Internet June 18, 2009, 10:16PM EST

Internet Marketing: Is Regulation Coming?

Lawmakers are looking at regulating the ways Google, Yahoo, Microsoft, Facebook, and the like track Web-surfing patterns to aid marketers

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The impetus to regulate online marketing may be gathering steam. On June 18 a House of Representatives subcommittee held a hearing to take a closer look at how advertisers gather and use information on consumers' Web-surfing habits.

Up to now the government has had a hands-off policy toward online marketing, giving companies relatively free rein in how they use tools that track what people do online and then use that data to deliver tailored marketing messages. Although regulation is likely to be far off, it would surely rewrite how Google (GOOG), Yahoo! (YHOO), Microsoft (MSFT), Facebook, and a wide range of other Internet companies grapple for share in the $25.7 billion online ad market.

The hearing, which brought together representatives of Web companies and online privacy advocates, may mark "the beginning of the end of self-regulation for online advertising," says Marc Rotenberg, executive director of the Electronic Privacy Information Center (EPIC).

Advocates of regulation say Internet companies need to be more up-front about their use of so-called behavioral targeting, which includes placing "cookies" and other software designed to discern a computer user's tastes and preferences—information that marketers can use to better deliver online ads. Representative Rick Boucher (D-Va.), who chairs the House subcommittee on communications, technology, and the Internet, has stated publicly since February that he plans to draft legislation on targeting practices this year. He says sites should maintain plain-language privacy policies, visitors should be able to opt out of data collection, and any third-party companies working with publishers must obtain permission from Web users before acquiring or using their information.

Behavioral Targeting Spreads

Privacy advocates say behavioral targeting is becoming more prevalent with increased use of ad-supported Web sites and services and that it's getting easier to disguise the practice as technologies become increasingly sophisticated. "The current model is going to collapse because the amount of information being collected is out of control," says EPIC's Rotenberg.

A study released by Pace University on June 17 illustrates how pervasive behavioral-targeting tools can be on a single Web site. Associate professor Catherine Dwyer discovered that the shopping site for Levi Strauss automatically plants "beacons," or tracking files, from nine different companies onto a visitor's computer when it arrives at the home page. These third parties included so-called behavioral ad networks, including Right Media, Tribal Fusion, and Specific Media, which apprise a site of a visitor's behavior on other sites. To Dwyer's surprise, Levi Strauss had informed users in its online privacy policy that it was using only a single partner, Microsoft-owned Avenue A. Levi Strauss says Microsoft lines up these other partners and changes them frequently and that it therefore didn't deem it necessary to list these other companies in its privacy policy.

Dwyer says such a lack of transparency not only compromises user privacy but also hurts the brand. "Does Levi's want to have this kind of relationship with their customers?" Dwyer asks.