PRIVACY REGULATION GROWS AS LEGISLATION PASSES

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Marketers who managed to stave off most U.S. regulation of Internet privacy this year are getting a warning from consumer groups and government agencies: "Just wait till next year."

The same complications that prompted Congress and agencies to temporarily delay action on privacy regulations for all but kids younger than 13 will prompt closer looks next year, they say.

Further, with the Federal Trade Commission, the European Union and Congress all pushing adult privacy issues, Internet privacy holds the prospect of gaining even more visibility next year.

"It will be a huge front-burner issue with the next Congress," said Jeff Chester, executive director of the Center for Media Education.

`A TOP ISSUE NEXT YEAR'

Marc Rotenberg, executive director of the Electronic Privacy Information Center, said he is anticipating that privacy will be one of the top issues on the legislative agenda next year.

"There are a lot of things that weren't done this year . . . medical records . . . financial privacy. So when you have that together . . . it will put more pressure on the administration to [get] its act together."

Congress last week approved its first Internet privacy legislation. As part of an appropriations bill, legislation authored by Sen. Richard Bryan (D., Nev.) will require commercial sites aimed at kids under 13 to seek parental approval to collect or post personally identifiable information including a child's e-mail address. A site can respond to a specific e-mail or send a newsletter, but it can't just send random marketing offers to kids.

For Web sites oriented to younger children, the changes would have immediate effects, making it much harder for such sites to be profitable. While sites can still display advertising and provide marketing information, collecting data from young kids and sending e-mails to kids becomes much more difficult under the legislation that President Clinton has indicated he will sign. The bill also makes clear that the Federal Trade Commission has the authority to regulate privacy for younger kids and to enter into agreements with industry associations to regulate their members' individual compliance.

EXPENSIVE TO IMPLEMENT

HeadBone Interactive, Seattle, (www.headbone.com) is working with Children's Advertising Review Unit (CARU) to involve parents in its HeadBone Zone site for kids. For "a larger company [the expense of implementing the new legislation] won't show up on their radar screen," said Joe Snell, exec VP-HeadBone Interactive. But for "a lot of us smaller companies," he added, "it's a substantial amount of money.

"We were close, but close doesn't count," he said of its existing registration process, which doesn't include parental permission to chat on the site.

One option is to turn the site into a paid subscription service, like Walt Disney Co.'s Daily Blast!, Mr. Snell said, but he said it would rather keep the content free. As a result, it's had to add staff to handle extra correspondence from parents, and it's working on a way to switch its computer server over to accept users registered under the new rules.

BUILT INTO OPERATING BUDGET

Other sites say they're unaffected by the new legislation. Going beyond what CARU dictates is "something that we absolutely need to and will continue to do," says Amy Robinson, senior manager-online brand management and business development at girls site Purple Moon. "It's part of our overall business model."

When Purple Moon (www.purple-moon.com) opened an online store recently, it made sure to involve parents by creating wish lists, on which girls could list items they'd like to buy, and gift certificates. Advertisers on the site include Bonne Bell and Sea World.

Similarly, Curiocity's FreeZone (www.freezone.com) also says it's been following the guidelines since before they were formalized. Trish Lindsay, exec director of Curiocity, says its strict monitoring hasn't prevented it from making money. "If anything, our strict adherence to privacy and monitoring standards has helped us generate revenue," she said, pointing out that its advertisers, which include Kelloggs Co., IBM Corp. and Microsoft Corp. don't want to risk running promotions on an unmonitored or questionable site.

RULES COULD EXTEND OFFLINE

Meanwhile, the FTC needs to write rules to implement the legislation and one front of the Internet battle will most likely be fought on the rulemaking process that could begin later this year. Now the questions include what other regulations will be examined, and would any regulations apply only to the Internet or could they also affect direct marketing and list brokering.

Mr. Bryan and the Center for Media Education say the first priority should be kids older than 13. Mr. Bryan removed language from his bill that would have called for lesser restrictions on sites aimed at teen-agers because questions after debate on the curbs threatened to prevent any Congressional action on privacy whatsoever. At the final Congressional hearing on his legislation, however, Mr. Bryan indicated he hoped to reintroduce the measures aimed at teens next year.

Senate Commerce Committee Chairman John McCain (R., Ariz.), a co-sponsor of Mr. Bryan's bill, said the bill was the start of Internet privacy issues his committee would address next year.

The Center for Media Education's Mr. Chester said that his group "has to pursue safeguards to protect youth and teens. There needs to be a clear policy on what you can collect from the Internet and digital broadcasting," he said.

Others suggest next year's fight will revolve more around adult restrictions. Mr. Rotenberg said that voluntary privacy efforts haven't been effective and after repeated promises by marketers, now is the time for regulators to act.

MUST COMPLY BY YEAREND

FTC Chairman Robert Pitofsky in recent testimony mentioned several times that if marketers don't adequately impose voluntary privacy standards on information obtained from adults, the FTC will need to step in. He has imposed a yearend deadline for achieving satisfactory voluntary efforts by marketers.

David Medine, the FTC's associate director of financial practices, said the agency "is looking for the industry to demonstrate" statistically that it now is complying with voluntary guidelines. If the industry can't demonstrate compliance by yearend, he said the FTC will proceed with legislation.

European Union actions may increase the pressure for the U.S. to act quickly.

An EU privacy directive that goes into effect this month bars the transfer of personal information from EU countries to any country without adequate privacy regulation. Originally, U.S. marketing groups had feared U.S. companies would feel immediate effects from the policy, but the EU has had troubles getting European countries in line (see sidebar below) and has shown no indication of taking action against other countries until its own countries meet requirements.

NEXT YEAR FOR POLICY DEBATE

Technology and advertising groups agree that next year could be the year of the big policy debate on privacy.

"My biggest hope is that there will be some real effort to deal with the policy issues from an American legislative perspective," said Deirdre Mulligan, staff counsel for the Center for Democracy & Technology, a technology civil rights group. She said privacy is a public policy issue with technology being the way to implement it.

John Kamp, senior VP for the American Association of Advertising Agencies, said that "privacy will be in the air next year. [As an issue,] we are most definitely going to be expecting it to come."

Contributing: Patricia Riedman

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