The Federal Trade Commission’s proposed privacy mechanism could cause a major shift in the online advertising industry, as companies that have relied on consumers’ browsing history try to make up for what could be billions in lost revenue.
If the vast majority of online users chose not to have their Internet activity tracked, the proposed “do not track” system could have a severe effect on the industry, some experts say. It would cause major harm to the companies like online advertising networks, small and midsize publishers and technology companies like Yahoo that earn a large percentage of their revenue from advertising that is tailored to users based on the sites they have visited.
Under a situation where many users opt out of being tracked, other companies, like Google, may take a much smaller hit because the vast majority of its revenue comes through search ads that would not be affected by a do-not-track mechanism. Microsoft, which also sells display advertising through its ad network, could also survive a hit to user data collection since it earns revenue from sources other than advertising, including software and gaming, experts say.
The F.T.C. is seeking comment over the next two months on whether a do-not-track mechanism should allow consumers to control the types of advertisements they would like to see in addition to having the ability to completely opt out of having their data collected. During this period, the commission will seek comments on the possible unintended consequences of the proposal, including the likely effect if a large number of consumers opt out.
“The do-not-track button holds far more complexities than the designers of the framework envision,” said John Montgomery, the chief operating officer for GroupM Interaction, the digital division of WPP. “If a number of consumers opt out, it might limit the ability for companies to monetize the Internet.”
The F.T.C. advocated the use of a device that could be built into a browser and signal to a Web site that the user did not want to be tracked or receive tailored advertisements. Advertisers say they would prefer to build upon the current self-regulatory system, which uses icons next to ads that, when clicked on, take users to a page where they can opt out.
“It’s the house already half-built. It’s just missing a window here and there,” said Xuhui Shao, chief technology officer for Turn, an ad software and services company. The commission’s proposed system would be harmful to publishers and ad networks, he said, because it would force them to adopt more contextual advertising, which is less effective and therefore less profitable.
Users who opted out would still receive ads, but they would be generic or solely based on the content of the page a user is viewing.
Steve Sullivan, the vice president for supply chain and revenue solutions at the Interactive Advertising Bureau, echoed the sentiments of the many technology companies that would be affected by the proposal, who say there are differences in data collected for things like analytics or creating user profiles. “One of the things that’s not clearly spelled out is what exactly do-not-track means,” he said.
Advertisers employ different methods of singling out audiences online, including the use of technology that can remember a product that a customer showed interest in — a shoe, perhaps, on a particular Web site — and deliver ads for that same shoe on other Web sites that the user visits. Marketers who follow online patterns say the data can help them serve ads that are relevant to the user’s interests. And, those marketers are willing to pay more for ads that can be delivered directly to a target demographic.
For example, Mr. Montgomery of GroupM Interaction said, with behavioral tracking, women will not get ads for Viagra and men will not see ads for feminine hygiene products. If the ability to collect information on users is curtailed, “the fear is that it creates a smaller available pool of consumers to learn from and to target,” he said. “If the ability to target and realize the return on investment and efficiencies we’re hoping to get through targeting get curtailed, it will attract fewer advertisers.”
The Interactive Advertising Bureau, in an analysis of ad agency data, found that in 2009, 80 percent or more of digital advertising campaigns incorporated behavioral targeting in some way. According to figures compiled by the bureau and PricewaterhouseCoopers, online advertising revenue, including contextual and behavioral ads, was $12.1 billion for the first half of 2010, an 11.3 percent increase over the same period last year.
Google representatives say they expect display ads to become a $50 billion market by 2015. The company has begun to move aggressively into the field as it seeks to expand its advertising product offerings.
Publishers make money by selling ad space directly to marketers and also by working with advertising networks to fill any remaining inventory. Advertising networks, which often work with many publishers, share revenue from the ads they provide. If those ads are tailored, their value increases.
The tradeoff
For advertisers and their publishing partners, all of that advertising serves another function: free content on the Web. “Think about the number of times you access the Web and how many times you have to pay for the content you look at,” Mr. Montgomery said. “This is about a value exchange.”
Opting out of tracking may actually harm consumers more than help them, said Dilip DaSilva, chief executive of Exponential Interactive, owner of the Tribal Fusion online advertising network. Much of the free content online today may be unavailable if the proposed rules become reality, he said.
Ads that do not offer a way to measure success are of less value to marketers. Publishers would have little choice but to start charging for their content.
“If you remove tracking, you remove advertisers,” Mr. DaSilva said. He added that the ability to track users, based on information collected from so-called cookies deposited on their computers, is “what helped the Internet grow so quickly.”
For large publishers and content providers, the impact of losing tailored ads may not be as severe as it could be for smaller publishers, said George Pappachen, the chief privacy officer of the Kantar Group, the research and consultant unit of WPP. Many sites with premium advertising space use traditional sales methods to sell that space to marketers and leave the remaining space to be sold to ad networks, which can then single out users.
Small publishers, however, rely heavily on ad networks and tailored advertising for revenue.
“They gain a lot by being part of a bigger network because the prices they pay are based on the combined network value,” Mr. Pappachen said. “Of all of the parties involved, if there would be winners or losers, big publishers would be the least likely to lose.”
Mr. DaSilva raised the possibility that publishers would offer consumers a choice. Visitors to Web sites could either accept being tracked to get free access to an article, for instance, or they could decline and be required to pay.
“If we move too far one way, the people supplying the free content will get together and say we aren’t going to supply the content for free,” Mr. DaSilva said. “It’s not like the publishers will offer free content to people who visit their site but don’t want ads tracking them.”
The Federal Trade Commission’s proposed privacy mechanism could cause a major shift in the online advertising industry, as companies that have relied on consumers’ browsing history try to make up for what could be billions in lost revenue.