The Shady Side of Internet Money

May 13, 2005

The mainstream news media take a lot of heat from their Internet-based cousins, some of it deserved, some not. But conventional media have the edge in one important respect: Everybody knows where they get their money. They gather a crowd and sell advertisers the chance to make a pitch.

By contrast, nobody outside the business understands how the cyberworld earns its keep.

That’s especially ironic, since the ethic of journalism and public comment that is emerging online talks endlessly about the virtues of transparency and clarity. Yet the business side of the Internet is shadowy and furtive.

And that’s a huge problem for this mighty communications medium. Because when people do discover the realities of Web revenues, many don’t like what they see.

Money flows to the Internet from numerous sources: cross-subsidy from off-line affiliates, venture capital, subscriptions, commissions from online sales, among others. But its greatest potential lies in its use as a marketing instrument — especially its ability to target consumers with precision, link them right to vendors and measure the results.

Take the two hottest areas of revenue growth: search advertising and behavioral marketing.

Search advertising isn’t just the banner ads that appear alongside your results when you ask Google or Yahoo to find you something. Those ads have been overtaken by “paid placement,” which the Interactive Advertising Bureau says is the single biggest source of online ad revenue, accounting for 35 percent of the $7.3 billion total.

You didn’t know that search engines take fees to list some results more prominently than others? Consumer Reports WebWatch found in April 2003 that 60 percent of Web veterans didn’t know either. “Some of our test consumers responded as if they had been betrayed by an old friend,” wrote Beau Brendler, WebWatch director.

The Federal Trade Commission in 2001 called for “clear and conspicuous disclosure” of paid placement. Still, last year WebWatch found: “Disclosures are generally hard to find, accessible by headings and hyperlinks that often blend in with the page, making them easy for consumers to overlook.”

But search advertising is being eclipsed by the glamour child of Web advertising, behavioral targeting, which exploits technologies that track what you do online.

Scott Ferber, CEO of Advertising.com, says 2005 is “the year of behavioral targeting,” which eMarketer estimates will hit $934 million —8.3 percent of online totals.

Behavioral targeting is accomplished through bits of code — called third-party cookies — that are deposited in your computer when you click to an advertisement on the site you’re visiting. Those cookies are tell-tales of where you’ve been. They enable marketers to send you messages based on what you recently sought or bought. If you checked out airfares to Paris, they’ll send you ads for French hotels or auto rentals.

That’s fine, if you don’t mind somebody recording what you read, or as a Consumer Reports headline put it, “online surveillance.” But people do mind. Jupiter Research turned heads in March when it reported a surprisingly high proportion of Web users — 39 percent — were killing cookies out of their computers monthly, if not more often, severely impeding behavioral targeting. Another survey by WebTrends found that the percentage of people who, given the choice, say no to third-party cookies was rising sharply.

But few online users know they have a choice. We routinely consent to having our online actions monitored when we click past those impenetrable consent agreements en route to one site or another.

Marketers argue they’re doing nothing more than savvy retailers do now when one department tries to cross-sell the customers of another, and credit card companies do by brokering customer lists to third parties. Besides, they argue, targeting benefits consumers by anticipating their needs and sparing them ads that have no bearing on their interests.

But that’s a case they’d better start making. An anti-spyware bill already passed Congress once, and the entire cyber-economy is ripe for the accusation that it’s merely Big Brother with an MBA.

Real disclosures would help. But it’s depressing to realize that once again a wondrous new communications technology is being hijacked by peddlers. It must be possible to permit people who don’t want to be watched, who don’t want to be pitched to, to pay for the online services they use and to be left alone.

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