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Would You Sell Your Secrets for Free Internet Service?
PowerChannel, a TV-based Web-access startup, wants to know all about you

What would persuade you to give your private data to marketers? $1,000? $100? How about free Internet service via your TV? That's the Faustian bargain PowerChannel Inc. offers its customers. In exchange for free use of its set-top Net connection box, the five-month old startup collects information on your purchasing habits each month to sell to advertisers and market researchers.

The Pearl River (N.Y.) company, which now has just over 400 subscribers, isn't the first Internet service provider to try this risky and controversial business model. Some have failed trying. One rival, NetZero in Westlake, Calif., has drawn more than 800,000 subscribers since its launch last October, though its service is delivered on PCs. What makes PowerChannel different is its medium -- TV -- and far more frequent customer surveys.

PowerChannel's strategy puts it at the crossroads of two of the hottest debates in information technology these days: Do consumers really want to surf the Net the way they surf the tube? And should regulators restrict how E-businesses collect and use consumers' personal data? The outcome of both will determine its future.

Defying skeptics, PowerChannel's executives are betting on TV to wire the tech-averse millions who don't own a PC. "We firmly believe that in today's market, the ability to provide no-cost Internet access through the TV is really an ideal way to get to the masses," says Steven L. Lampert, founder and chairman of PowerChannel, which rolled out its service at the end of last year. Other heavyweight believers are Microsoft Corp. and America Online, which announced this week plans to launch an interactive TV service.

Abhi Chaki, director of bandwidth and access strategies for Jupiter Communications in New York is still a doubter: "The reasons people are using the Internet today have nothing to do with entertainment. It is all about utility." Chaki points out that of the 36.7 million people with Net access today, Microsoft's interactive WebTV reaches only about 2%, a mere niche.

A niche that size would be dandy, retorts PowerChannel. With about 70 million U.S. households having no Internet access, "Three to five percent penetration would be a great place for any company to be when the market is that large," says company President James Gambrell.

The core of PowerChannel's operation -- and its future money pipeline -- is data-collection. Would-be subscribers sign up online or by fax. A few weeks later, the company sends them a set-top box with a built-in modem and PowerChannel's Web browser. The box plugs into any TV and is controlled via wireless keyboard. The equipment lets users surf the Web and send E-mail. In exchange, subscribers answer about 25 questions each month, which pop up on their screens when they log on. If they don't respond within a week, PowerChannel cuts them off. Early questions are general and then get more specific. If you say you have a cat, the following month the survey may ask if you'd like cat-food promotions. Some questions will come from clients, others from PowerChannel.

From such consumer insights gold is spun. The more specific the detail, the more valuable. "A motor company would be interested in every single answer of who is going to buy a car in the next 90 days," explains Lampert. The companies can use that data to market to subscribers through the mail or online through banner ads tailored to them. PowerChannel also intends to track the online travels of subscribers -- as does its rival NetZero, which requires only one initial questionnaire -- to get a more complete picture of their true interests. Gary Blau, PowerChannel's senior-vice president, says the monthly surveys, the company's "living database," will be particularly valuable since the typical annual consumer survey quickly turns stale.

The company expects to get two-thirds of its annual revenues from selling its information to market researchers, ad agencies, or companies that sell consumer goods or services. PowerChannel, which has yet to sell any of its data because its customer base it still too small, already sends the information it gathers to KnowledgBase, a Young & Rubicam subsidiary, which refines it into categories.

PowerChannel says it's in talks with more than 50 big customers. The trouble is that the startup has only 410 subscribers now, although Lampert says there are 10,000 requests for service pending. That's still peanuts compared to Microsoft's WebTV, which has more than 800,000 subscribers who pay between $20 and $25 a month for the service -- plus $99 to $199 for the set-top box. No one will really be interested in PowerChannel's data till it has 50,000 to 100,000 subscribers, says Blau, who expects to sign up that many in the next six months. Blau says once PowerChannel reaches that benchmark, the company can get between 7.5 cents and several hundred dollars for each name and address. However, Jupiter's Chaki says advertising agencies and consumer-products companies aren't interested in lists from companies with fewer than a million subscribers. Lampert says he's not counting on profits for about three years, when he foresees over 2 million subscribers. "We expect to be inundated with millions of applications," Lampert boasts.

As PowerChannel enlarges its database and refines its analysis to anticipate customers' behavior, it's bound to collide with concerns about violation of privacy -- an issue the company is sensitive about. To alleviate consumer fears, PowerChannel is seeking certification from both the Better Business Bureau's and Truste's privacy seal programs.

The company is eager to keep an image of transparency. Its original privacy statement said it never sold names and addresses as part of the demographic profiles it builds for each subscriber. It omitted to say it will sell names, addresses, and telephone numbers to companies for product promotions. When frontier Online pointed out the murky area, PowerChannel amended its privacy statement the next day. Now it reads: "PowerChannel will sell the data acquired from its Subscribers' answers to these monthly questions, including the name, phone number or address of its Subscribers, to reputable third parties...[for] promotional offers."

Despite PowerChannel's candor, privacy experts such as Jason Catlett, president and founder of Junkbusters, an online advocacy group for Internet privacy, remain skeptical of the free-access-for-data model. "A lot of these places say they will anonymize the data and aggregate it for advertisers, and they won't sell any one individually," he says. "Most of these policies leave themselves open to change without notice." Catlett and others want regulators to make sure companies don't abuse the information they collect, an issue that has become prominent as it dawns on consumers how much financial and personal information they leave behind every time they shop on the Web.

At least one PowerChannel subscriber, Diana Calhoun, a 58-year-old psychotherapist, says she doesn't mind scrutiny of her online shopping habits. Although she has a PC, she eschews regular ISPs because she's afraid hackers could penetrate their defenses and get into her client files. She has no such worry accessing the Web with her TV. And she says the monthly questions about her buying habits don't bother her at all. "I don't see what the problem is," she says. "Privacy in my practice is a very different thing than privacy in my own personal life." A few million more such nonchalant consumers, and PowerChannel will have it made.

By Jeremy Quittner in New York



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