Putting a Price Tag

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Putting a Price Tag on Privacy

By Neil Munro

Staff Writer



Michael Saylor of MicroStrategy Inc. said consumers could gain from advances in medical science as their health-related data is combined and analyzed.
It was the week before Christmas, and all through the mall, no one was still, especially not Kay-Bee Toy Stores. The company's executives were awake at their desks, with visions of databases dancing in their heads.

So amid all the clatter of credit card machines and cash registers, Kay-Bee was offering a $5 rebate to many of its customers to buy their names and addresses.

Like many other companies, Kay-Bee wants the data to sharpen the accuracy and boost the response rate of its advertising campaigns - helping to create what industry officials see as an emerging marketplace for the purchase and trading of consumers' data.

The information technology industry is playing a central role in this emerging market, because it is providing the software, hardware, networks and advice needed to collect, analyze and distribute the consumers' data. And the industry may also spin off new businesses - so-called "data agents" - that will work with consumers to sell their data to the highest bidder.

This fast-growing industry faces challenges, including the consumers' willingness to charge for the use of their information, and persistent lobbying by privacy advocates eager to curb corporate collection of consumers' data.

The stakes are massive. Each U.S. consumer spends an average of $1.86 million on goods and services during his or her lifetime, according to industry estimates, while advertising and direct marketing to consumers is predicted to grow 7.2 percent a year from its current level of $630 billion. This figure includes $415 billion spent in 1996 on telephone pitches and direct mail marketing.

"You're seeing a paradigm shift" as infotech enables companies to cut spending on paper-based mailings, which cost roughly 75 cents per customer, said Keith Wardell, vice president of the Occoquan, Va.-based Buyers Choice division of The Polk Co. Companies must now compete for attention from busy consumers by offering cash, discounts or other interesting information, he said.

Wardell's division asks consumers to fill out lengthy questionnaires about their spending habits in return for shopping discounts and a promise to mail only the advertising flyers most interesting to them. Wardell declined to estimate the average value of the discounts used by his customers.

As the advertising business automates, Wardell predicted that some companies will likely grow to provide a trusted intermediary service that will broker data about a subscribing consumer's spending habits in return for cash, discounts or other special offers. "The consumer has control on the Internet and so [he] will get the compensation" for use of the data, he said.

Companies with trusted names such as AT&T or American Express could have the technical skill, the business alliance and the consumer confidence to become a trusted intermediary, Wardell said. But a smaller company could seize the initiative, and "become the Netscape of integrated marketing," said Wardell, who declined to discuss his company's plans.

Alternatively, "somebody who becomes the 'info-mediary' [could] take a percentage of any transaction that occurs," said Jeffrey Rayport, a professor at the Harvard Business School, and an author of an article in the January-February issue of the Harvard Business Review titled "The Coming Battle for Customer Information."

"We're thinking that's an opportunity .... It could be a nice opportunity," said George Spix, chief architect of Microsoft Corp.'s consumer products division.

But the value of the information - or how much consumers might charge for it - is too uncertain to predict, say industry officials.

Kay-Bee's payment of $5 for each name and address is based on "a leap of faith that [the data] is valuable," said Thomas Jeffrey, Pittsfield, Mass.-based vice president of information services for Kay-Bee, which sold $1.2 billion worth of toys via its 1,200 stores in 1996. However, "I don't know anyone who has quantified it," he said.

Others pay similar prices; Jonathan Falkner, a software engineer at Comtex Information Systems Inc., based in New York, built a data warehouse for one company that spent an average of $2 to interview homeowners about the age and manufacturer of their kitchen appliances, and then sold that information to nearby appliance retailers for $3 per homeowner.

On the World Wide Web, a variety of services, including Cybergold and Firefly, have already sprung up to swap consumers' data in return for electronic coupons or discounts. Also, a group of companies and the World Wide Web
Consortium, based at the Massachusetts Institute of Technology in Cambridge, Mass., are developing data-filtering software that may eventually allow people to automatically charge online advertisers for a few moments of the computer users' attention.

The promise of the Internet has lured even the largest companies, such as New York-based American Express Travel Related Services Company Inc. The company now uses data warehouses to sift through its customers' credit records to identify promising advertising opportunities, which it then prints directly on the customers' bills. American Express charges retailers for the advertising, which often includes enticing discounts. Emily Porter of American Express declined to estimate the value of discounts annually used by its customers.

According to Wardell, consumers can't expect much return from data about themselves that is sold to direct-mail marketers, who need only pay 2 cents to rent a consumer's name from a specialized data-collection company.

However, if consumers are able to trade data about their online activities in an open market, "it won't be a gold mine, but it will be far more than they are getting from mailers," he said.

Others estimate that each consumer's data is virtually worthless to the consumer; "Most of [consumers'] information, on an open market, is not worth a plug nickel," said Bruce Belair, a Washington-based lawyer specializing in privacy and marketing issues.

Moreover, consumers already get much value from companies' collection and analysis of their data, say industry officials. For example, Michael Saylor, chief of Vienna, Va.-based MicroStrategy Inc., said customers already gain interesting advertising information and reduced interest rate credit cards. Consumers also stand to gain from advances in medical science as their health-related data is combined and analyzed as health care companies use low-cost technology developed by companies such as MicroStrategy, he said.

While industry officials compete against one another in this emerging market, they must also battle privacy advocates, who oppose the large-scale collection and sale of people's data.

"The issue is just beginning .... Laws will need to be established to make [data collection and reselling] fair and equitable," said Mark Rotenberg, an attorney with the Washington-based Electronic Privacy Information Center.

One proposal made by privacy advocates would give people a legal right over the use of their name, effectively giving them the right to charge the companies for the right to sell the information.

However, Westin predicted the advocates "won't get a law passed." Constitutional protections on free speech and "the naked political power of the direct marketing and advertising industries" will block any proposal, he said.

Last July, a Virginia court rejected a lawsuit by Ram Avrahami, a computer expert living in Arlington, Va., who sought to bar U.S. News & World Report magazine from using his name.

But Chet Dalzell, a spokesman for the Direct Marketing Association, rejected Avrahami's claim, saying that a consumer's name has value only when sorted into various groups by industry. "A list is extremely valuable ... because of the sweat of the company that built that list," he said.


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