[From The Economist magazine] New privacy services will soon allow consumers to buy goods anonymously onlineÑforcing web-based retailers to change the way they do business OVER the past couple of months, a Dallas-based company called Digital Convergence has given away more than 1m bar-code scanners to computer users across America. If the company sticks to its business plan, it will have handed out some 40m by this time next year. The scanners cost around $10 apiece. So why the sudden generosity? Because the company expects to get its money back, and more, by selling information about the usersÕ purchasing habits. Scanning the bar codes on a packet of cornflakes, say, sends the userÕs Internet browser to the manufacturerÕs website. Each scanner, known as a CueCat, comes with its own unique identifier code and software to operate it. On installing the software, the user is required to register personal details such as name, e-mail address, age, sex and post code. Such details can then be correlated with the information that the CueCat gleans about the products a user scans. The company hopes that such marketing information will eventually be worth more than the $400m it plans to spend seeding the market with CueCats. But the company had not reckoned with the ingenuity of users of Linux software. Noted for their programming skills and their contempt for MicrosoftÕs Windows, a group of Linux hackers decided to let CueCat work on computers that use the free Linux operating system instead of the ubiquitous Windows. Being a mischievous bunch, they wrote their software so that it would bypass Digital ConvergenceÕs own computers. And for a laugh, they made a Windows version available as well. Just days after the CueCats were released, free scanning software started appearing on the Internet and was downloaded eagerly by countless users. Digital Convergence was not amused. For the company, every hacked CueCat was another $10 down the drain. Data mavens A number of e-commerce ventures have been based on the proposition that retailers, manufacturers and advertisers are ready to pay large sums to get their hands on marketing data collected by online services that bribe users with some free offer to divulge their personal details. But, as the hacked CueCats show, companies that do this are likely, sooner or later, to be bitten by their own customers. Indeed, life is getting harder for online firms that try to survive by exploiting the marketing data they collect. Consumers have become far more concerned about invasions of their privacy, and they are now being given the technology to protect themselves. Recently, two controversial incidents have caused politicians and consumer groups to turn their attention to online privacy. After vociferous complaints, DoubleClick, an online advertising agency based in New York, aborted its plan to merge its records of peopleÕs visits to websites with its database of usersÕ names and addresses. And public opprobrium was heaped on Toysmart, a failed Internet start-up, for violating one of its own privacy pledges when it tried to sell its customer database to another retailer. Soon, consumers will no longer have to rely solely on the integrity of online merchants to limit what advertisers glean about their web-surfing practices. A new breed of privacy-service provider, or ÒinfomediaryÓ, is learning to make money from protecting peopleÕs privacy by short-circuiting the way that online retailers secretly accumulate information about visitors to their websites. One infomediary that works with consumers, Lumeria, based in Berkeley, California, aims to let its users evade marketers selectivelyÑand to earn money in the process. The companyÕs free software encrypts a userÕs profile and stores it on its own computers. Whenever the user wants to access the Internet, he can use LumeriaÕs computer as a proxy-server, to stop his personal details from being transmitted direct to any advertisers. The proxy-server intercedes between the user and every web page, allowing only those adverts that match the userÕs interest profile to appear on his browser. Anonymous, aggregated information is then sold to marketers, with a royalty paid to the user. The only survivors For the more paranoid, iPrivacy of New York has come up with software that can shield a userÕs activities so completely that not even the company itself has access to the information. In iPrivacyÕs scheme, a user begins by downloading software from a company he knows and trustsÑfor instance, his credit-card company or bank. The software allows the user to browse in complete privacy. When he wishes to buy something, the program generates a new identity for himÑcomplete with a fictitious name and e-mail address, a coded postal address, and a one-off credit-card number. This fresh identity is passed, via the online merchant, back to the credit-card company, which matches the details with the userÕs real identity and approves the transaction. Meanwhile, the post office is sent a decoded address label, but still a coded name, and ships the goods. The only entity that knows what is actually going on is the userÕs original credit-card company, which had all the personal information already. Two added bonuses are that, because the fictitious identity is used only once, it is impossible for online marketers to develop a profile of the userÑor for criminals to profit from its theft. Ruvan Cohen, iPrivacyÕs chief executive, has already made a contract with the United States Postal Service for decoding addresses. The company is also working with financial-services firms that want to license the software for their clients. The main reason such a firm might be interested is the Gramm-Leach-Bliley Act, passed in November 1999, which requires financial institutions to disclose details of who sees the private information they collect from customers. The first disclosure statements must be sent out by July 2001. Not surprisingly, many financial institutions, anxious about their customersÕ reactions, are looking for ways to shore up their reputations for confidentiality. American Express has already launched a free one-off system of credit-card payment and intends to provide its customers with a private web-browsing service by the end of 2000. Other credit-card suppliers plan to test iPrivacyÕs software early next year so as to be ready for the July deadline. If enough users take advantage of these online filters, the benefits for e-commerce could outweigh the costs. Forrester Research, a technology consultancy based in Cambridge, Massachusetts, reckons that privacy concerns stopped consumers from completing more than $12 billion of online purchases last year. One worry, however, is that a privacy backlash by consumers could make it harder than ever for online retailers to turn a profit. Amazon.com, the worldÕs largest online retailer, relies heavily on its marketing database to ÒpersonaliseÓ its interactions with its 20m customers. Loyal customers swear by AmazonÕs uncanny ability to recommend genuinely useful purchases. But if enough users camouflage themselves, Amazon will no longer be able to send special offers of, say, toys to customers who have just bought some childrenÕs books. And this kind of cross-marketing is a mainstay of AmazonÕs business model. Many online firms have played a zero-sum game that predicated their own profitability on their customersÕ loss of privacy. The balance may soon tip the other way. The danger is that it could tip too far in the consumerÕs favour. Ironically, online consumers could then find themselves being treated rather like offline customersÑwith free offers and the rest becoming a thing of the past. Copyright © 1995-2001 The Economist Newspaper Group Ltd. All rights reserved.