December 6th, 2007

Watching What You See on the Web

By Bobby White
Wall Street Journal

New Gear Lets ISPs Track Users and Sell Targeted Ads; More Players, Privacy Fears

CenturyTel Inc., a Monroe, La., phone company that provides Internet access and long-distance calling services, is facing stiff competition from cellphone companies and cable operators. So to diversify, it’s getting into the online-advertising business.

And not just any online advertising. The technology it’s using could change the way the $16.9 billion Internet ad market works, bringing in a host of new players—and giving consumers fresh concerns about their privacy.

CenturyTel’s system allows it to observe and analyze the online activities of its Internet customers, keeping tabs on every Web site they visit. The equipment is made by a Silicon Valley start-up called NebuAd Inc. and installed right into the phone company’s network. NebuAd takes the information it collects and offers advertisers the chance to place online ads targeted to individual consumers. NebuAd and CenturyTel get paid whenever a consumer clicks on an ad.

This technique—called behavioral targeting—is far more customized than the current method of selling ads online. Today, it’s an imperfect process: companies such as Revenue Science Inc. and Tacoda Inc., which was recently bought by Time Warner Inc., contract with Web sites to monitor which consumers visit them, attaching “cookies,” or small pieces of tracking data, to visitors’ hard drives so they are recognized when they return. The targeting firms feed the data to Web site owners, who use it to charge premium rates for customized ads. But the information is limited, since the tracking companies can’t monitor all of the sites an individual visits.

The newer form of behavioral targeting involves placing gear called “deep-packet inspection boxes” inside an Internet provider’s network of pipes and wires. Instead of observing only a select number of Web sites, these boxes can track all of the sites a consumer visits, and deliver far more detailed information to potential advertisers.

Until now, the booming online ad market has been dominated by the likes of Google Inc. and Microsoft Corp. and small techie advertising shops such as Right Media Inc. and AdECN Inc. But new companies are rushing in. Both wireless and wireline Internet-access providers such as CenturyTel, Rochester Telecom Systems Inc. and Embarq Communications Inc., among others, have entered the advertising gold rush. And they’ve tapped Internet equipment companies like NebuAd, FrontPorch Inc., and Phorm Inc. to provide the gear to help them along.

The technology does raise privacy issues. The Internet-service providers often know other information about consumers, such as their names, locations and age and income ranges, which can be very valuable to potential advertisers, especially when combined with Web browsing habits. “Some of these [Internet equipment] guys are traveling in dangerous territory,” says Emily Riley, an advertising analyst with Jupiter Research. “Should one company have all of that data in one place? It’s a little troubling.”

The idea of matching online and offline information about individual consumers has raised privacy concerns in the past. Many of the major online ad companies have pledged to abide by voluntary standards put forth by the Network Advertising Initiative, an industry group, which call for members to notify consumers that they are being targeted and give them the chance to opt out.

NebuAd says that it isn’t a member of the group and that the information provided by the ISPs is fairly standard data that they often make available to third parties. FrontPorch also says it believes it isn’t going too far by receiving a small amount of offline user data.

Privacy advocates say transparency is key. “Consumers need to know exactly what is going on and they need to know it at all times,” says John Palfrey, executive director of the Berkman Center for the Internet and Society at Harvard University. “Today they say they are using consumer information for ads, but it could be something completely different tomorrow. The ISPs and the companies they are working with need to share as much information as possible.”

Some Internet providers are reworking their privacy policies to pre-empt concerns. Many give customers online fact sheets informing them of their new behavioral targeting service along, and ask if they want to participate. If they opt out, the consumers’ Internet address is tagged and their Web activity isn’t tracked.

If a consumer doesn’t opt out of the service, the equipment companies say they take steps to shield a consumer’s privacy. NebuAd, for instance, says it doesn’t keep a consumer’s personally identifiable information, but only builds a profile of a consumer’s interests based on the sites a user frequents. The company also doesn’t track traffic to sites related to sex, health or politics.

Internet access providers say they take the privacy concerns seriously. “Privacy is a huge issue that you must get right,” says Dan Toomey, chief executive of Anacapa Holdings Ltd., a Dublin, Ireland-based company that provides wireless Internet access. “One mistake could spell big trouble.” Anacapa, which began using FrontPorch’s equipment in September, operates 2,400 wireless Internet networks at hotels and coffee shops in 18 countries in Europe. The company allows consumers to use their wireless Internet service for free in exchange for viewing ads.

The use of the new networking gear to observe online behavior—while currently nascent—is growing. Zachary Britton, FrontPorch’s chief executive, says his company’s advertising business generated $15 million in the first nine months of the year, up 187% from the year-earlier period. The company has signed up 202 new customers for its deep packet inspection boxes this year. Meanwhile, NebuAd is expecting revenue of $100 million in 2008 based on sales of its advertising equipment. NebuAd Chief Executive Bob Dykes says the company has signed up more than 30 new customers, mostly Internet access providers, since it started.

For CenturyTel, the new business has already turned into a healthy sideline. The company estimates it will see a 5% to 10% boost in average revenue per user for its high-speed Internet business, with extra revenue totaling around $2 million a quarter. “We need new revenue streams to survive,” says Chris Mangum, vice president of strategic planning of CenturyTel, which notifies its consumers of the behavioral targeting in an online fact sheet and allows them to opt out.

Having been initially skeptical, Mr. Mangum says, “We’re now comfortable with how we approach this,” says Mr. Mangum. CenturyTel says it’s too early to tell what percentage of customers have opted out.


Add your own Comment