertising and engage in some form of targeting. These include Google (GOOG), Facebook, and Microsoft (MSFT), which on July 29 announced a plan to partner with Yahoo! (YHOO) in the area of Internet search. It would also affect the way legions of companies and advertisers craft marketing campaigns.

Behavioral targeting has become more prevalent as it gets easier and cheaper to use software to track online behavior and then use the data to pitch Web users related goods and services. These ads are more likely to induce a customer to make a purchase or otherwise respond to a pitch, researchers say.

Web Ad Spending Is on the Rise The pitches' growing effectiveness is helping to attract more ad dollars to the Web. Researcher eMarketer estimates that advertisers will spend $960 million on personally targeted ads next year, accounting for about one-fifth of all display ads on the Web, up from $705 million this year, when they accounted for 15% of the total. The average Web surfer benefits, too: An array of free services, from Google's Gmail to social network Facebook, are partly supported by targeted ads.

But the FTC and a growing chorus of consumer advocates warn that online advertisers are not always forthcoming about their use of targeting. And some are downright deceptive, Leibowitz said in an interview with BusinessWeek. "There's a critical issue about whether consumers have notice of what companies are doing with their information and whether they're making informed choices about [sharing] information," Leibowitz explains. For example, if an advertiser sends an ad based on sensitive information about a person's health, "you might want to take that off the table."

Seated in his office in the Apex Building, less than three blocks from the Capitol rotunda, the balding, bespectacled Leibowitz hardly looks like a tech-industry Terminator. Of medium height, Leibowitz readily admits that his basketball buddy Julius Genachowski, chairman of the Federal Communications Commission, "has been schooling me on the court for over a decade."

But confronted with the suggestion by one consumer-privacy advocate that the FTC lacks the technical chops for an issue as complex as behavioral targeting, his pugnacious side surfaces. "Our guys are pretty good on technology issues, and I think they're learning more," he says emphatically.

stalking spyware perpetrators As an FTC commissioner since 2004, Leibowitz has been outspoken about the need for stronger protections for consumer privacy online—evidenced by his aggressive spyware and data-security cases, as well as public positions he's taken on mobile privacy and online ads. In June retailer Sears (SHLD) settled an FTC complaint charging that Sears had failed to disclose the extent to which it was tracking the activities of certain shoppers, who had been paid $10 to download a piece of "research" software to their computers. The settlement forced Sears to end the practice and destroy all the data it had generated.

Sears is the latest target of a campaign against spyware that has forced millions of dollars in settlements from companies such as DirectRevenue and Zango, which had profited from software that installed itself on computers and collected data without users' consent. Leibowitz has generally taken a harder line than his fellow commissioners. In June 2007 he said the $1.5 million settlement with DirectRevenue was too lenient, calling it "a disappointment because it apparently leaves DirectRevenue's owners lining their pockets with more than $20 million from a business model based on deceit."

Internet industry executives viewed Leibowitz's appointment as chairman as a signal that Washington would ratchet up its attention to the impact of technology on consumers. "The stars are aligned for significant change" in online privacy, says Jules Polonetsky, a former executive at AOL (TWX) and Internet advertising company DoubleClick, who now heads the Washington think tank The Future of Privacy Forum.

The FTC has worked closely with the advertising industry to draft guidelines that would help marketers regulate themselves in the area of online privacy. "The FTC has taken a highly substantive and thoughtful look at online advertising so far, says Alan Davidson, Google's director of public policy and government affairs. It has been very attentive both to meeting consumer needs and supporting innovation, and we look forward to working with the agency as its efforts continue."

Congress Readies Opt-In Consent Bill But Leibowitz hints that he's growing impatient with marketers' efforts. "It's not clear that they're moving far enough or fast enough, even though they're making some progress," Leibowitz says. He supports the controversial approach of making more of the targeted ads on the Internet "opt-in"—meaning they would require consent from Web users before collecting data—and is in talks with members of Congress intent on drafting legislation for online ads.

Many companies fear the prospect of tighter regulation. Bill Todd, general manager at online ad network ValueClick (VLCK), says an opt-in measure "would force our company and others to rethink how we do business today, and I think it would destroy much of the innovation that many people in our industry have developed."

Leibowitz, a graduate of New York University School of Law, disagrees. He says there are "plenty of ways in which companies may very well be able to extract types of information using an opt-in approach," he says. For example, advertisers could reward consumers with cash or extra content for choosing to opt in.

Although the FTC has no direct sway over legislators, Leibowitz is building alliances in Washington. In recent weeks he's met with Representative Rick Boucher (D-Va.), who plans to introduce a bill by September that may require opt-in consent for certain types of online ads. "My overall purpose is not to interfere with the legitimate practice of people who are doing targeted advertising," Boucher says. "My goal is to try to create a greater sense of confidence on the part of consumers."

Despite his calls for self-regulation, the FTC's Leibowitz says he supports Boucher's plans to draft legislation: "We want to work with him, and I think he's exactly on the right track."

    Before it's here, it's on the Bloomberg Terminal.