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Not so very long ago, the stocks of Internet marketers won sky-high valuations, in part because of the personal information about current and prospective customers that many of the companies could collect, stockpile, and sell over the Web -- with or without customers' permission. Investors' infatuation with the data-mining concept gave many online companies a huge incentive to get up close and personal with customers. Soon, it spawned dozens of startups with ever bolder data-collection schemes.
But in recent weeks, amid the overall backlash against Net stocks, analysts have discounted the values of online marketers -- in some cases, by as much as $15 to $30 a share. They're concerned about the effectiveness of banner ads on Web sites, about the long-range viability of the data-mining business model -- and about when a privacy crackdown by the feds might come and how it would affect the potential for future profits. In fact, it's no longer a question of if, but of when and how dramatically lawmakers and regulators will act on privacy, predict many market analysts. Call it the privacy penalty.
Tough talk out of Washington is getting harsher by the day. The first week of June, the Federal Trade Commission, concluding that consumer privacy is not properly protected on the Internet, announced plans to ask Congress for the authority to impose strong safeguards. "Companies say self-regulation will work, but it's becoming clear that companies on the Net are not protecting the privacy of consumers," FTC Chairman Robert Pitofsky told a Senate panel.
Meanwhile, more than 300 online-privacy bills to limit personal-data sifting -- the bread and butter of many online marketers -- are pending before state legislatures and on Capitol Hill.
BIG MONKEY.
To be sure, most lawmakers don't expect a vote on many of these bills until after the Presidential election this fall. But that's just the point. Wall Street hates uncertainty. Until the regulatory threat gets resolved one way or another, analysts say, expect a privacy penalty of between $20 to $30 a share to cloud the stock values of some firms -- especially companies such as DoubleClick, 24/7 Media, and MatchLogic.
DoubleClick was the first to take a privacy-anxiety hit. Its stock price slid from a high of $135 in January to $81 in mid-February
"Companies perceived to be clean three to six months ago on the privacy front are now being seen in a different light," says Lanny Baker, an online-marketing analyst for Salomon Smith Barney. Adds Michael Griffiths, vice-president and chief technology officer for MatchLogic Inc., a Westminster (Colo.) online marketer and subsidiary of Excite@Home: "If investors have doubts about your accounting practices, your values go down. What's new is that if Wall Street has questions about your privacy policies and the way you deal with the privacy issue, that's another reason your value might go down."
The 800-pound gorilla in the Net marketing world is New York-based DoubleClick, which hosts banner ads to Web sites that account for nearly 50% of Internet traffic. It was the first to take a privacy-anxiety hit. Its stock price slid from a high of $135 in January to $81 in mid-February amid public concerns over plans to merge its information on Web surfers with data from Abacus Direct, a database company it acquired last year for $1.7 billion.
PUSHING THE ENVELOPE.
Abacus' files contain details of the mail-order-catalog purchases of some 88 million U.S. households -- complete with names, addresses, and phone numbers. By combining online and offline data, DoubleClick's profiles would have enabled a company for the first time to target potential customers by name with highly personalized ads -- and all without consumers' permission.
DoubleClick has since backed down on its data-merging plans -- partly to stem further privacy hits to its stock price. But questions about the company's long-term plans and potential profitability remain, and DoubleClick has become the poster child for how online companies can push the privacy envelope too far -- in Washington and on Wall Street.
Market analysts also cite as worrisome the potentially costly outcome of 16 lawsuits now pending against DoubleClick by consumers alleging privacy breaches. Jennifer Blum, a DoubleClick spokesperson, says the privacy brouhaha "certainly doesn't help" the company's stock price but points out that other online marketers have been affected by the debate over whether regulation is needed.
LONG-RUN LOSS.
Salomon's Baker agrees: "The whole online-marketing sector is getting pinched," even though it's difficult to pinpoint the precise penalty of privacy anxiety from one day to the next against the backdrop of intense overall market volatility. David Doft of ING Barings says the privacy firestorm has already caused firms to lose millions, if not billions, of dollars in market value.
