Online Advertising

On November 6, Facebook outlined a strategy to integrate more targeted advertising into its popular social networking website. Facebook CEO Mark Zuckerberg saw the new initiative as an opportunity for users to refer products to each other and allow friends to share information as they shopped online and visited other websites. The system, called Beacon, was also intended to lead to more relevant -- and profitable -- advertising through precise targeting based on a user's buying habits, social circle and geography.

But on December 5, after receiving numerous complaints from the high school kids, college students and young professionals who populate Facebook, Zuckerberg issued an apology for a program that, among other things, could track a user's web behavior and report it on a Facebook user's profile page. The problem: Facebook didn't initially ask its customers to opt in to the targeting program. As a result, some customers were caught off guard by Facebook's sudden use of detailed user tracking. In conjunction with the apology, Facebook introduced new privacy options to give users more control over how Beacon operates.

The incident raises many questions, according to experts at Wharton. For example, what is the balance between privacy and online ad targeting? Will marketers continue to experiment? Are these early efforts just a precursor of what's to come? Will consumers become more wary of sharing information? Does privacy really exist online?

Those questions don't have quick answers given that online advertising is entering an experimental age where marketers, Internet giants and consumers are fumbling to find the proper balance between more advanced ad targeting and privacy. Indeed, experts at Wharton say that companies aren't quite sure where the line between the two is until they trip over it.

"We are in a situation with the Internet where we are having an escalation of marketing activity to hyper-target consumers," says Joseph Turow, director of the Information and Society Program at the Annenberg Public Policy Center (APPC) at the University of Pennsylvania. "The Facebook incident is symptomatic of the direction we are headed. We will see more attempts to mine people's habits and relationships. We are in the post privacy era. It's not just that companies are using data: They are using statistics to figure out the probability of a person" making a purchase, for example, or visiting another site.

Facebook's broad ad strategy, which also lets partners such as Coca-Cola, Fandango and Overstock.com create pages and befriend users, is designed to allow marketers to target groups based on location, college and peer group. That strategy, however, was largely overshadowed by Beacon's tracking technology, which includes the ability to report back to Facebook when a user makes a purchase or similar transaction on a Facebook partner website. For example, if a person buys movie tickets, jewelry or a DVD on a partner site, Beacon can broadcast that fact to anyone who has access to the user's Facebook profile. As originally configured, Beacon was enabled by default, unless the user declined the action on each transaction or went through a series of steps to opt out of participation for each vendor.

Privacy worries arose almost immediately, and partners like Overstock.com stopped using Beacon after complaints started pouring in. One Overstock.com customer wrote on a blog post that he bought an engagement ring to surprise his girlfriend on New Year's Day, only to have the secret broadcast on Facebook. Forrester Research analyst Charlene Li said in her blog that she was "blindsided" when she bought a coffee table from Overstock.com and saw it on her Facebook profile page. Her biggest complaint was that she didn't know Facebook was tracking her. Like every other Facebook user, Li was included in the Beacon program when it initially launched. Only after numerous complaints -- and advertiser angst -- did Facebook create a blanket opt-in policy for Beacon that requires the customer to give prior permission before being included in the program.

"We released a new feature, called Beacon, to try to help people share information with their friends about things they do on the web. We have made a lot of mistakes building this feature, but we have made even more with how we have handled them. We simply did a bad job with this release, and I apologize for it," wrote Zuckerberg in a blog post on December 5. "The problem with our initial approach of making it an opt-out system instead of opt-in was that if someone forgot to decline to share something, Beacon still went ahead and shared it with their friends."

At issue is the evolution of online advertising. Companies ranging from Coca-Cola and Land's End to Internet giants like Google and Amazon.com track customer behavior in an effort to better tailor products, advertising and services. For the customer, the payoff is more relevant advertising. For the web publisher, the return is better advertising revenue, given that a few extra pennies from advertisers spread over billions of page views can add up to a large payment. "Certainly, targeted marketing helps firms," says Shawndra Hill, a professor of operations and information management at Wharton. "The more information you have on your consumers, the better. When marketing to millions, if not hundreds of millions, of customers, just a slight improvement in targeting translates into a lot of money."

In her research, Hill has found that network-based marketing -- the type that Facebook is pursuing -- can be more effective because it finds customers who would otherwise be overlooked. The message: Social networks can be lucrative to advertisers. However, Hill suggests there is "a balance between targeted marketing and invading consumer privacy."

The big issue is finding that balance, preferably at a point that satisfies both consumers and marketers, says Andrea Matwyshyn, professor of legal studies and business ethics. "There is a contradiction here. Users on one hand are willing to experiment with privacy-invasive technologies at websites like Facebook, but there's a tipping point in data sharing when users say 'this is enough.'" From an advertiser standpoint, "it becomes a delicate balance between targeting and providing services, and crossing a thin line in the sand" over privacy, says Matwyshyn, who adds that online advertising could be derailed if it is viewed as an intrusion.

One thing is certain: Internet giants and their advertising partners are working diligently to better target users even if this occasionally