October 1, 2010, 10:35 AM

Who's watching?

Ad networks, that’s who. They’re tracking online consumers more closely than ever. A backlash could curtail an effective marketing tactic.

When shoppers see online ads presented to them based on their previous behavior, they’re more likely to click on them and make a purchase. But that doesn’t mean consumers like the idea of such behaviorally targeted ads.

The contrast between what consumers say and do is stark.

Clicks on targeted ads convert 6.8% of the time compared with 2.8% for standard online ads, according to a study of 12 advertising networks commissioned by the Network Advertising Initiative, a trade group of online marketing and analytics firms. For Hayneedle Inc., which operates 220 niche e-commerce sites, presenting targeted ads with the help of vendor TellApart Inc. boosted the click-through rate on its web display ads from 0.5% to 2.0%.

“Consumers are going to be exposed to ads anyway. So why not present them with ads that are interesting to them?” says Ash Eldifrawi, chief marketing officer for Hayneedle.

But the fact they respond to targeted ads does not mean online shoppers like the tracking of where they’ve been on the web and what they’ve done, even if it does allow someone who’s been researching the latest Nikon camera to see ads offering discounts on that very item.

When given the chance, a substantial majority of consumers tell survey organizations they don’t want anyone to follow them around the Internet. A recent Zogby International survey found that 81% of consumers are “somewhat” or “very” concerned about companies tracking their online activities.

And, when given details about the web-tracking tools retailers and ad networks use, consumers are even less comfortable, according to a 2009 study conducted by the University of California, Berkeley School of Law’s Berkeley Center for Law & Technology and the University of Pennsylvania’s Annenberg School for Communication. The study found 73% of consumers say they opposed advertising based on a consumer’s activity on a particular web site and 84% opposed ads based on a consumer’s activity across the web. As for seeing personalized ads themselves, 66% said they don’t want marketers to tailor ads to their interests.

Washington watch

Such sentiment is fueling a backlash that has resulted in several lawsuits this year that are challenging 2001 and 2003 court rulings that web sites can place cookies, small text files that track browsing history, on consumers’ computers.

That anti-tracking persuasion is also getting a hearing in Washington, especially since the Democrats captured the White House two years ago, giving President Barack Obama the power to appoint consumer-friendly commissioners to the Federal Trade Commission, which oversees online privacy matters. The FTC is discussing measures that could significantly curtail behavioral targeting, and Democrats have introduced legislation in Congress that would have similar effect.

Given the prevailing winds, online marketers and retailers are taking steps to show their respect for the privacy of web shoppers, and to curb abuses that might prompt crippling laws or regulation.

That includes the Interactive Advertising Bureau, a trade association for web advertising networks and marketing agencies, joining with the NAI to develop guidelines for behavioral targeting; Google Inc. now allowing online consumers to opt out of being targeted with ads based on information about them; and Wal-Mart Stores Inc. last year unveiling an expanded and easy-to-understand privacy policy on its e-commerce site.

Whether such voluntary measures will forestall further government action is hard to say, according to observers, and the outcome of the November elections will certainly affect the landscape. For now, marketers are advised to be prudent.

“It’s in everyone’s interests to be straightforward about what’s going on,” says Nicolle Pangis, senior vice president of product management for 24/7 Real Media, a web advertising firm. “If a retailer has a trusted name and reputable business, it doesn’t make sense to ruin that reputation by stalking a user as she navigates around the web.”

Always watching

As the debate unfolds, online marketers, who in the past often downplayed the privacy threat of behavioral targeting, are getting more of an opportunity to hear the concerns of privacy advocates.

The marketers have long argued there was no threat to an individual’s privacy because the web-tracking systems do not typically collect data that identifies anyone by name. The beauty of the system, they argue, is that it provides valuable data for advertisers even though they don’t know the consumer behind the tracking cookie or beacon. (Beacons are small tracking GIF files that can gather more information than cookies and can help detail more precisely a consumer’s on-site behavior, such as which online ads attracted a visitor’s attention and which shoppers then visited the advertiser’s site.)

When a consumer visits one of Hayneedle’s sites, for instance, everything she does on the site can provide the retailer with valuable insights, such as what she’s looking to buy and how much she’s looking to spend. Even once she leaves the site, her actions are telling.

Using a cookie to gather a consumer’s on-site and off-site information, TellApart feeds the information into a formula that gauges the value of a customer for a particular retailer, such as Hayneedle. After determining the kind of online shoppers to target, TellApart bids heavily on ads when those customers show up on particular sites. The network only gets paid for those ads when a consumer clicks and makes a purchase.

Behavioral targeting works because ad networks like TellApart allow a retailer to focus on customers most likely to make a purchase, says Eldifrawi. “Customer acquisition is much more effective when you’re using actual consumer behavior information rather than a proxy, like search, to serve up relevant ads,” he says.

To avoid consumer discomfort the information that companies gather is anonymous in the sense that it isn’t linked to a user’s name, but rather to either the computer’s IP address or a code randomly generated by the ad network, says Pangis of 24/7 Real Media. However, privacy advocates say whether the data is tied to the consumer’s real name, or a pseudonym, such as her IP address, the consumer’s privacy remains at risk.

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