By Anick Jesdanun and Peter Svensson

NEW YORK (AP) --

It sounded like a winning proposition — free money — for Internet access providers. By tracking their subscribers’ personal Web surfing habits, they could help deliver ads targeted to the consumers’ interests, and claim a share of the burgeoning online advertising market dominated by Internet search companies. But those efforts to sniff out consumers’ interests are running into the ditch.

A slow-building privacy storm moved in on NebuAd Inc., the Silicon Valley startup that can facilitate the Web tracking. And its potential partners, the Internet service providers, failed to make the case that they should be in the ad business at all, rather than simply being the pipes that pass Internet traffic back and forth.

One by one, cable and telephone companies that had conducted trials using NebuAd’s ad-serving system have indefinitely suspended expansion plans. In interviews, executives at the Internet access providers blamed an unfavorable climate as Congress considers tightening federal oversight.

“A bunch of them have dropped (NebuAd) like hot potatoes,” said Gigi Sohn, president of the advocacy group Public Knowledge.

Annmarie Sartor, a spokeswoman for broadband provider CenturyTel Inc., said the company was ready to proceed until “Congress started questioning privacy.”

“We were going to launch this summer,” she said. “The trial from our viewpoint was successful.”

Bresnan Communications LLC, The Washington Post Co.’s Cable One Inc. and Knology Inc. also have ended trials without immediate plans to move forward, joining the previously disclosed suspensions by Embarq Corp. and WideOpenWest. Charter Communications Inc. dropped plans for a summer pilot because of the scrutiny.

Although NebuAd claimed late last year that Internet providers representing millions of customers run NebuAd’s system, it’s unclear how many, if any, partners remain.

NebuAd, whose chief executive, Bob Dykes, freely spoke with The Associated Press about its plans several months ago, declined comment for this story. Spokeswoman Janet McGraw said via e-mail, “We do not have any specific business updates at this point.”

Across the Atlantic, a similar company called Phorm Inc. has also faced complaints since its February announcement of partnerships with three access providers reaching 70 percent of Britain’s broadband market — BT Group PLC, Virgin Media Inc. and Carphone Warehouse Group PLC’s TalkTalk.

Shares in Phorm have declined about 75 percent since peaking 11 days after the announcement. A company representative said Phorm CEO Kent Ertugrul, who earlier praised his own company’s commitment to privacy, was traveling and unavailable for an interview.

Both systems work with Internet service providers to scan customers’ Web traffic for patterns. Then NebuAd or Phorm determines which advertisements are likely to interest those customers.
    If you’ve visited several sites on golf, for instance, NebuAd could label you a golfer. Then Web sites that participate in ad networks created by NebuAd can be triggered to show you an ad for golf clubs or golf resorts, while someone else who frequents sites on Jaguars might see an ad from an auto dealer instead.
    The thinking is that Internet users are more likely to pay attention and find advertising less annoying if the pitches are relevant to them. That’s why Web sites or the networks that deliver online ads can charge advertisers more for running targeted ads, even when they use cruder methods for trying to discern people’s interests.

For Internet service providers, the rise of NebuAd or Phorm means they could share in ad revenue now going mostly to the networks of Web sites affiliated with Google Inc., Yahoo Inc., Microsoft Corp. and Time Warner Inc.’s AOL.

“Naturally if there is a way to take a meager slice of that revenue in some way, it’s something which companies will want to look at,” said Adam Liversage, a spokesman for BT Group, which plans to start trials “pretty soon” with Phorm.

Both NebuAd and Phorm say their systems do not register visits to sites related to “sensitive” subjects like health or sex, nor do they read e-mails or track consumers by name.

Yet questions have emerged about how well their partner Internet service providers are informing subscribers and getting their consent, and whether the ISPs need permission from Web sites as well.

Although Web sites routinely target advertising, privacy advocates hold ISP traffic as sacrosanct. Imagine the post office opening your mail to gauge your preferences and then deciding which catalogs and fliers to leave in your box.

