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Recently, Amazon.com (AMZN) revised its privacy policy -- which affects 20 million customers -- and came under heavy fire. Critics charged that the changes give the e-tailer more flexibility to share customer information with other companies. Many visitors to Amazon have no idea that when they enter personal data, it's being passed along to the company's partners and may one day be handed to third parties. NO SELF-REGULATION. Not only did Amazon's move show how easy it is for a company to change its privacy policy but also "it highlights the failure of the industry's efforts at self-regulation," argues Sarah Andrews, a policy analyst at the Electronic Privacy Information Center. And the flap underscores the potential for many more money-losing Web companies to rewrite or renege on their privacy policies. Sharing customer data can be a revenue source when other strategies for revenue generation fail. In perhaps the most egregious case, defunct retailer Toysmart.com tried to sell its customer-profile database during liquidation proceedings, prompting a Federal Trade Commission complaint filed in July. Concerns about invasive privacy policies have already played a role in whacking 70% or more off the stock prices of Web-advertising companies like DoubleClick (DCLK) and 24/7 Media (TFSM) (see "The Privacy Penalty on Dot-Coms," Privacy Matters, June 13, 2000). DoubleClick touched off a firestorm early in 2000 when it announced plans to match online and offline databases of consumer purchases so marketers could match up e-mail addresses with home addresses. The stocks of other online marketers were also hammered. "Internet-marketing companies have born the brunt of it in the near term," says David Doft, an analyst with ING Barings and one of Wall Street's top privacy experts. He believes most of the concern has already played out in those stocks. Still, consumer privacy concerns continue to mount. "It has been an issue for a while," Doft says. But he adds that the issue "feeds on itself" as public-interest groups and politicians raise awareness. New technologies, such as the ability of wireless devices to track an individual's precise location at all times, are also fueling consumer concern, Andrews says ("The Next Big Privacy Brawl May Be over Your Location," BW e.biz: Perspective, Aug. 28, 2000). Rather than calming fears, experience may be teaching consumers to be more vigilant in protecting their privacy online, points out Wit Soundview analyst Jordan Rohan. For example, consider how hard it can be to get off e-mail lists once an Internet company has your address. A mailbox clogged with unsolicited e-mail is more inconvenient than sinister, but an invasion of privacy nonetheless, Rohan says. SHOPPING SUFFERS. What may be more relevant now for Internet investors is evidence that privacy fears are having a real impact on consumers' willingness to shop, explore new sites, and sign up for new services. With the holiday shopping season approaching, this could be a huge problem for e-tailers ("A Privacy Penalty E-Tailers Can Ill Afford," BW e.biz: Perspective, Sept. 18, 2000). And it's an important reason for investors in premier Web companies like America Online and Yahoo! to keep an eye on where the privacy debate is heading. For Internet companies whose value used to be based on surging subscriber or customer growth, privacy concerns have already played an indirect role in reducing their stock market value, says Tom Taulli, a stock analyst at Internet.com. With the Toysmart case, for example, the FTC made it clear it doesn't want customer lists to be transferable. That decision was a yellow light for companies, deflating the potential worth of those lists. The privacy problem may be exacerbating the poor health of the online ad market, which has lately dragged down the stock of Yahoo! If companies didn't have to worry about invading customers' privacy, they could charge more for highly targeted ads. For example, a diaper company might pay handsomely to advertise only to visitors whose surfing patterns suggest they have a baby at home. It could also generate revenue by selling customer lists to third parties. Doft says many Web companies have shied away from the most aggressive means of targeting. BIG BLOW-UP? To make sure companies stick to their stated policies, government regulators are stepping in. On Sept. 13, More.com was hit with a lawsuit from Missouri's attorney general after an investigator's effort to buy contact lenses on the site was followed by a solicitation from Lens Express. More.com's privacy policy states that it doesn't provide information to third parties. Doft doesn't think privacy flare-ups will have a major impact on stock prices of mainstream Internet companies. In fact, many analysts believe that while fringe players may pull a fast one on customers, leading dot-coms know they can't dish out abuse. "The large service providers and media companies -- the AOLs, Yahoo!s, NBCi's of the world -- understand the issues," says Paul Noglows, an analyst with investment bank Chase H&Q. "In most cases, they will try to remedy the situation or self-police before it gets to a point where it either drives away users or there is a need for outside intervention." Yet when pressed, some analysts concede that privacy matters could have a more subtle long-term effect on the growth of major Internet companies -- especially if there's a high-profile privacy blow-up that captures the public's attention in a way recent incidents really haven't. Growth of the Internet is still very rapid, but privacy concerns "may have taken out some of the incremental growth," says Rob Owens, an Internet security analyst at Pacific Crest Securities. For example, Owens thinks consumers will continue to browse online, but privacy concerns may prevent some from completing the actual purchase. SOME MAY BENEFIT. On the flip side, privacy protections could hold benefits for some companies. Take NetCreations (NTCR). It's emphasizing so-called opt-in marketing strategies, where consumers only get pitched via e-mail if they actively elect to receive more information. (Standard privacy protections on many Web sites require customers to actively "opt out" to avoid pitches.) Companies with software products that fight viruses and protect online transactions -- such as Symantec (SYMC), VeriSign (VRSN), and Network Associates (NETA) -- could also be potential beneficiaries of consumer concerns about Internet safety, Owens says. VeriSign, for example, is a leader in providing Web sites with technology that ensures safe, reliable online transactions. Horst Joepen, CEO of WebWasher.com, which makes privacy-protection software, argues that Web companies will ultimately be more successful if customers feel they can trust the Internet. "Yes, it changes their business, but at the end of the day, they will have more business," he says. And the kind of targeted ads that might sound good on paper can backfire in practice if customers receive inappropriate solicitations, Taulli says. "There is a certain amount of hubris in thinking technology can predict what people want." So, being forced to preserve customers' privacy is good for business. But until real growth returns to online retail and advertising markets, new concerns about privacy will be another drag on the industry. Smart investors will bone up on how privacy issues can affect Web-traffic patterns and cyber-customer loyalty over the long term. Stone is an associate editor of Business Week Online EDITED BY BETH BELTON |
