When Google rolled out Buzz in mid-February, people were angered by the type of privacy breaches which have plagued another social medium. The three main issues for Buzz were:

• auto generation of follower lists from individuals’ private email and chat behavior
• auto completion of some email addresses in a feature similar to Twitter’s @reply
• auto connection to Google Reader and Picasa Web Albums.

Google responded to privacy concerns within days. However, for some who had very real privacy concerns, this simply wasn’t good enough.

I use my private Gmail account to email my boyfriend and my mother.

There’s a BIG drop-off between them and my other “most frequent” contacts.

You know who my third most frequent contact is?

My abusive ex-husband.

Which is why it’s SO EXCITING, Google, that you AUTOMATICALLY allowed all my most frequent contacts access to my Reader, including all the comments I’ve made on Reader items, usually shared with my boyfriend, who I had NO REASON to hide my current location or workplace from, and never did.

There’s still a lot to learn about how we integrate privacy into new products, but we know the golden rule - personal information should never be published without personal consent.

I had the privilege this week of attending a lecture by Professor Hal Varian, Chief Economist for Google. Varian discussed the advent of computer-mediated transactions and how they transform our business practices.

There were a couple of interesting points he raised: historical (in a pre-literate and pre-numerate era, how could people shipping barrels of olive oil have any confidence that the amount of oil that left was the same amount that arrived?), logistical (computer-mediated transactions enable more and more complex contractual arrangements), and conceptual (behavioral targeting, etc.).

This last, conceptual, is a big thing for Google these days, since they’ve been in the behavioral targeting business for all of two weeks. It’s also where Varian started to get into Web Genome Project territory. I found one thing he said particularly interesting:

In general, people have no problems with the intended use of data (more relevant content, etc.). What people are worried about is the unintended use of data (AOL’s massive data spill, etc.). The problem, therefore, is not so much a privacy problem, but rather a security problem.

That’s a pretty interesting comment, and it certainly rings true to me. “I don’t want Google knowing all this stuff about me,” people say. “Who knows what they’re going to do with it? What if somebody unscrupulous gets their hands on it?”

The core proposition of the Web Genome Project is personalisation with privacy. In light of Varian’s comments, however, it’s worth revisiting that proposition, because in fact it’s much stronger than that. The WGP model means that no clickstream or historical data is ever collected in the first place. If a thief were to break in, the vault would be empty; there’s just nothing there. So the model actually eliminates the entire question of privacy. It doesn’t much matter whether I can keep your data private if I don’t have any data on you to begin with.

Gratifying stuff from someone who’s earned his stripes. What are your thoughts about privacy vs. security?

Don’t label me. Don’t fence me in. Don’t pre-judge, pre-classify, or presume you know me — ’cause you don’t.

Feelings like these are common and appreciable. We humans are incredibly complex, and proud of it. We are fiercely proud of our independence, not in the political sense, but in the mental sense. We want to believe that we consider each of our actions in its totality before proceeding, and that, therefore, you just never know what we’re going to do next.

Those desires notwithstanding, the reality is obviously fairly different. A couple of months ago, I wrote a post called Are you as unique as you think?, postulating that you aren’t. To quote myself :

…if we were truly unique and truly unpredictable; if our actions were in no way interconnected and in no way integrated; if we didn’t have some means of anticipating, to some degree, the behavior of others’ our lives would be ruined.

You wouldn’t have any idea whether your co-workers would show up or whether your spouse would be waiting at home. Events that require critical mass, like rock concerts and political movements, would be impossible. And none of the products that tap into the short head of the marketplace would exist.

In order to function, the complexity of our lives requires repetition, patterns, and short cuts. If we had to make a truly individualized decision for every action we take, we would become paralyzed. If we tried to assimilate all of the data available to us at any given moment, we would go insane.

Predictability. Categorization. Patterns. These are the tools that allow us to function in an incredibly complicated and complex world, and they apply in every situation we encounter. My fellow Search Insider Gord Hotchkiss talked about this (in a much more scientific manner) last week:

When we’re engaged in a mental task, any mental task, our brain is constantly looking for cognitive shortcuts to lessen the workload required. Most of these short cuts involve limbic structures at the sub cortical level, including the basal ganglia, hippocampus, thalamus and nucleus accumbens. This is a good thing, as these structures have been honed through successful generations to simplify even the most complicated tasks. They?re the reason driving is much easier for you now than it was the first time you climbed behind the wheel.

