Microsoft Corp. is sticking with a decision to make it harder to track users' online behavior, earning plaudits from privacy groups while drawing fire from the advertisers its money-losing Web unit needs most.
After months of criticism that the new tools cut off valuable customer-targeting information, the software maker has no plans to change the automatic setting in its newest Internet Explorer browser that tells websites not to track user behavior, General Counsel Brad Smith said in an interview.
"We crossed the Rubicon and are completely comfortable being on other side of the river," he said. "We have no intention of going back and have no intention of engaging in discussion on that possibility." Smith will provide an update on the company's position today in a blog posting.
The so-called Do Not Track feature has been at the center of privacy debates over browsing data and how websites and marketers use it to make money. For Microsoft and the advertisers, at stake is a $31.7 billion U.S. Internet ad market that grew 22 percent in 2011, according to the Interactive Advertising Bureau, much of it generated by ads tailored to user behavior.
Now Microsoft, whose banner advertising business was already losing market share to Facebook Inc. and Google Inc., is being criticized by trade groups and facing opposition from advertisers and even partners like Yahoo! Inc., who say they will ignore privacy signals transmitted by Internet Explorer 10.
"Advertisers have invested a lot in their ad platforms and the Achilles heel is the consumers aren't aware that their data is being bought and sold," said Anthony Mullen, an analyst at Forrester Research Inc. "That being exposed, which is what this Microsoft initiative does, is healthy, but I can see why the ad industry is nervous." Microsoft wants to engage in talks with advertisers and standards bodies to assuage some concerns, Smith said.
In May, Microsoft surprised privacy advocates and some of its own managers by saying its Internet Explorer 10 browser, the version included in the new Windows 8, would automatically turn on a signal that tells advertisers not to follow user behavior.
Other browsers, by contrast, have the Do Not Track signal turned off and give users the option to turn it on. In Explorer, users can choose to change the setting to "off" to enable tracking.
Association of National Advertisers President and CEO Bob Liodice said his group opposes the decision to turn on the signal by default, even after Microsoft made some changes that make the setting clearer to users. The group, whose board includes members from Coca-Cola Co., Wal-Mart Stores Inc., Unilever NV and Intel Corp., has written Microsoft to register its opposition.
In an interview, Liodice said Microsoft has expressed a willingness to talk to advertisers, and "they seem amenable to compromise." Microsoft's Smith said the company is willing to discuss tweaks to how it describes the setting to users, and how easy it is for users to alter. He also wants the group working on Do Not Track to set up an easy way for trusted advertisers to gain user consent to be followed.
For Redmond, Wash.-based Microsoft, the world's largest software maker, the kerfuffle is the latest challenge to its ad business. The company wrote down $6.2 billion from the unit in the quarter that ended June 30, and Microsoft's U.S. display business is forecast to grow 13 percent this year, while the total U.S. market for display ads expands by more than 20 percent, according to data from EMarketer Inc.
For now, a lot of the debate over Do Not Track is just saber-rattling. Internet Explorer 10 was released on Oct. 26 with the newest Windows software, so it's not in use on many systems yet. Advertisers are unlikely to pull listings from Microsoft's websites in retaliation if the ads make money, said Clark Fredricksen, a vice president at EMarketer.
Still, advertising industry groups are concerned that Microsoft may crimp future ad-spending growth by creating a larger group of Web users who object to being tracked.
Almost all sites collect browsing data and track Web surfers' habits to decide which ads to show consumers, and use the demographic information to persuade advertisers to buy space. Without this information, ads would be far less effective, making it harder to generate the ad revenue that Liodice said pays for much of the content on the Internet.
In response to a 2007 complaint by privacy groups such as the Electronic Frontier Foundation and the Consumer Federation of America about the tracking and selling of private user data, the U.S. Federal Trade Commission began examining the idea of a Do Not Track list. Do Not Track now works by having a browser send a signal to websites, stating that the user doesn't want his or her behavior to be monitored. As the feature was envisioned, advertisers would voluntarily comply.
All the major browser makers -- Microsoft, Google Inc. and Mozilla Corp. -- have incorporated Do Not Track signals into their products. Google and Mozilla have the setting turned off as a default, requiring users to actively turn it on to block tracking.
For now it's not even clear how advertisers wanting to comply with Do Not Track should behave. A World Wide Web Consortium working group tasked with devising a standard for Do Not Track has labored for about 18 months without coming to an agreement.
Microsoft's move was surprising to people both inside and outside the company. The Internet Explorer team made the decision over the objections of some of Microsoft's advertising officials, said people familiar with the matter, who asked not to be named because the decision was confidential.
Before the announcement, even Microsoft officials on the Do No Track working group had raised questions about whether it made sense to turn the signal on by default, said Jonathan Mayer, a member of the group and a Stanford University graduate student who is one of the researchers who came up with the initial idea for the standard.
The Internet Explorer group itself, though, decided that starting with the setting activated was the best way to protect consumers.
"Seventy-five percent of the consumers we surveyed in the U.S. and Europe said they wanted DNT on by default," Microsoft's Smith wrote in an October blog post.
Microsoft may also be aiming to use privacy as a stick to beat rival Google with, Mayer said. Google's Chrome browser has gained share, rising to 15 percent of the market last month from 10 percent at the end of 2010, according to Net Applications.
Internet Explorer fell to 48 percent from 57 percent. Google is also poised to seize the No. 1 spot in the display-ad market this year from Facebook, EMarketer forecasts.
Still, it's not clear whether the more consumer-oriented approach will win Microsoft any Chrome users, and it has already alienated one group -- big advertisers.
In its October letter to Microsoft, Liodice's Association of National Advertisers said the default Do Not Track setting will hurt advertising, reduce the amount of Internet content supported by those ads and ultimately "undermine American innovation and leadership in the Internet economy." Both that association and the Digital Advertising Alliance are recommending advertisers ignore Do Not Track signals coming from Internet Explorer 10. Yahoo, the biggest U.S. Web portal and Microsoft's partner in search, has said it will ignore the setting.
"The Internet is funded by advertisers," Liodice said. "The ability to reach our consumers requires that we absorb information from them." And even if Microsoft and the advertisers can make peace, Do Not Track still faces major challenges. Every Wednesday at 9 a.m. San Francisco time, Mayer spends 90 minutes on a conference call with other members of the workgroup and any advertisers or industry members that want to join. There's been no progress toward agreeing on a standard to guide advertisers on how to abide by Do Not Track, he said.
"Everything that could be said has been said," he said. "There are fundamental differences of opinion."