Web giants' consumer privacy strategy faces hard sell

Emboldened by their victory in quashing online piracy legislation, US internet companies are gearing up for a battle over whether consumers should be able to restrict efforts to gather personal data.

Google Inc, Facebook, Apple Inc and other tech companies have lobbied against congressional and federal agency proposals that would let Internet users press "do not track" buttons on their browsers to block targeted advertising. Consumers could also edit personal information that has been stored about them.

With the privacy issue, the multibillion-dollar Internet industry faces a challenge larger than potentially harmful legislation or regulations that could limit their advertising and corporate growth. Their efforts to self-regulate continue to suffer setbacks amidst accusations of privacy violations and last year's Federal Trade Commission findings that Facebook and Google engaged in deceptive privacy practices.

The FTC is expected to issue new privacy recommendations in the coming days, and companies are watching several legislative proposals on Capitol Hill.

Privacy advocates are pushing to give consumers greater control over data collection. The companies must convince consumers that they benefit by allowing personal data to be collected and shared.

Their pitch - in efforts like Google's current "Good to Know" advertising campaign - argues that data collection lets companies offer faster, smarter products, like better search results and customized mapping.

Internet companies successfully fought legislation to limit Internet piracy. Medley Global Advisors analyst Jeffrey Silva said Web companies may feel confident that they can tackle other government intervention. "I think the lesson they've learned is if they don't like a certain bill, they can organize and create a lot of static and pushback," Silva said.

Internet data collection allows advertisers to target users in a demographic who are more likely to buy their product. These ads often subsidize Web content.

Google, for example, has come under fire for a new policy that took effect March 1 that treats information from most of its products, including Gmail, YouTube and Google+, as a single trove of data for advertisers.

Google contends the change will benefit customers. The company would be able to spot a signed-on user looking for recipes and seamlessly direct them to YouTube cooking videos.

"When we talk about how the Internet will improve and grow for consumers, that's coming from online behavioral advertising," said Daniel Castro, senior analyst at the Information Technology and Innovation Foundation.

Strict privacy rules could lead to substantial cuts in online advertising dollars and an even larger hit to growth over the next five to 10 years, Castro said.

A 2010 study by University of Toronto professor Avi Goldfarb and MIT professor Catherine Tucker revealed a 65 per cent decrease in ad effectiveness after European countries implemented data collection rules for targeted advertising. Around 96 per cent of Google's $37.9 billion revenue comes from advertising, financial statements showed. Filings ahead of Facebook's much-discussed initial public offering revealed 85 per cent of its $3.71 billion in revenue last year came from advertising.

Nearly two-thirds of Apple's fiscal year 2011 net sales came from its iPhone, iPad and related products and services that rely on tracking a user's exact location.

New government data collection policies could have huge implications. "If Google got 65 per cent less revenue than it got last year, that would be a big upset to a company like that," Castro said.

The industry got a break last month when the White House released a blueprint "privacy bill of rights" giving consumers more data control, but relying heavily on voluntary compliance by Internet companies. The FTC's expected recommendations are causing more anxiety. Analysts and privacy advocates predict that the FTC report will have more teeth.