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THE DAY AHEAD: DoubleClick&#039s FTC flap pits privacy vs. profit

DoubleClick thought it had it all figured out. Take its Internet user data, buy direct marketer Abacus Direct, which has actual names and addresses, and put it all together to make lots of money.

DoubleClick's (Nasdaq: DCLK) plan sounded good -- not to mention potentially profitable -- until the regulators and the privacy backlash appeared.



Privacy vs. profit: Which one will win?



The company this week confirmed the Federal Trade Commission is conducting an informal probe into whether the company engaged in unfair or deceptive practices in collecting and maintaining data on consumers. To no one's surprise, DoubleClick shares took a 15 percent hit on Thursday (chart).

Here's what DoubleClick's utopian direct marketing world looks like: With the combination of DoubleClick's assets, the company could target users by name, address and Net preference. Web ads could look like this, "Larry Dignan I understand you're looking for a mortgage and you just put a bid on a house at this address. We thought you'd like the following rates."

Sure it's a bit creepy, but that's both the promise and pitfall of the Web. Consumers want everything for free, but scream when they find out they are being profiled. Investors should closely watch the privacy flap because if regulators crack down hard on DoubleClick, no Net company will ever make a buck.

"Everybody on the Net has some right to privacy," said Jeff Goverman, an analyst with Pacific Crest Securities. "But let's get real. The reason why there's free content is because there is a quid pro quo. Every newspaper and magazine sells lists."

Wall Street analysts said they thought the FTC probe wouldn't hurt DoubleClick. But some did entertain us with a worst case scenario -- new privacy laws. If DoubleClick is not allowed to track your every move maybe that makes the direct advertising model championed by Yahoo! Inc. (Nasdaq: YHOO) and others less effective. There goes the profit hopes folks.

"DoubleClick is only one of the many companies that could be affected by changes in the law," said Lowell Singer, an analyst with Robertson Stephens, in a research note.

On another level, the FTC DoubleClick probe could also cast a pall over marketing companies such as 24/7 Media (Nasdaq: TFSM), Engage Technologies (Nasdaq: ENGA) and Matchlogic, which is owned by Excite@Home (Nasdaq: ATHM). And on a purely financial level, DoubleClick may have wasted millions of its common stock to buy Abacus so it could connect the names and addresses with the anonymous Net profiles.

Now the big question is where do DoubleClick shares go from here. We've seen these government/corporate jousts before and investors typically hit the snooze bar. Microsoft Corp. (Nasdaq: MSFT) and the department of justice are still fighting even though the whole Net landscape has changed. The government raised concerns about Network Solutions (Nasdaq: NSOL) about domain registration and resolved the situation by giving the company a cushy deal that ensures it will remain a cash cow.

DoubleClick's FTC flap won't be any different. Sure the states are piling on with the government, but the lawsuits always fly when an issue gets popular. "In the end I don't believe this is a real issue," said Goverman.

Goverman's take is on target. In the end this FTC probe will blow over and shares will do fine. But there will be some mileposts to watch as this privacy problem plays out. Here are a few items to watch.

DoubleClick's public relations game -- It has already started. The company has changed its privacy policies and maintains users can just opt out of the tracking. The only problem is most users don't realize they're being tracked in the first place. Opting out is a direct marketing practice that may have to be rethought on the Web. How about allowing users to opt in for tracking?

On Thursday, DoubleClick said it was confident the regulatory cloud would clear. "We are confident that our business policies are consistent with our privacy statement and beneficial to consumers and advertisers," the company said. "DoubleClick has never and will never use sensitive online data in our profiles."

That statement doesn't mean DoubleClick didn't think about selling sensitive data.

Privacy controversy has surrounded DoubleClick ever since it revealed new plans to track Internet user movements and connect the info with real names and addresses. DoubleClick in response to the controversy is trying to promote itself as privacy champion.

The company announced a new privacy policy that critics said fell woefully short. DoubleClick even created privacy advisory board and a new Chief Privacy Officer position. Watch to see if DoubleClick can press release its way out of this jam. For now, activists see a wounded company.

Engage goes on the offensive -- Gee imagine a CMGI (Nasdaq: CMGI) company taking a swipe at a competitor? CMGI/Engage will be watching this DoubleClick flap closely. CMGI bought Flycast, Adforce and a host of other direct marketing concerns. Now they are lumped in with Engage. The key difference? Engage is a champion of anonymous profiles, which are more palatable to privacy wonks. Matchlogic will stump for the anonymous approach too. The DoubleClick-FTC problems may be a good opportunity for Engage and MatchLogic to raise their profiles.

Engage didn't waste any time on Thursday and announced 41 new marketers and advertisers have recently purchased online media through Engage and its affiliates, Flycast and Adsmart.

And just in case you forgot, "Core to Engage's next generation solutions is Engage Knowledge, a database of 42 million anonymous profiles, which enables media buyers and advertisers to specify a target audience based on demographics, geographics and over 800 interest categories," the company said in a statement.

The newbie effect -- First hack attacks and now this. Privacy and security concerns could put a lid on newbie spending on the Net. Problems with auction fraud and eBay's (Nasdaq: EBAY) dealings with auction portals, eToys' marketing (Nasdaq: ETYS) and Amazon.com's (Nasdaq: AMZN) use of consumer data are all beginning to pile up. Regulators are becoming more vigilant and could hinder growth. Throw in a pile of consumer complaints and Net titans have a lot to worry about.