The ISP-based behavioral targeting industry is about as shaky as the Dow Jones Industrial Average these days. While UK-based Phorm has been making some headway, it’s still fighting a significant battle of public opinion, while US companies like NebuAd and Adzilla are waving the white flag of surrender.

If you’re just joining us, these are companies that partner with ISPs to track user behavior across the entire Internet in order to offer more targeted advertising.

The last time I wrote about these guys, it was to point out how much better Phorm was doing than NebuAd. Subsequent events seemed to support that observation; on October 1st, Wendy Davis reported that Phorm was going to expand into other countries including the US. Despite the company’s ambitious plans, Wendy was clear about the potential negatives of their ISP-based system:

ISP-based behavioral targeting has been criticized by privacy advocates, who are wary of the practice because ISPs have access to users? entire clickstream data. But Web publishers also have reason to be wary of ISP-based targeting. If Phorm?s platform works as intended, the company will be able to harvest data from publishers without paying them for the information.

For instance, if a user searches for iPods on Google, Phorm can arrange to send that user an ad for a portable music player later, when the user is on some other site. While that site that served the ad would be a Phorm partner, and would presumably be able to charge a higher CPM for the targeted ad, it?s hard to see what Google would get out of the transaction.

In fact, it wouldn?t be surprising if Google ? or other publishers that serve as involuntary sources of data ? finds some way to challenge this type of targeting.

There are a couple of other things to add to the privacy advocates and the no-you-can’t-use-my-data publishers. One is the public attitude. Evangelists are always out there fighting tooth and nail for data portability and other things of disinterest to the general population, but will the public care about these systems? Will they vote with their behavior and their wallets?

For example, Wendy’s article drew a comment from Paula Lynn:

It is a horrible, stalked feeling when this happens. Big brother is closer than you think. And no, people do not usually think for themselves when someone else will do it for them. There are a zillion examples of mind bending influence peddlers who are posing to sell you more than shampoo. Caveat emptor.

The question is, does Paula represent the privacy extreme or mainstream? Because the mainstream are the people who will determine if this technology has any legs.

The other big issue is government regulation, one of the key factors in the downfalls of NebuAd and AdZilla. In fact, it wasn’t even regulation; it was the threat of regulation that made them suffer so. And just yesterday, Wendy published an update that shows Phorm is starting to face similar pressure across the pond:

In the latest development, the European Commission’s Information, Society and Media division, headed by Viviane Reding, last week sent a second letter questioning U.K. authorities about Phorm. “The European Commission takes data privacy of citizens very seriously and therefore is asking the UK authorities to ensure that they fully comply with their obligations under EU law,” according to Martin Selmayr, spokesperson for Reding’s office, in an e-mail to Online Media Daily. The Commission asked the U.K. officials to explain how they “have protected the privacy of U.K. citizens with regard to Phorm in the past, and how they intend to do so in the future,” Selmayr stated. The regulators requested an answer within one month.

So, to summarize:

• Privacy.
• Proprietary data.
• Creepiness factor.
• Government regulation.

Looks like the currently-accepted-as-standard behavioral targeting model doesn’t stand a chance.

So what is at the core of the problem, and what is the solution? Tune in to my next post for my opinion. In the meantime, feel free to share yours in the comments.

Well, Phorm got the go-ahead from regulators, for one…

Wendy Davis from Online Media Daily is reporting that the U.K.’s Department for Business, Enterprise and Regulatory Reform gave the stamp of legality to Phorm this week. Phorm, which hasn’t officially launched yet, has arrangements with three British ISPs.

The move is a big thumbs-up, given the troubles faced by others in the ISP-based behavioral targeting market. NebuAd, in particular, has gotten serious pushback from all sides, including Congress, end users, and — once they realized they were on a sinking ship — the ISPs themselves.

To be clear, NebuAd’s technology was NOT determined to be illegal. In fact, no determination has been made one way or another. Nonetheless, the U.S. company faced so much pressure that they had to withdraw their ISP-based offering.

Which means that Phorm may still face a parallel uphill battle. It doesn’t much matter that the government says you’re good to go, if your customers and their customers don’t want your product.

Interestingly, Wendy says the critical criterion for Phorm’s legal acceptability was opt-in consent. Effectively, this is saying it’s not a question of how personal the data is or how intimately you’re followed, it’s whether you’re made aware that it’s being collected and consciously choose to agree.

Personally, I think the type of data they store is also relevant. From the Phorm’s privacy statement

…the technology doesn’t gather personally identifiable information, doesn’t store IP addresses, search terms or browsing histories, and only sees users as a unique, random number.

This is actually similar to the way VortexDNA works — a number compared with a number, that can never be disaggregated to reveal an individual’s activities. Where we differ is in the algorithm that generates the number and in the mathematical principles behind that algorithm. Nonetheless, it is gratifying to see that the privacy embedded into their conceptual model is endorsed by a variety of authorities.

Once again, the tipping point comes down to choice, and it remains to be seen how many people will choose to opt in to the program.

Are any of you familiar with Phorm? What do you think of their technology?