Privacy Issue Won’t Go Away: Is Profiling Stereotyping?

Knowing how to read a customer’s mind, predicting his or her hot buttons and giving them what they want is good business for any e-commerce marketeer. But some say today’s powerful customer-tracking tools invade the buyer’s privacy, expose them to risk and reduce them to stereotypes.

The strong market for such “collaborative filtering” software was recently demonstrated in Net Perception’s April Initial Public Offering.

The company, based in Eden Prairie, Minnesota, develops software that personalizes ads for customers when they visit an e-commerce site. It does so by analyzing their buying history, preferences, demographic niche — and even their browsing behavior.

The company’s stock almost doubled its first day out, from about $16 (US$) per share to over $29 per share.

Why All the Enthusiasm for Such One-to-One Marketing Software?

In one word: Profits. A recent study by Jupiter Communications showed that the top 25 online e-commerce sites using such tools averaged a return on investment of 300 percent.

“Generally, there’s no downside with such programs,” said David Baltaxe, an analyst with Sterling, Virginia-based Current Analysis, Inc., “unless it limits what you’re shown.”

Critics of such programs say they use a snapshot of an individual’s tastes and interests at a certain point-in-time. By doing so, they forever regurgitate the same choices back in the person’s face in the form of banner ads and special offers. This, critics argue, pigeonholes consumers — stunting their growth, by limiting their exposure to different products.

For instance, using interactive agents, a hip-hop CD-buyer never gets pitched classical music, and the history buff never sees a romance novel advertised on their page’s banner.

Then There’s the Privacy Issue that Won’t Go Away

Aside from collecting cookies on those who browse an e-commerce site without telling them, Seattle, Washington-based Blarg Online Services, Inc. recently reported even more serious violations of customers’ privacy. According to Blarg, many small Internet retailers unknowingly disclose customers’ credit card numbers and phone numbers because of incorrectly installed encryption software.

Violations of privacy have prompted IBM to begin pulling off its ads from sites that don’t post policies explaining how they collect and use such information from consumers.

The issue has also spawned Zero-Knowledge Systems, Inc. — a software company that makes tools that shield consumer’s privacy on the Internet. “Our customers will control their identities and the amount of information that is created, collected and profiled about those identities,” the company’s mission statement says.

Privacy horror stories are so prevalent today that many in the e-commerce industry fear imminent government intervention.

Earlier this month, the Arlington, Virginia-based Information Technology Association of America called on the government to take a “hands off” approach to online privacy. The group said only consumers should be allowed to decide the amount of information they want to make available over the Internet.

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