Complaints about NebuAd largely failed to gain traction until Charter, the nation’s fourth-largest cable access provider, began notifying customers of its planned trial. A House subcommittee took notice and held a hearing in mid-July, following a similar one in the Senate.

Dave Burstein, editor of the industry Web site DSL Prime, said the backlash came as a surprise given years of deregulation being embraced in Washington.

“Inside the industry, nobody took the politics seriously,” Burstein said. “They all looked at the financial opportunity and didn’t think about the repercussions. They didn’t realize what problems they would get when they got exposed.”

NebuAd said late last year that some of the largest service providers were at least testing the service, though it identified only CenturyTel. Then this June, CenturyTel stopped its tests on about 20,000 customers, mostly in Kalispell, Mont., and surrounding areas.

In recent letters sent to Congress, the nation’s largest service providers all said they have not participated. United Online Inc. said it considered doing so, but ultimately decided against it. Smaller phone and cable companies that have conducted trials with hundreds of thousands of customers said they have ended them.

“There will be a long time to go before anyone is making any decisions with any finality,” said Shawn Beqaj, a spokesman for Bresnan, which tested NebuAd in Billings, Mont. That stance is wise, Beqaj said, “whenever the congressional committee with the regulatory authority over your industry expresses concerns with your technology.”

Knology said in its letter to Congress that it stopped its trials in Georgia, Florida, Tennessee and Alabama on July 14 — three days before the House hearing — “to study the issues raised about the NebuAd system by your Committee, privacy advocates, and others.”

Cable One spokeswoman Melany Stroupe said her company was waiting for “clear rules and boundaries.” She added that based on a six-month test in Anniston, Ala., it wasn’t clear that customers noticed any improvements in the relevancy of ads.

In Britain, though, the three large service providers appear ready to proceed, with BT paving the way.

Liversage said BT will seek explicit consent, known as “opt in,” before any trial, whereas the U.S. providers using NebuAd had at most offered a way to decline, or opt out. Critics say an opt-out approach is inadequate because it assumes consent even if the notification is in the fine print of a billing insert that most customers throw away.

Yet Liversage acknowledged that secret trials BT conducted in 2006 and 2007, disclosed after a memo was leaked on the Internet, haven’t helped its efforts to promote BT’s commitment to transparency regarding Phorm.

Even if NebuAd and perhaps Phorm are forced to fold, privacy advocates believe other companies will surely follow, adapting their approach slightly until one succeeds. Other startups such as Front Porch Inc. have similar technology.

Front Porch’s chief executive, Zachary Britton, said his company insists that ISPs get opt-in permission from subscribers, perhaps in exchange for more bandwidth or discounts. Although opt-in is the approach favored by privacy advocates, Britton suspended U.S. trials this summer anyhow.

“We have to work out in society what we believe is a good exchange,” he said. “When that happens, we want to be ready to move forward.”

Yet Front Porch’s promotional material continues to circulate. Its promise: “New FREE Revenue for Broadband ISPs!”

CEO Of Embattled Web-tracking Firm NebuAd Leaves
The chief executive of NebuAd Inc., whose Web tracking technology raised a privacy backlash, has left the company to be chief financial officer at Verifone Holdings Inc., a maker of payment processing equipment.
   Verifone said late Tuesday that Robert Dykes will become senior vice president, effective immediately. He will become CFO after the company files its financial report for the latest quarter.
   NebuAd has marketed a technology that allowed Internet service providers to track their subscribers’ Web surfing habits and deliver ads presumed to meet their interests. Several U.S. ISPs tried out the technology, but most have withdrawn as privacy advocates and members of Congress raised concerns.
    In a statement, NebuAd said its new CEO would be Kira Makagon, who had been the company’s president. Dykes will remain chairman. NebuAd also said it would broaden its market to encompass “more conventional media channels.” A spokeswoman was unavailable to elaborate on Wednesday morning.
   At San Jose, Calif.-based Verifone, Dykes faces another challenge. The previous CFO, Barry Zwarenstein, stepped down after the company uncovered a series of financial misstatements that exaggerated its profits during the first three quarters of fiscal 2007. The mess is under investigation by the Securities and Exchange Commission.

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