"They're getting hit like everyone else, but they're getting hit harder because of
"The viability of this entire...sector depends on whether customers feel they're adequately protected," one analyst says
privacy concerns," Doft says. He estimates a privacy penalty of between $10 and $20 a share for online marketers and ad firms. But 24/7 Media Inc. has taken a bigger hit than that. Its stock price has fallen from a high of $65 on Dec. 21 to a low of nearly $13 on May 24.
Rob Goldman, executive vice-president for customer experience at Dash, a private New York-based online advertising and marketing firm, says it's reasonable to suspect that regulation could ultimately make most data-brokers less profitable in the long run. "I don't believe that many companies that collect enormous amounts of information will be safe under their existing business models," Goldman says.
PR TOUR.
Most companies will have to alter the way they do business, at least slightly, and there could be huge costs associated with that, depending on the regulations or legislation ultimately imposed, Goldman adds. Mike Russell, an equity analyst for Morgan Stanley, says a lot depends on how online customers perceive the privacy issue: "The viability of this entire online-marketing sector depends on whether customers feel they're adequately protected."
Companies are responding. In May, several online marketers began launching massive public-relations campaigns aimed at distancing themselves from the DoubleClicks of the world -- and at telling consumers that data collection doesn't necessarily mean underhanded snooping. On June 12-13, Engage, which profiles online consumers but does so with anonymous data not tied to names, addresses, and other personally identifiable information, kicked off a "press tour" in Washington and New York. The goal: "To tell reporters that we're different than DoubleClick," says spokesman Mike Mayzell.
Adds Engage co-founder Daniel Jaye: "We want to get the message out about how we're different so we can reassure investors, Wall Street, and the general public at large." The timing is no accident: This month and next, the privacy debate in Washington will heat up again as Senate and FTC hearings on privacy continue.
CAPITAL CONVOCATION.
But the companies aren't stopping at expensive PR campaigns. They're also appointing so-called chief privacy officers (CPO) to help further ease consumer fears and influence the debate in Washington. The naming of former New York City Consumer Protection Agency Commissioner Jules Polonetsky as DoubleClick's CPO this past spring launched a campaign to reverse its bad-boy image.
But the industry also realizes it'll need more than PR to counter consumer and investor perceptions. Says Megan Hurley, vice-president and associate general counsel for 24/7 Media: "We need to do more than just talk to reassure Wall Street. This is starting to cost real money, this privacy anxiety, and this, we feel, is a step in the right direction."
"Customer data is the gold mine of e-commerce," says an analyst. Too much regulation and it won't be easy or as profitable to collect anymore
Offline data-collection companies, including Equifax and other credit-data collectors with Web strategies, seem to agree. Representatives of 50 such companies met in Washington on June 12-13 at the first-ever chief privacy officers' convention, hosted by the nonprofit business-privacy group, Privacy & American Business.
"VICTIMIZED."
But privacy advocates think more can be done. Though recent public-opinion polls have found that privacy is the No. 1 concern of people using the Net, less than 20% of Web sites actually post their privacy policies, according to the FTC. And efforts by giant software maker Microsoft and others have yet to achieve widespread adoption of voluntary initiatives they favor, called the Privacy Preference Project .
"There remains a vast amount of commerce online where consumers feel they're being victimized," says Jean Ann Fox, an official at the Consumer Federation of America, a Washington-based watchdog group. E-commerce, she says, won't be as attractive to consumers until they get privacy protections they're not getting now.
Could the public-relations offensive work on Wall Street? Doft says it can't hurt. "Customer data is the gold mine of e-commerce," says William Whyman, an analyst with the Legg Mason Precursor Group. Too much regulation, and it won't be easy or as profitable to collect anymore.
Still, Doft says early resolution would help the online marketers regroup and push forward. "Wall Street doesn't care how it's resolved," he says. "It's the uncertainty that's the problem. The sooner there's clarity, the better." Don't count on any stock miracles for this sector until the privacy brouhaha is resolved in Washington.
Marcia Stepanek is BW's Technology Strategies editor. She closely follows online privacy issues EDITED BY BETH BELTON
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