By Catherine Valenti
ABCNEWS.com from TheStreet.com
N E W Y O R K, Dec. 17
— Consumers may be worried about privacy on the Internet, but are they willing to pay for it?
That’s the bet that Zero-Knowledge Systems is taking. The Montreal-based Internet privacy company this week began selling its first online privacy solution — called Freedom 1.0. For $49.95, the package gives users five pseudonymous digital identities from which they can e-mail, surf the Web and chat online without anybody knowing who they are.
Though Zero-Knowledge’s product is not the first to promise online obscurity, the launch of this latest weapon in the battle for Internet privacy has brought the issue to the forefront once again.
Consumers Munch on Cookies
At the heart of the controversy are Internet advertisers that target ads to consumers by tracking the Web sites that they visit by using devices called cookies. Cookies assign a serial number to Internet users when they click on a Web site affiliated with the online advertiser. The cookie can then track other affiliated sites the user visits.
Advertisers use the information learned from the cookie to target ads to the appropriate audience. For example, if an online user frequents a travel site, the advertiser can show them vacation ads.
Although a cookie doesn’t link a person’s personal information with the assigned serial number, privacy advocates are nonetheless up in arms about the practice, saying it violates consumers’ right to privacy.
“You can make some arguments that advertising crosses some kind of borderline into manipulation,” maintains Andrew Shen, policy analyst at the Electronic Privacy Information Center in Washington, D.C.
Shen compares this online tracking to being followed in a shopping mall, where the follower may not know your identity, but knows everything about your buying habits and interests.
Market for Privacy Could Be Limited
While many consumers say they are concerned about online privacy, analysts believe that the market for Internet privacy products may be limited.
A recent survey of 10,000 online households from Forrester Research, a Cambridge, Mass.-based independent research firm, showed that although two-thirds of the participants were concerned about privacy, only 12 percent said they would be willing to pay for it.
“Zero-Knowledge has a really great idea, because you have two-thirds of consumers who have privacy concerns. But how are they going to convince consumers to pay?” asks Christopher Kelley, associate analyst at Forrester.
“Demand for a service like that is very small,” agrees Keith Pieper, an independent e-business analyst at his Boulder, Colo.-based research and analysis company KeithPieper.com. “But I think [Internet privacy] companies will succeed with that small figure.”
Companies like San Jose-based Privada Inc. and Anonymizer.com have already been providing Internet privacy systems for several years. But Zero-Knowledge President Austin Hill says his firm is different because even it doesn’t know its own clients’ personal information.
Firm Claims Zero Knowledge
“We’re the only system that says, ‘Don’t trust us, trust yourself,” says Hill. “The others are, ‘I know about you, but I promise not to tell.’ We’ve re-engineered it so that every aspect of a pseudonym’s activity online is secure and private in a way that it never was before.”
Hill declined comment on Freedom 1.0 sales so far, but says Zero-Knowledge has been “bombarded” with the response for the system. Sales of the product are limited to 100,000 users through mid-February, but Hill expects to complete additional deals in February to increase the distribution of the Freedom network.
Though Hill is optimistic about the market potential for Internet privacy products, some analysts said fear of online tracking could be overblown.
“Advertisers are being pretty careful about using those cookies,” says Charlene Li, senior analyst at Forrester. “If not, they’re going to face the wrath of the consumer.”
And online advertisers need the trust of the consumer if their lucrative industry is to succeed, analysts say. Li estimates that $2.8 billion was spent on Internet advertising this year, an amount she expects to rise to $22.2 billion by 2004.
Online Advertisers’ Stock Prices Soar
Expectations for that growth is reflected in the stock prices of online advertisers such as DoubleClick Inc. and 24/7 Media, which have risen this year by 712 percent and 107 percent, respectively, despite consensus forecasts that both companies’ earnings per share will fall in negative territory for the year.
“A lot of it is a race for market share, since none of these companies are making money right now,” says Traci Gearty, analyst at First Analysis Corp. in Chicago.
Because advertising is one of the prime generators of revenue for the Internet, other industry watchers say targeting ads is more productive for both the consumer and the advertiser.
“Everytime you look at a Web site, you’re going to see an ad. Wouldn’t you rather just see a banner ad that’s more appropriate for you? Because you’re going to see something regardless,” says E. Lawrence Hickey, vice president at First Analysis. 
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