Yesterday's decision by the Federal Trade Commission is the first time the government has set rules on online consumer profiling. The move went a long way toward easing fears that the industry would be severely regulated any time soon.
Internet advertising is counting on its ability to create detailed databases of consumer habits--known as profiling--to target messages to individuals who are most likely to respond to them. But some consumer advocates have said those efforts may violate people's privacy rights.
Shares in online advertising networks traded up sharply today.
DoubleClick, the top ad network, was upgraded to "buy" and "strong buy" at Donaldson Lufkin & Jenrette Securities and SG Cowen, respectively, among others; DLJ gave the stock a 12-month target price of $90. The shares traded as high as $38.63 today after closing yesterday at $34.06.
Investor demand is a welcome turnaround for the ad networks, which have been hit hard by worries that privacy issues may constrain their business models. Earlier this month, DoubleClick's shares dropped because of analyst warnings that its earnings would fall off in the third quarter because of concerns over imminent government ruling on profiling standards.
"We see (the FTC) agreement as a strong positive for all of the ad networks--and especially DoubleClick," said Richard Petersen, electronic marketing analyst for Credit Suisse First Boston, which released a report on privacy yesterday.
"The sheer uncertainty (of privacy guidelines) has been hard for the stock, and the standards now set in place are favorable for the ad networks," Petersen added.
Jodie Bernstein, director of the FTC's Bureau of Consumer Protection, said that the industry's self regulation "must play a central part in protecting consumer online privacy."
But the FTC is still requesting that Congress create legislation to protect consumer privacy online from those companies not participating in the Network Advertising Initiative (NAI, which proposed the standards. The trade group consists of companies comprising an estimated 90 percent of the industry, including ad networks DoubleClick, Engage and 24/7 Media.
More broadly, the issues surrounding profiling policies online have yet to be finalized, as a flurry of proposed legislation from policy makers has recently been introduced that may be harder on the ad networks.
The FTC approved proposal stipulates that the online ad networks and their partner Web sites give consumers notice and choice when collecting their personal information and tracking their whereabouts online.
Another sign that the standards may face more scrutiny came this morning, when privacy advocates sent a letter and report to the Senate Commerce Committee, disclaiming the NAI's proposal and urging them to review solutions for adequate consumer privacy online.
Privacy advocates took issue with the agreement, saying that it does not go far enough to protect consumer privacy and did not include input outside the industry.
"This proposal turns every American home with a computer into a Nielsen (Media Research) family," said Mark Rotenberg, executive director of the Electronic Privacy Information Center.
Many advocates believe that industry self regulation is just one component to fully protect consumer privacy online. Other parts include baseline legislation and technologies that give consumers control of their personal information online.
"We're encouraged that the advertisers are looking at fair information practices. But we don't believe it goes far enough to give users real, informed notice and choice," said Ari Schwartz, policy analyst for the Center for Democracy and Technology.
Detractors of the proposal say that it doesn't go far enough in requiring companies to inform consumers about how their personal information will be used. Specifically, consumers aren't given vital information in the proposed "notices" that tell them who is sharing their information and what their profile will look like.
"There's no way for someone reading these notices to know what they're signing into or what they can opt-out of. It's not real choice," Schwartz said.
DoubleClick, which came under fire earlier this year for intentions to merge anonymous consumer information with personally identifiable data, believes this is a tough but fair agreement. "This protects consumer privacy in an unprecedented manner and allows online advertising to thrive and the Internet to remain free," said Josh Isay, director of public policy for DoubleClick.
The ad network is working to put several parts of the proposal in place, including a third-party seal program to enforce the NAI's rules and a Web site that lets consumers opt-out from all members' profiling services.
For its part, the NAI believes the self regulation proposal goes a long way to address consumer concerns about privacy.
"We're making the notice strong, and we're making it easy to opt out. These companies understand that privacy is important to consumers and that for them to succeed, they need to be responsible," said Jeff Connaughton, an NAI spokesman and a consultant with Quinn Gillespie & Associates.
"There had been a lot of uncertainty of the rules of the road; now we have some rules," Connaughton said. But this is not the end of the story, he said. The NAI plans to continue its discussions with policy makers to ensure the self regulation is a good solution.
Although industry analysts doubt that any legislation will be decided on this year, more hearings on these issues are expected when Congress reconvenes in September. Sen. John Kerry, along with former presidential hopeful Sen. John McCain, introduced legislation earlier this week that addresses online privacy.
Kerry praised the industry's move toward self regulation today but said that moderate legislation should also be there to protect consumers online.
"No serious policy maker should stop looking for thoughtful, constructive ways to move us toward a more secure Internet while still promoting the growth of the industry," Kerry, a member of the Commerce Committee, said in a statement today.
But the online advertising networks can reap the benefits of FTC sanctioned guidelines for now.
"Investors hate not knowing what's going to happen. The fact that the uncertainty is gone now is good for investors," CSFB's Petersen said.