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Microsoft and Madison Avenue in Epic Battle

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Microsoft and Madison Avenue are in a battle unlike anything we’ve seen for years.

They’re fighting over the future of Internet advertising, and the $70 billion annual global ad business is at stake.

It all comes down to one little default setting—Do Not Track – in a new browser, Internet Explorer 10.

Microsoft is defaulting to a ‘Do Not Track’ setting to give web surfers more privacy, looking to regain market share from Google’s Chrome.

But this has advertising agencies up in arms – this will make it impossible for them to target ads to millions of users.

This issue is coming to a head today as industry-standards body, the World Wide Web Consortium (W3C) meets at Microsoft. The industry group is evaluating whether to give its stamp of approval to the browser, and most importantly, what the standards for “do not track” will be for websites. Advertisers are lobbying the W3C to exempt them from complying with “do not track” messages if it’s the default setting. Two of the largest ad agencies, WPP and Publicis Groupe , which work with Microsoft on their ad campaigns, have reached out to the company on the issue.

Microsoft explains in a statement that it’s giving customers “more control over how their online behavior is tracked, shared and used.” It’s not against targeted advertising, acknowledging that it can be beneficial to both consumers and businesses. But Microsoft says the devil is in the details, working “towards an industry-wide definition of tracking protection.”

Google, whose business is built on targeted ads, seems to be in Microsoft’s cross-hairs with this move. But if targeted display ads across the web stop working as well because of the new default setting, Google’s search ads, which don’t rely on tracking, could actually make gains.

Who else could benefit?

Companies that have permission to track their users, because those users have logged in, like to Gmail. That also includes Yahoo (think Yahoo mail), Amazon and even Apple.

And now Washington DC is weighing in and taking sides.

The co-chairs of the Congressional Bi-Partisan Privacy Caucus, Representatives Edward Markey and Joe Barton, are asking W3C to support “do not track” as a default setting. Click here to read their letter to the W3C Tracking Protection Working group.

Meanwhile Federal Trade Commissioner J. Thomas Rosch came out in opposition to Microsoft’s default setting, sending a letterto W3C that says that the setting does the opposite of giving consumers choice. “To the contrary, Microsoft’s default DNT setting means that Microsoft, not consumers, will be exercising choice as to what signal the browser will send.”

There will be a lot of attention on the decisions of the W3C working group, expected to be released Friday afternoon or Monday morning. But this is just the beginning, there will be an ongoing progress of consensus-building before the W3C reaches a final decision. The organization aimed to have a standard for “do not track” by mid-year, but now it’s looking like it won’t happen until closer to year end.

Questions? Comments? MediaMoney@cnbc.com

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.