Media Giant Serving Two Masters

A month after completing the biggest merger in U.S. history, AOL Time Warner finds itself walking a tightrope on Internet privacy, with strong forces pulling the company in opposite directions.

Wall Street and Madison Avenue expect AOL Time Warner to quickly deliver on promises of merger synergies by leveraging its lifestyle and financial information on about 130 million consumers--which magazines they read, the sites they visit online, the programs they watch on television--to sell more products and services.

But AOL subscribers, privacy hawks and lawmakers are increasingly concerned about how large companies use such sensitive customer information, often without a consumer’s knowledge or consent.

Because of its unprecedented size and scope, AOL Time Warner is in a unique position to use its databases to create detailed portraits of the private tastes and interests of consumers, using such data for marketing or selling it to others, privacy advocates fear.

Making matters more complicated, AOL and Time Warner--though both known as aggressive marketers--have developed different approaches to privacy.

After some high-profile missteps in the mid-1990s, AOL has staked out a strict privacy policy, promising it will not use information about where individual members go online for marketing purposes. AOL also has said it won’t disclose personally identifiable information (except for names and addresses) to outside firms, or even its own affiliates, for marketing purposes.

Time Warner, by contrast, has long been a direct-marketing powerhouse in the offline world, where information-gathering strategies haven’t stirred as much controversy.

The company has maintained less stringent privacy policies on its Web sites. For example, Time Warner’s online privacy policy reserves for the company the right to sell the personal information it collects about customers and Web site visitors, except for individuals who opt out.

Time Warner’s cable unit is being sued for creating and selling profiles about its subscribers, including such lifestyle details as their age and ethnicity and whether they receive Playboy Channel or Disney Channel. Time Warner denies its practices violate any laws.

Unlike AOL, Time Warner Web sites track visitors’ online movements through cookies--tiny files placed in their computers--that can be linked to their name. The company uses such data to market products based on individual interests.

Company officials have said they see no need to meld the different AOL and Time Warner privacy policies. Although they say the company intends to live up to all the privacy promises it has made, it will allow different units to maintain different privacy rules.

In recent weeks, executives from the Time Warner side of the business, most notably AOL Time Warner Chief Executive Gerald Levin, have been outspoken about the need to leverage the lifestyle information the company collects about its subscribers, particularly at AOL. Using language that probably makes some AOL members nervous, Levin speaks frequently on Wall Street about “renting the habit-structure of AOL members” to advertisers.

“We have a tremendous capability to deliver a highly targeted message,” Levin told reporters recently. “It’s an idea that has been around for a long time but has not been successfully executed. We have all the elements to bring it together.”

AOL Time Warner Co-Chief Operating Officer Richard Parsons said it might work like this: An AOL member clicks on a banner ad for “The Perfect Storm” and is transported to AOL’s Entertainment Channel, where it is possible to watch a video trailer of the film or buy tickets through AOL’s Moviefone. Six months later, when the AOL member returns, a computer displays a tailored advertisement to purchase the video release of “The Perfect Storm.”

An AOL spokesman said such a practice would not run afoul of AOL’s promise not to track members online because the company’s policy also permits it to target ads based on what members buy from the company, such as movie tickets. In addition, AOL officials say members will always have the opportunity to prevent their personal information from being used by opting out.

“Privacy is the cornerstone of our relationship with members, and nothing will be done to weaken it,” AOL spokesman Andrew Weinstein said.

AOL Time Warner has started increasing the amount of advertising targeted to where members live. For example, AOL is now hawking Time Warner cable service to AOL members who live in Time Warner cable territory.

Likewise, AOL has offered advertisers the ability to send ads only to members who live in certain geographic areas, such as those within 30 miles of a newly opened department store, or only to certain categories of members, such as women.

The trend marks an abrupt change for AOL, where targeted ads make up only about 3% of the total. AOL executives have been reluctant to use personally identifiable subscriber information to sell products, in part because they feared it might upset consumers.