Just as categorizations and pre-processing make our lives bearable, other people’s lives become more bearable when they can categorize us.

And this is the tricky bit. This is where people’s backs start to get up. Just think about it, though. If you want to predict people’s behavior — such as, for example, whether an employee will be skillful or whether a spouse will be faithful — you have to accept that other people will be predicting yours. And the way to do that is through a combination of categorizations, patterns, and belief systems.

Businesses operate under the same framework, only in business it’s not called categorization, it’s called segmentation. When businesses segment customers and markets, they can offer more relevant products and services, more efficient pricing, and more appropriate value.

Just as critical, they can also identify who ISN’T their customer, and avoid wasting either that person’s or their own time.

As with anything, it’s important to find the right balance. Will knowing what kind of underwear you buy help a company sell you a more appropriate cellphone? Probably not, and the cost of the invasion of privacy would likely outweigh any benefits from the information. On the other hand, knowing your history of cellphone usage would definitely help a new service provider steer you to the right plan.

So the trick lies in finding the sweet spot between segmentation and presumption, in making useful categorizations that allow for these benefits to consumers and suppliers without crossing the line into creepiness.

In my next post, I’ll describe these benefits in a bit more detail, using the insurance industry as an example. In the meantime, what do you think about customer segmentation?

Last week, I summarized the current sorry state of the behavioral targeting industry. Adzilla in the chilla. NebuAd looking sad. Phorm facing scorn.

Okay, Eminem I’m not.

Nonetheless, I think there is a fundamental problem in the behavioral targeting industry, a problem that is being reflected across all of these companies and the problems they’re facing:

The cost to the consumer is greater than the value proposition for the consumer.

The FUNDAMENTAL premise of these companies is that they improve ad relevance. That’s fine and dandy — I’d rather see an ad for rock climbing gear than one for men’s hair dye.

On the other hand, it doesn’t really cost me anything to see the men’s hair dye ad. In fact, you could make the argument that I benefit more, because I don’t spend money on climbing gear that I want but don’t need. (This is of course in an alternate universe where it isn’t our patriotic duty to buy as much stuff as we can.)

OK, so there are arguments for relevant ads and arguments against them. Either way, it’s not a big pain point for individuals. Irrelevant search results? Big pain point. Irrelevant ads? Ho-hum.

Ad relevance is, however, a big pain point for the companies creating, paying for, and publishing those ads. Clearly, if the ads aren’t relevant, people don’t click on them. If people don’t click on them, none of the entities in that chain get paid. That’s a problem.

So behavioral targeting provides a solution that offers a powerful benefit to advertisers and publishers, but only a so-so benefit to consumers.

Unfortunately, in order to deliver their solution, the consumers have to pay almost as much as the advertisers and publishers, albeit in a different currency. Advertisers and publishers pay with dollars; consumers pay with data. In our attention economy, the data may even be worth more than the cash.

So advertisers and publishers have to pay cash for a powerful benefit they really want, while consumers have to pay data for a so-so benefit they aren’t exactly clamoring for.

In addition, under the model of these ‘traditional’ BT companies, it is impossible for them to provide advertisers a powerful-benefit-for-cash unless consumers go for the so-so-benefit-for-data.

This means that companies have come up with all sorts of creative ways to push the so-so benefit, or, at times, making an end run around the problem by not telling customers about the exchange. Phorm tried exactly this tactic in its initial trials, but has since capitulated to government pressure and now has an opt-in system.

So that’s the core of the problem: the moneymaking value proposition businesses’ll pay for relies on a non-moneymaking transaction with consumers who don’t want it.

What is the solution? It’s elementary, my dear: get back to basics and put the user first.

• What do web users care about?
• What are you offering them?
• Do they value what they’re getting as much as they value what you’re asking from them?
• What don’t they like about what you’re offering?
• What don’t they like about what you’re asking them to pay?
• How can you change what you’re offering, what you’re asking them to pay, or both, so that you’re creating value for the consumer?

Forget about maintaining surfing history, whether it’s anonymized or not. Forget about dangling the dubious carrot of ‘more relevant ads’.

