June 1, 2012, 12:00 AM

Who's Watching

As politicians and regulators threaten action, marketers seek to sell the benefits of targeted ads.

Lead Photo

With the online privacy debate reaching all the way to the White House, there's a growing possibility that Washington will act to limit ads that target consumers based on their online behaviors. While not yet forcing retailers to change their tactics, the rumblings have moved advertising trade groups into action to explain why targeted ads are in consumers' best interests, hoping to head off or soften any legislation or regulation.

Whether it's because it is an election year or in reaction to growing consumer concerns, the debate surrounding online privacy has heated up. The Federal Trade Commission issued a report on the subject in March, President Obama in February called for an online privacy "bill of rights," and members of Congress have drafted at least five bills on web privacy issues in the last year.

The industry's efforts to promote the value of targeted advertising may not succeed in heading off regulation. And new rules could have a significant impact on retailers, who make up the single biggest group of online advertisers.

Data collection and the subsequent use of that data are at the heart of the online privacy debate. Consumers are waking up to the fact that their online movements are being tracked, and many are unclear who is collecting their browsing data and what they're doing with it. A Pew Research Center study early this year found 68% of U.S. consumers don't want web sites to show them ads based on their online activity, and 73% consider it an invasion of privacy when search engines tailor results based on what the consumer has previously searched for. A USA Today/Gallup poll from late 2010 found that 67% of online consumers favored a "do not track" policy that would prevent advertisers from tracking their online behavior and using that data to show them targeted ads.

"There's a lot of chatter right now and we're watching it, but we're not anticipating making any changes this year at all," says Daryl Logullo, Internet marketing manager at e-retailer Southern Fulfillment Services LLC. The e-retailer uses ad retargeting display ads for its citrus fruit gift brands, which include Hale Groves and Pittman & Davis. Logullo says consumers haven't complained about the ads and that the ad format performs well for Southern Fulfillment Services' brands.

Dan Morrill, e-mail marketing manager at online ticket marketplace StubHub, says consumers haven't complained to StubHub either. The company pairs the data stored in its customer database with a display ad retargeting service provided by Responsys to serve relevant display ads to StubHub customers on different web sites. Ads are typically personalized based on a customer's previous purchases. For example someone who bought tickets to a New York Giants game last year might see a display ad for Giants tickets when this season's tickets go on sale. "Ads are relevant to behavior on the site and are very fan-focused and friendly," he says. "If we see an influx of any type of complaint, we can react to it. We have not seen it."

The online advertising industry is taking action in an effort to keep advertisers from having to change their advertising methods. It's launched an "About Ads" initiative to inform consumers who see targeted ads online about how their browsing data are used and is working with Internet companies like Yahoo Inc. and Microsoft Corp. to offer consumers a way to opt out of having their moves tracked online via do-not-track settings in web browsers.

Privacy advocates, however, say the initiatives don't go far enough. E-retailers like Logullo are concerned there may be a backlash when consumers realize just how much of their data is being collected. "There's this gap of knowledge between what the [data] industry has and what consumers know they have," he says.

Behavioral ads are big business

Any regulation of online ads would be important for merchants. Retailers spent $7.1 billion during 2011 on online advertising, accounting for 22.4% of total online ad spending, according to the Interactive Advertising Bureau, a trade group for online marketers. Total online ad spending was $31.7 billion during 2011, of which $11.1 billion, or 35%, was spent on display advertising. That includes display and banner ads, rich media ads, digital video advertising and sponsorships, all of which can be shown to consumers based on their browsing data.

Information on that browsing behavior is collected in large part via cookies, small text files that can collect and store data. Retailers and other web site operators often drop cookies onto the browsers of web site visitors, sometimes only to make shopping more convenient for consumers. E-retailers, in the normal course of business, for example, use cookies to recognize returning customers, keep track of what consumers put in their shopping carts and to collect on-site behavioral data they can analyze to improve sites.

But other firms, like ad networks and data-collection companies, put cookies on consumers' computers too, and these cookies sometimes track consumers as they move around the web—recording what news stories they read, what sites they visit and links they click, and how frequently they take those actions. This data let the collector, and anyone it may share the data with, build profiles of consumers over time.

Marketers can then buy ad space that'll show consumers with a particular profile their advertisements. "If information from their browsing sessions indicates that they visit car and travel sites often, we will serve more automobile and travel ads," says a spokesman for Microsoft Advertising, an ad network. "Microsoft Advertising incorporates information from the customer's Internet sessions to match a person's interests up with advertising that is useful and valuable to that individual."

Data owners stress the profiles are anonymous. They are not interested in tracking individuals, they say, but many consumers with particular characteristics, such as women under 40 who like to scuba dive.

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