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The Best of Business Week Online: Privacy

None of Your Business

Customer data were once gold to e-commerce. Now, companies are paying a price for privacy jitters

Not so long ago, the rich lode of personal data about customers that Internet companies were collecting helped push their stock prices sky-high. Tapping this vast potential for targeted marketing looked like a fast track to sales, profits, and quick capital gains. Now, suddenly, online marketers' power to accumulate, and possibly misuse, these huge databases is making Web users leery--and stirring a sharp backlash on Wall Street. Call it the privacy penalty.

Until recently, Wall Street was infatuated with the concept of data-mining--the collection, stockpiling, and sale of information about current and prospective customers, with or without their knowledge or permission. Investor interest spawned dozens of startups with ever bolder data-collection schemes.NOT IF, BUT WHEN. Now, 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 impose privacy regulations on such companies.

Tough talk out of Washington is getting harsher by the day. In early June, the Federal Trade Commission announced plans to ask Congress for authority to impose strict 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 the sifting of personal data--the bread and butter of many online marketers--are pending before state legislatures and on Capitol Hill.

To be sure, votes are not expected on many of these bills until after this fall's Presidential election. But that's just the point: Wall Street hates uncertainty. Until the regulatory threat gets resolved one way or the other, analysts say, expect the privacy taint to depress the stock prices of many companies--especially online ad firms such as DoubleClick, 24/7 Media, and MatchLogic. What's new, says Michael Griffiths, vice-president and chief technology officer for MatchLogic Inc., a Westminster (Colo.)-based online marketer and subsidiary of Excite@Home, is that a company's stock value may get hit "if Wall Street has questions about your privacy policies and the way you deal with the privacy issue."ANXIETY BLOW. The leader in the online marketing world, New York-based DoubleClick Inc., hosts banner ads linked to Web sites that account for nearly 50% of Internet traffic. And it was the first to take a privacy-anxiety blow. 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. Abacus files contain details of mail-order catalog purchases of some 88 million U.S. households--complete with names, addresses, and phone numbers. By combining online and offline data, companies using DoubleClick's profiles would have been able for the first time to target potential customers by name with highly personalized ads--and all without their permission.

DoubleClick has since backed down on its data-merging scheme--partly to stem further privacy hits to its stock price. But questions about the company's long-term plans and potential profitability remain. DoubleClick has become the cautionary example--in Washington and on Wall Street--of how online companies can push the privacy envelope too far. Market analysts also worry about the potentially costly outcome of 16 lawsuits now pending against DoubleClick by consumers alleging privacy breaches. DoubleClick won't talk about the stock slide or the lawsuits.

The malaise is spreading. "The whole online marketing sector is getting pinched," says Salomon's Baker, even though it's difficult to pinpoint the privacy penalty against the backdrop of intense overall market volatility. David Doft of ING Barings says the privacy firestorm has already cost companies millions, if not billions, of dollars in market value. "They're getting hit like everyone else, but they're getting hit harder because of privacy concerns," he says. For example, 24/7 Media's stock price has fallen from a high of $65 on Dec. 21 to a low of nearly $13 on May 24. Analysts say up to half of that may be attributed to privacy jitters.

Ultimately, regulation could make most online ad firms and data brokers less profitable, says Simon R. Goldman, executive vice-president of customer experience for Dash, a private, New York-based online advertising and marketing company. "I don't believe that many companies that collect enormous amounts of information will be safe under their existing business models," Goldman says. Most companies will have to alter the way they do business, at least slightly, and the associated costs could be huge, depending on the limits imposed. Adds Michael Russell, an equity analyst for Morgan Stanley Dean Witter: "The viability of this entire online marketing sector depends on whether customers feel they are adequately protected."

Companies are responding. In May, several online marketers began launching massive public-relations campaigns aimed at distancing themselves from DoubleClick--and educating consumers that data collection doesn't necessarily mean underhanded snooping. Engage, which profiles online consumers with anonymous data--not tied to names, addresses, and other personally identifiable information--launched a new media campaign in Washington and New York on June 12. The goal: "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," says Engage co-founder Daniel J. Jaye.BAD BOY. Companies are also appointing so-called chief privacy officers (CPOs) to further ease consumer fears and influence the debate in Washington. DoubleClick, in a bid to reverse its bad-boy image, has named former New York Consumer Affairs Dept. commissioner Jules Polonetsky as its CPO. "We need to do more than just talk to Wall Street," says Megan Hurley, vice-president and associate general counsel for 24/7 Media: "This privacy anxiety is starting to cost real money."

Offline data-collection companies, including Equifax Inc. and others that use the Web, seem to agree. Representatives of 50 such companies met in Washington June 12-13 at the first Chief Privacy Officers' convention, hosted by nonprofit business group Privacy & American Business.

The online marketing industry, meanwhile, is hoping to persuade FTC and Commerce Dept. regulators to let it draw up voluntary rules that would place new restraints on so-called online profiling. That's the practice of gathering information--sometimes without customers' knowledge or permission--about consumers' Web-surfing habits and other preferences. Under pressure, advertisers may be willing to give consumers better notice on use of data, as well as clearer explanations of privacy policies.

But privacy advocates think more should be done. They say government regulations, rather than voluntary rules, are needed to ensure tough consumer privacy protections. "Voluntary regulation hasn't worked so far," says Marc Rotenberg, executive director of the Electronic Privacy Information Center, a nonprofit privacy watchdog in Washington, D.C.

Although privacy is the No. 1 concern of people using the Net, according to recent public opinion polls, fewer than 20% of Web sites post their privacy policies, the FTC says. "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.

The stakes are huge. "Customer data is the gold mine of e-commerce," says William E. Whyman, an analyst with Legg Mason Woodwalker Inc. Too much regulation, and it won't be as easy or as profitable to collect anymore. Still, early resolution would help companies regroup and push forward. "Wall Street doesn't care how it's resolved," Doft says. "It's the uncertainty that's the problem." Don't count on any stock miracles until the showdown over privacy is settled.By Marcia Stepanek


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