Web Giants' Consumer Privacy Strategy Faces Hard Sell

(Reuters) - Emboldened by their victory in quashing online piracy legislation, U.S. 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.

A MULTIBILLION-DOLLAR BUSINESS

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 percent decrease in ad effectiveness after European countries implemented data collection rules for targeted advertising. Around 96 percent 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 percent 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 percent less revenue than it got last year, that would be a big upset to a company like that, Castro said.

MULTI-PRONGED ATTACK

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, in part because FTC Chairman Jon Leibowitz recently described Google's new privacy policy as a somewhat brutal choice for consumers.

The FTC report may call for strict enforcement to ensure firms adhere to their privacy policies, according to sources familiar with the agency's thinking.

It may also try to accelerate firms' adoption of the do not track technology, which could work like the do not call registry that caused telemarketing industry havoc.

Silva said the FTC recommendations come from people that live and breathe privacy policy and have a greater knowledge of the law, companies' practices and an institutional knowledge of what's happened before. They probably have a better feel for the degree to which self-regulation works or doesn't.

As for legislation, numerous privacy bills are winding their way through Congress.

A notable one is a bipartisan privacy framework from Senators John Kerry and John McCain. It would require companies to reassess their privacy practices for both personally identifiable information and online behavioral advertising profiles.

Critics say it could force more companies to start charging for services like e-mail, social networks and other content currently subsidized by advertising.

I'm talking about American companies having rules that control their own destiny, before Europe or other trading partners impose their policies on all our companies, Kerry said. Hell, establishing minimum privacy protections in law can help build consumer trust in the marketplace and in turn increase economic activity.

Tech companies have argued that government regulations could cut its revenues, reduce job growth and hurt the broader economy.

Lawmakers are looking for the sweet spot between too much regulation and none at all, Representative Mary Bono Mack, chairman of the House Commerce subcommittee on commerce, manufacturing and trade, said. Any knee-jerk reactions could have a chilling impact on innovation and e-commerce in the United States and threaten our economic recovery, she said.

WEB FIRMS' FOOTHOLD Internet companies are well-positioned in Washington to push back against regulatory proposals.

With the piracy debate, they came together to argue that bills designed to shut down access to overseas websites trafficking in stolen content or counterfeit goods were too broad. They argued that they could undermine innovation and free speech and compromise the Internet's functioning.

What followed was an unprecedented online protest that saw Wikipedia and other sites go dark while bigger players like Google and Facebook displayed censorship bars and arguments against the bills on their sites. The effort was supported with 3.9 million tweets, 2,000 people a second trying to call their elected representatives and more than 5,000 people a minute signing petitions opposing the legislation.

Privacy regulations are a harder sell, said privacy expert Amy Mushahwar, an attorney with Reed Smith. Consumers might not be able to immediately recognize that increased privacy obligations could lead to a lesser amount of content on the Web, which is really what the advertising industry is concerned about, said Mushahwar, a registered lobbyist for the Association of National Advertisers. Internet companies have tried to get ahead of mandatory reforms by adopting their own policies. The Digital Advertising Alliance rolled out new data collection principles that take effect this year. They explicitly prohibit collection and use of a person's Internet surfing data for determining their eligibility for employment, credit, insurance and medical treatment. The industry is also using old-school lobbying tactics. It has ramped up its political activities dramatically, spending $1.2 billion between 1998 and 2011. Google spent $9.68 million and Microsoft Corp $7.34 million on federal lobbying in 2011, according to lobbying disclosure reports. Facebook, a latecomer to Washington, has beefed up its lobbying team, adding Joel Kaplan, former deputy chief of staff to President George W. Bush, and Myriah Jordan, also a Bush aide and former general counsel to Republican Senator Richard Burr. Facebook's lobbying expenditures skyrocketed from $351,000 in 2010 to $1.35 million in 2011, reports show. Winning lawmaker support is only part of the battle. The sector also may benefit from the views of average people, said Linda Woolley, executive vice president of government affairs at the Direct Marketing Association. Despite recent controversies over Google's privacy policies, you didn't hear of people cancelling their Gmail accounts.

From where I sit, I do not see hordes of Americans running to Capitol Hill saying we need to do something about this, she said.