Microsoft Mix07 | Privacy, ad sales collide online

LAS VEGAS — We don't pay for most of the Internet applications and content we use today. Searching with Google is free to the user. Likewise with Hotmail, MySpace and countless news, entertainment or social media Web sites.

These services are funded by advertising sales, but in reality the cost is not borne by the advertiser alone.

In exchange for the benefits of the Web, consumers — whether they know it or not — generate some piece of data with virtually every action they take online.

Marketers use that data to present more relevant advertising that takes into account age, income, location, previous purchases and other information.

But debate continues among privacy advocates over whether consumers need to be better-informed about data collection, who should have access to that data and how personal this targeted advertising should get.

"I think consumers do broadly understand the trade-offs that they make," said Andrew Rashbass, publisher and managing director of The Economist magazine, during a sparsely attended panel discussion at Microsoft's Mix07 conference here Tuesday.

The conference focused on technologies and business strategies for more-sophisticated Internet applications.

Another panelist disagreed, saying consumers and even some technology experts discovered the scope of what data companies keep on user behavior only after AOL's search data leaked last summer.

In that incident, an AOL researcher released three months' worth of search data that could be used to trace data to specific individuals.

"Many very savvy Web technologists were shocked to see the history of data that was associated with a single person," said Marc Hedlund, whose financial-services Web startup, Wesabe.com, has a data "bill of rights."

The debate comes as Microsoft is pushing new, focused, interactive advertising efforts across its properties from Xbox to the Windows Vista desktop to a suite of Live services.

The company and its competitors are deploying new technologies to put brands and products in front of target audiences wherever they are.

"How we reach people in this digital age is changing," Microsoft Entertainment and Devices Division President Robbie Bach said.

The panelists agreed that few people actually read company privacy policies that describe how personal data will be used and shared. But some consumers are taking steps to shield themselves from advertising and control the information collected about them.

If that trend accelerates, it could be problematic for the ad-supported business model.

"I think that ad blockers fundamentally destroy the economic model on which the Web is based," said Trevor Hughes, executive director of the Network Advertising Initiative, an industry group working to promote consumer confidence in online advertising.

" ... Certainly the free content and services on the Web today — there is no free lunch. It's getting paid for somewhere," Hughes said. "And most often it's getting paid for in the online-advertising world."

As Bach demonstrated, there are new ad opportunities that will be harder for consumers to avoid: in-game advertising; video games that are essentially commercials, such as the Xbox 360 games produced for Burger King; and branded software gadgets that put information about products and services right on the desktop.

Microsoft is aware there is a balance to be struck between optimizing advertising and protecting privacy.

In a speech Monday, Microsoft Chief Software Architect Ray Ozzie described extreme viewpoints of Internet services as "centralized storage and monitoring, and auditing, and creepy behavioral analytics vs. local storage, privacy, empowerment, anonymity and freedom."

Marketers are still establishing what product categories are right for targeted ads and what might be outside consumers' comfort zones.

"That line is very difficult to draw," Hughes said. "I think we could all say, 'OK, shopping for a car, that's probably one of the most marketed categories in the world, and that's a safe target.' But then when you get into health and finances, sexual orientation, personal life ... things get a little shakier."

Benjamin J. Romano: bromano@seattletimes.com