Yes, That's Microsoft Welcoming Regulation

Behemoth's Backing of Bills Seems to Fly in the Face of Its Bid for Yahoo and Ad Revenue Goals

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NEW YORK ( -- Microsoft is pushing for regulation of the data that online companies collect for marketing purposes, leaving rivals angry and perplexed.

Almost every other internet-ad company is squarely against government regulation, fearing it'll lead to the elimination of advertising's most valuable trait -- the ability to target individuals. Many are also mystified as to why a company that aims to make 25% of its $50 billion in revenue from online ad revenue, and is in the throes of buying Yahoo, a pure-play online ad seller, would favor government-mandated controls over data that have the promise to deliver targeted advertising and thus help grow the online ad business. [Ed. note: Following publication of this story, Microsoft withdrew its bid for Yahoo.]

Specifically, Microsoft is supporting of two state proposals -- one in New York and another in Connecticut -- that would regulate how internet companies track online consumers' web-surfing data.

The New York bill, introduced by Assemblyman Richard L. Brodsky, would require companies to offer clear and easy ways for consumers to opt out of having their online-surfing behaviors tracked by third parties. It also would bar online-ad sellers from pairing search-behavior data with personally identifiable data -- name, address, phone number, etc. -- without consumers' explicit permission.

The Connecticut bill requires websites to clearly post how third-party firms collect and use data and, as the Hartford Business Journal reported in April, it has been pushed by a lobbying firm, Capitol Strategies Group, of which Microsoft is a client.

When asked whether Microsoft was involved in drafting the Connecticut bill, Michael Hintze, associate general counsel for Microsoft, said: "We're working very closely with the sponsor of that bill and giving our feedback to them."

Best practices
On the general principle of why Microsoft would support regulation when almost all its rivals are opposed to it, he said: "We think legislation can be an appropriate part of the mix in protecting consumer privacy. ... It's been a long-standing position of ours that we're willing to at least discuss well-crafted legislation as part of a privacy solution. We've taken a position that we're willing to talk with and engage in a positive manner with the sponsors of these bills. The bills themselves have not gone much further than listing best practices around NAI [Network Advertising Initiative] guidelines or other best practices that are out there."

Still, the advertising business has almost always favored self-regulation. The usual argument is that marketers don't want to overstep their bounds, because alienating consumers is not in their best interest. And when marketers do run afoul of consumers or politicians, they have typically volunteered to come up with their own guidelines and ways of enforcing them, thus avoiding federal or state intervention. And that's exactly how Microsoft's rivals view the prospect of regulating computer cookies: They believe it could do considerable damage to the internet ad industry's ability to grow and provide ads that are relevant to consumers, rather than ads based on site context or just pinged at them at random.

Too much regulation could even hurt Microsoft itself, given that it has placed a great deal of emphasis on tactics such as engagement mapping, unveiled just a few months ago as a revolutionary way to measure online advertising. It could also hurt the $40-billion-plus business the company would like to acquire: Yahoo.

That's why its stance is perplexing: first because it's Microsoft, a company that has typically favored less, not more, government regulation, but also because most online-ad companies fear that the language in regulatory bills is far too broad and that a state-by-state patchwork of legislation would be confusing and technically unfeasible. In fact, some of Microsoft's most cynical critics suggest the company is purposefully trying to make business more difficult for online advertisers. In other words, if it can't win at online advertising, it's going to make sure no one can.

"They have less skin in the game," said a person familiar with the legislation. And it is true: Advertising is still a much smaller part of Microsoft's business than Google's. In Microsoft's 2007 fiscal year, ad revenue totaled $1.84 billion, less than 4% of its $51 billion total. Nearly all of its chief rival's $16 billion-plus 2007 revenue was ad-related.

'In with both feet'
Mr. Hintze denied such charges. "Look, we just spent $6 billion to buy aQuantive, and we're looking at another major acquisition ... [which] would be the biggest in our history," he said. "We're in with both feet in the ad space. It would be foolhardy for us to spend that kind of money ... and then turn around and do something that we think would undermine that business model."

The worry is that one regulation will lead to another and eventually something much more dramatic -- such as a requirement that consumers opt in to cookie collection -- could become law. Microsoft said it would not support such a measure. It could arguably deal with it better than others because its software is on 90% of desktops, and it would have little trouble bundling an opt-in with its consumer software/service relationship.

Regulation ultimately will help the industry, Mr. Hintze said. "These business models, which we think are completely legitimate, do involve the collection of data and raise questions about privacy," he said. "We think that if consumers and advocates in nonprofits and legislative bodies are more comfortable that this is being done in a responsible way that protects consumer privacy, [then] that benefits the business model."

In an interview with Ad Age, Mr. Brodsky called Microsoft's reaction to his bill intelligent and thoughtful. "They were asking questions about to whom the principles would extend," he said. "In the end it'll extend to anyone collecting the data. ... It's a process of working out language. And a lawmaker will learn from listening carefully to affected companies."

Currying favor
Even privacy advocates are a bit surprised -- pleasantly, of course -- by Microsoft. "They've decided to become the un-Google," said Jeff Chester, executive director of the Center for Digital Democracy. He said the company could be trying to curry goodwill with regulators in advance of acquiring Yahoo, as that combination likely would be examined.

Online-ad companies have been critical of a state-by-state approach also because state regulations could become de facto national regulations, as it is impossible to be sure where an internet user is located. Neither state proposal will necessarily have a chilling effect on online advertising, as the requirements go no further than the industry's self-imposed standards.

But, said Jim Halpert, counsel for the industry association State Privacy and Security Coalition, "once you start with regulation in this area, it's very difficult to stop it."
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