December 12, 2000 12:10 PM PST

DoubleClick struggles to balance revenue, privacy

DoubleClick's downward earnings revision this week could put new pressure on the company to risk inflaming privacy advocates and capitalize on its year-old merger with data collector Abacus Direct.

Analysts believe the merger could eventually give DoubleClick a substantial boost if it can successfully thread the eye of the privacy needle and launch much-needed new products. To date, the Abacus deal has been hobbled by concerns about how the combined companies will use their massive databases of consumer profiles.

"DoubleClick had to put the development of what they would do with Abacus data on hold because of privacy concerns. To this point, they haven't really done much with it," said Steve Weinstein, a research analyst at Pacific Crest Securities.

Beyond privacy concerns, DoubleClick has been forced to contend with a lukewarm market for online advertising. The sector has taken a bruising this year on slow-growth fears.

DoubleClick's stock is trading around $14 a share--up Tuesday after the company revised its earnings estimates, but down more than 80 percent for the year. As a cost-saving measure, the company this month cut more than 100 jobs, about 5 percent of its work force.

To reverse the tide, DoubleClick and rivals such as Engage and 24/7 Media are seeking to develop products that will convince skeptical advertisers that the Web is a viable marketing medium. Key to those products are deep data-mining tools that have fallen under relentless criticism from privacy groups.

"The privacy controversy will not go away by any means," said Richard Smith, chief technology officer for the Privacy Foundation, a nonprofit research center. "As (new products) are introduced, the issues will be introduced again."

Now, almost a year after the Abacus merger, the New York-based online ad network is trying to get some benefits from the deal while avoiding further privacy land mines--a balancing act that has forced DoubleClick to drastically scale back its ambitions for the combined company.

But DoubleClick hasn't given up entirely. The company is moving ahead with a handful of new products based on the merger as it tries to carefully navigate privacy guidelines and steer clear of further privacy bombs.

"DoubleClick is attempting to abide by the initial set of guidelines ratified by the (Federal Trade Commission) earlier this year," said Tom Carpenter, a research analyst at Hilliard Lyons. "Whether those rules are set in stone, we'll see, but there are still some legislative risks. Some privacy groups will still have concerns over what DoubleClick plans to do."

Privacy or profits
DoubleClick's caution in moving forward with marketing schemes that capitalize on the Abacus deal underscore the depth of the privacy problem.

Programs launched under DoubleClick's Abacus Online division to date include PredictiveMail, a combined email and direct mail marketing service, and an "intelligent" targeted advertising service that taps into a database of some 100 million anonymous online profiles.

In addition, DoubleClick executive vice president Jeffrey Epstein told analysts at an industry conference last week that the company plans to launch an anonymous customer profile service in March or April. The service, which DoubleClick says is in development, will gather information about Web surfers and match it to offline data from Abacus, keeping consumers anonymous.

The collaborations are some of the first to emerge from DoubleClick's $1.7 billion merger with Abacus, which has built the largest database of buyer information, via catalogs, in the United States.

The marriage caused an uproar among privacy advocates and regulators earlier this year because of DoubleClick's public plans to merge its anonymous online visitor information with personal data collected by Abacus. The original intention, which the company rescinded last March, would have given DoubleClick an exhaustive database of customer data, gathered on and offline, along with the ability to charge higher rates for targeted ads.

The great fear has been that information about where people travel on the Web, such as medical or sexually oriented Web sites, could be captured and linked to personal dossiers from offline shopping habits.

New products, new problems?
The company's new Abacus Online services, like many of its other products, are developed to make DoubleClick the go-to online ad network for targeted advertising.

"When you are able to understand consumer interests and preferences, you are much more able to deliver the right message to the right user at the right time," said Jonathan Shapiro, global head of Abacus Online. "Our experience, which has improved responses, suggests that we're doing a better job for marketers and the users."

The resulting services rely on Abacus' ability to analyze what customers have bought in the past to predict what they will buy in the future, a technique called statistical modeling. Some also rely on Abacus' database of the names, addresses and purchase histories of 90 million U.S. households.

In the case of PredictiveMail, DoubleClick can tap this information by giving consumers clear notice and choice to opt in or out, stipulations that fall within industry guidelines.

For its future anonymous online profile product, which has yet to be named, DoubleClick plans to use Abacus profiles, along with those captured online, by filtering them through a third-party "service bureau," which will keep customer names and addresses anonymous, according to a representative from DoubleClick.

But even in PredictiveMail's restricted collaboration, privacy advocates are wary of such data collection.

"You still end up with profiles of people based on online and offline data, which is probably more than most consumers expect," said Andrew Shen, a policy analyst at the Electronic Privacy Information Center (EPIC).

"The real problem here is that most consumers have no idea of what information is being held about them, because there is no legal requirement to access," he added. "If anything, the system has become more complex and companies are becoming more clever at getting around the weak protections that exist."

Skeptical advertisers
Another foil to DoubleClick's profiling plans could be the advertisers themselves. Advertisers, often deluged by too much information, aren't rushing to spend their money on ad profiling technologies.

Engage, which sells ads via a targeting system similar to DoubleClick's, has seen a decline in demand for these types of ad buys. The number of customers using Engage profiling went from 42 in the third quarter to 20 in the fourth quarter, according to a September earnings announcement.

"We're not seeing advertisers accept the technology right now and pay a premium for it," said Pacific Crest's Weinstein. "Over time, as advertisers become more sophisticated, and DoubleClick becomes better at profiling and targeting ads, that's when we'll see returns on the investment. We're not seeing the benefits of it today."

But privacy advocates believe this is merely a defense of technology that doesn't work and may never work.

"Profiling for banner ads is never going to deliver the goods. People are too complicated; you can't really pigeonhole them the way the ad networks want," said the Privacy Foundation's Smith.

 

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