Worry about what the consumer wants, and what the consumer doesn’t want — then worry about pleasing your advertisers.

What do you think about this idea?

Phorm is requiring that users opt in to the latest test of its ISP-based behavioral targeting platform, according to Online Media Daily:

Unlike the case in previous trials, BT will only deploy the platform, “Webwise,” with subscribers who have affirmatively agreed to receive targeted ads. For the initiative, BT intends to intercept 10,000 users with a Web page asking whether they wish to sign up for Webwise, which it touts as offering “more relevant” ads. The company also promises that it will help protect users from online fraud by alerting them when they land on suspected malware sites.

I think this is the appropriate move — that people get to choose whether they want it — but what I’m really interested in is how many will? How compelling is the ‘relevant ad’ offer? What percentage of the 10,000 will go for it?

Personally, I think anything better than 100 could be considered a success for the company. 1% acceptance of an untried and uncommon service is a pretty good return.

Phorm’s uptake is critically important, because it will represent the best test to date of how people value privacy and relevance.

We Internet users have shown ourselves more than willing to trade privacy for functionality: think Google or Facebook. When we are the ones who want the access, no data price is too high.

But the Phorm test doesn’t dangle a functionality demanded by consumers. What’s on offer from them is more relevant ads, something that is more of an active pain point for underperforming advertisers than for us users.

We complain about egregiously bad advertisements (see David Berkowitz’ The Chutzpah of Facebook’s Jewdar for a superb example), but are we willing to pay the price of privacy for something different?

We’ll soon find out. In the meantime, would you agree to the Phorm test if it popped up on your machine?

Digital Outsider reported today on AdSense, which offers a network of 65-inch plasma screens mounted in eight-foot panels in the most highly trafficked areas of shopping malls in 39 of the top U.S. media markets. The plasma screens display the best retail offers available in that mall at that moment.

Sounds pretty straightforward, but the bit that caught my attention was buried close to the bottom:

Given this type of programming model, you?d think that AdSpace sells its advertising inventory ? 11 15-second ad units per six-minute programming loop ? to mall retailers, but it doesn?t. The ?Today?s Top 10? programming is free to any retailers that legitimately qualify as the best deals of the week. So who buys the AdSpace ad units? Big brand marketers like Coca-Cola, AT&T, Verizon, Macy?s, Ford Motors Co., Sony Pictures, KAL brands, some of which aren?t even physically offered in the shopping mall.

…?We?re like Lucky magazine for the mall,? [AdSpace representative Dominick Porco] says. ?Here?s a great cell phone at the Verizon store. It?s 50% off today. Or Ann Taylor has a great cashmere sweater and it?s 50% off today. That?s our editorial content.?

I can understand why the likes of Coca-Cola and Sony Pictures are using this opportunity to target consumers. The ones who really win the lottery here, though, are the ‘Top 10′ retailers, who?get this?often complain about selling out of their inventory too quickly when they get a slot on AdSpace.

The fact that retail promotions constitute valid editorial content is not new, but it should be the mantra of all marketers in the digital age. Relevance opens the doors to anything. The same consumers who would TiVo right past the Ann Taylor commercial at home are the ones who are screaming, “Ohmigosh, a cashmere sweater!!!” when they’re in the mall.

If you are delivering the right message at the right time, your customers will fall on their knees with gratitude.

Consider, for example, my high school classmate Dany Levy, whose what-to-buy fashion site Daily Candy sold a majority interest to Bob Pittman in 2003 for $3.5 million, and then a minority interest to a private equity firm in 2006 for $130 million. Consider, on a vastly smaller scale, the locally-ubiquitous Entertainment Books, for which people shell out $65 in exchange for a book full of ads. Yes, there are coupons in there, too, but you get my point. People will pay to be advertised to, if the ads are special and unique and relevant and help them get into the inner circle.

Here is the problem: marketers and product developers and publishers think new media is different, it’s game-changing, we don’t know how to handle it. But the rules are actually simple, and they’re no different to the marketing mantras of a century ago. Put yourself in the consumers’ shoes. Think about what they care about, what problems they have, what they’re afraid of. Then help them achieve, solve, and alleviate. Whether you are doing this virtually or physically makes no difference.

I’ve said it before and I’ll say it again:

It is always, and only, about people.

Your feedback is welcome!