Dying Dot-Coms Betray Customers

For sale: Customer list of failed retail dot-com. Includes thousands of one-time customers from Christmas of 1999. Value to a rival dot-com striving for all-important market share: Considerable. Real cost in terms of lost faith among consumers in the privacy and security of e-commerce: Immeasurable. Price: Negotiable.

First of Many

For several weeks now, Toysmart.com has been advertising the sale of its assets — that is, what remained after financial backers such as Walt Disney decided to pull the plug on the pure-play toy retailer.

Forget about the computers, servers and domain names on the block. The hands-down top draw for fire sale shoppers is the customer list the company built up during its relatively brief existence.

Toysmart desperately needs the cash the customer list could bring — the creditors in its Chapter 11 bankruptcy case are hoping to get at least a few pennies for every dollar they are owed.

Already, the U.S. Federal Trade Commission (FTC) has informed Toysmart that the commission is unhappy about the sale. The online privacy watchdog group TRUSTe, of which Toysmart was once a corporate member, has condemned the sale as “ethically wrong.”

Broken Promises

What is causing the most consternation is that Toysmart promised customers that it would never do exactly what it is now doing. During its nearly year-long existence, Toysmart prominently displayed a privacy policy at its Web site that said, in part: “You can rest assured that your information will never be shared with a third party.”

A comforting assurance — especially when Toysmart went on to collect detailed information about customers and to track their purchases over time. So does Toysmart’s inability to survive a competitive market nullify that promise?

In the company’s eyes, it appears that it might. Some watchdogs worry that once the list is sold, Toysmart will lose its ability to place any future restrictions on the data, meaning the customer information could be sold over and over.

Repeat Performance

Toysmart is not alone. Boo.com sold its customer information database to Fashionmall.com as part of a larger asset sale that included the retailer’s infamous Web technology. And other failed dot-coms have already made similar moves or have sales in the works.

Of course, anyone who has ever gotten a fistful of junk mail knows that catalog companies and magazines have long been in the business of selling customer lists. They are, in fact, big business, with solid prospects bringing top dollar.

For a rival toy retailer, what could be more promising and valuable than the name, e-mail address and purchase preferences of a known online toy shopper?

But there are two big differences here. First, Toysmart made its pledge publicly and openly — and, it could be argued, the company used that pledge to convince shoppers to spend their cash at Toysmart rather than patronizing one of its many rivals.

Second, word of the sale got out before it was finalized. That means that thousands of customers and potential customers are reading about the potential sale and wondering if promises made by e-tailers are worth the virtual paper they’re written on.

Spoiled Barrel

In the end, they have to be. Not just for the sake of the Toysmart customers but for the health of e-commerce.

Think of how suspicious shoppers will become of every privacy pledge they encounter from now on, knowing that an earlier promise was broken. Every day, dot-coms spend time, energy and money building up confidence in their ability to keep the transactions that are happening somewhere out there safe and secure.

The top e-commerce companies have been making a big push to be allowed to self-regulate on the issue of privacy, to escape the potentially onerous oversight of the FTC and Congress.

Self-regulation? Forget about it. The Toysmart lesson is clear: When the chips are down, dot-coms will sell their souls — not to mention the names, ranks and shopping preferences of their far-flung customers — to keep their creditors at bay.

It is clearly time to call in the FTC, fire up a Congressional committee, draft legislation and enact regulations. The e-commerce world had a chance to get on the right side of the privacy issue, and a couple of lost causes blew it.

What do you think? Let’s talk about it.