DoubleClick Burning in Bonfire of the Vanities

Kevin J. O’Connor, the 38 year-old Chairman and CEO of controversial Internet advertising company DoubleClick, Inc., must feel like Sherman McCoy, the fictional star of Tom Wolfe’s famous novel The Bonfire of the Vanities.

When he went to bed last week, O’Connor was a “master of the Internet universe.” His company was worth about $9.3 billion (US$), and was set to raise $455 million in a secondary offering. On top of it all, DoubleClick’s business strategy was going to make it the most powerful Internet advertising company in the world by far.

Now, O’Connor’s company has been accused of the equivalent of cyber spying by Jennifer M. Granholm, the Attorney General of Michigan. Additionally, the U.S. Federal Trade Commission (FTC) and the New York State Attorney General’s office are investigating DoubleClick’s advertising practices.

The company faces five lawsuits for invasion of privacy, which will likely end up as a single class action. DoubleClick’s stock has also dropped 22 percent, so the company is now worth $7.3 billion.

Also, DoubleClick brashly commenced a secondary stock offering Friday to sell 7.5 million shares at $90.25 per share. However, if the stock collapses further on more bad news, and the company has not properly warned investors of the potential risks, DoubleClick may face even more lawsuits.

Most importantly, DoubleClick’s fundamental business strategy could well be torn to shreds.

How Did It All Happen?

DoubleClick has grown phenomenally from $9.3 million in revenues in 1995 to $258.3 million in 1999. At the heart of this growth was a technology called DART, which tracks the behavior of browsers on the Internet in order to serve advertising that is targeted to each browser’s surfing patterns.

While privacy advocates expressed concerns, they accepted DoubleClick’s strategy because the browsers were not linked to the identities of the people using them.

Anonymous Turned Specific

However, in late 1999, DoubleClick purchased Abacus Direct Corp, which tracks personal information from catalog purchases made by millions of Americans. Abacus’ database includes names, addresses, telephone numbers and other personal information.

DoubleClick then changed its strategy to include linking the anonymous information to Abacus’ database of names, addresses and telephone numbers. While the company says this linkage will only happen with a user’s permission, many critics are claiming that such permission is gained surreptitiously — and that users are unaware that their personal information is being tracked.

All About Cookies

Now, DoubleClick’s fundamental business strategy is seriously threatened. Michigan has labeled DoubleClick’s opt-out policy as misleading and a violation of its Consumer Protection Act.

The state has also ordered DoubleClick to cease and desist placing cookies on its consumers’ computers to track their Net surfing unless it has direct permission. Michigan’s action, if it holds, will likely set a precedent for how cookies can be used on the Net.

Michigan’s position is that only the primary Web site that a user is visiting can place a cookie on a user’s computer without permission — and then the user must have a reasonable expectation that such a cookie might be placed.

The state specifically maintains that a company like DoubleClick, with which the consumer has no direct contact, cannot place cookies without permission. DoubleClick’s claim that it benefits consumers and will never use sensitive data that it collects is irrelevant under the Michigan interpretation of its Consumer Protection Act.

If Michigan wins, it may spark a nationwide movement that will send DoubleClick to cyber oblivion. DART will become a historical artifact, except to people who agree to be tracked by it.

Sitting on the Bonfire

DoubleClick is now sitting on a bonfire that could well burn out of control.

When the privacy issue was first raised by investigations from the FTC and New York State, DoubleClick reacted as one might expect from a company run by a “master of the Internet universe.” The company claimed to be confident that its policies were appropriate and it actually was quoted as saying that it supported the investigations’ “efforts to keep the Internet safe for consumers.”

Basically, DoubleClick just did not understand that many people were outraged at its decision to acquire Abacus Direct and to link its anonymous information to specific names and addresses.

So, we assume that Michigan’s Attorney General must have eroded some of the company’s confidence, although one would not know it from the decision to go ahead with a secondary offering at such a volatile time.

Basically, DoubleClick’s behavior has sparked Michigan into taking a much stronger position against DoubleClick’s actions than even the company’s privacy critics were taking before the Abacus Direct acquisition.

From the Pan to the Fire

As bad as it might look for DoubleClick already, it could even get worse. If DoubleClick is stopped from placing spy cookies on users’ machines, states like Michigan may then start asking why Abacus should be allowed to collect personal information on millions of Americans in the offline world without their permission.

In short, O’Connor’s life as a master of the Internet universe could soon come to a screeching halt, along with his company’s stock price. What’s more, if the stock price does indeed sink, the decision to go ahead with a secondary offering could result in a new lawsuit that will make DoubleClick’s present problems seem tame.