“We’re extremely cautious about how that would be perceived by members,” said Patrick Gates, vice president of AOL’s e-commerce unit, in an interview before the merger closed. “Also, there’s not a lot of evidence that it works.”

Time Warner executives seem much more interested in giving it a try. “It’s not about Big Brother,” Levin said. “It’s about trying to come up with something that will be helpful to individuals. It’s all about lifestyle information leading to an individual transaction.”

AOL Time Warner officials say executives from both sides of the business are committed to preserving privacy. “There’s no light between our executives on privacy,” AOL’s Weinstein said.

How AOL Time Warner balances the desire to drive advertising with the privacy expectations of AOL members could prove to be one of the company’s biggest challenges this year. Executives have promised Wall Street that they will boost advertising and related revenue by about 20%, to nearly $10 billion, this year.

Jason Catlett, president of Junkbusters, a privacy watchdog group, worries that AOL Time Warner will merge its Internet, cable, music and magazine databases, potentially giving the company an unprecedented look at an individual’s Web-surfing, reading, television-viewing habits and musical tastes.

“The risk is that they could create profiles that are more and more intrusive, and then make them available to more and more employees and businesses,” Catlett said.

Robert Pittman, co-chief operating officer of AOL Time Warner, said the company has no plans to combine information about AOL members with its other corporate databases to create detailed profiles.

“We have pretty strong privacy policies,” Pittman said. “I don’t think we’ll be merging databases together to look at individual people. I don’t think that’s what the consumer wants.”

Pittman stressed that there are ways to target ads without revealing subscriber information to outside parties. AOL officials also noted that they can target certain audiences, such as sports fans, simply by placing ads on the company’s Sports Channel, eliminating the need to rely on specific lifestyle information about individuals.

But skeptics wonder whether executives will be able to resist the temptation to dip into the AOL subscriber databases, particularly if the economy sours and advertising revenue shrinks. Many failed dot-coms have found that their customer databases are their most valuable asset.

“Privacy policies can always change,” said Frank Torres, legislative counsel for Consumers Union in Washington. “I don’t know if they’ll be able to help themselves. If the market is tight, that data becomes a great source of revenue.”

Online advertising experts agree that it will be difficult for AOL to turn its back on the potential profit available from selling targeted ads, which can generate three times as much revenue as ads directed at the general population.

“Consumers are already overwhelmed by marketing messages,” said Frank Catalano, author of “Internet Marketing for Dummies.” “AOL is going to be forced to get more targeted.”

Examples, Catalano said, might include sending an offer for a Time-Life book on child rearing to an AOL member who visited the online service’s parenting site and e-mailing a coupon for a Warner Music CD to someone who listened to the song at AOL’s Music Channel.

Wall Street investors have high expectations for such cross-promotion of company brands. Last fall, analysts were buzzing over AOL’s success in selling Time Inc. magazine subscriptions through blanket pop-up ads. To date, AOL has sold nearly 800,000 subscriptions to Time, People and other magazines.

AOL will be hard-pressed to keep up that pace without using its companywide databases to target offerings.

“The first time you offer something like that, it’s easy,” said Michael Kubin, chief executive of Leading Web Advertisers, an online ad research firm in New York. “That’s the low-hanging fruit. But the second and third times are the challenge. . . . Eventually, AOL is going to have to target ads just like all the other Web sites do.”

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Privacy: AOL Versus Time Warner

Subscribers by Segment

AOL Time Warner’s properties have relationships with 130 million subscribers.

*

Magazines: 38%

49 million

*

Cable: 38%

* HBO: 37 million

* Time Warner Cable: 13 million

*

Internet: 24%

* AOL: 27 million

* CompuServe:

3 million

* Road Runner: 1 million

*

Differences in Privacy Policies and Practices

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AOL Time Warner Sells personal data to 3rd parties? Name and address Yes* Certified by privacy seal program? Yes No Chief privacy officer? Yes No Links names to online cookies? No Sometimes Uses Web-surfing habits for marketing? No May

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* Allows option out