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U.S. FIRM TAKES SURVEILLANCE ON INTERNET TO NEW HEIGHTS

Posted on October 4, 2000

      Devin Hosea, the 30-year-old founder and president of Predictive Networks Inc., is the boyish face behind what some consider the Internet's latest threat to consumer privacy.

      A digital wizard who learned how to crack software code by the age of 10, Mr. Hosea has been drawing fire from consumer advocates who say his technology takes online surveillance to new heights.

      Mr. Hosea's Massachusetts-based start-up company has developed software that builds digital ''silhouettes,'' or profiles, of Internet users, after tracking their clicks across the Web. For example, if a Web surfer visits an airline site and then a Boston museum site, Predictive's profile model might immediately send the user a pop-up advertisement for a Massachusetts travel guide from Amazon.com Inc.

      Predictive is being closely watched by privacy advocates because, unlike many similar companies, it has struck deals with Internet service providers, or ISPs, rather than individual Web sites. As a result, Predictive's software can follow users of these ISPs everywhere on the Web, gaining insights into their ages, incomes, shopping preferences and hobbies.

      ''We see the whole menu,'' said Mr. Hosea, who maintains that his company protects consumers while allowing advertisers to better target their audience.

      Mr. Hosea said Predictive tosses out the list of Web sites that a user visits and keeps only ''scores'' that reveal implied preferences and demographic data. No advertiser or ISP can view the profile. Rather, Predictive controls the silhouettes and sends ads directly to users.

      But some privacy advocates remain skeptical of promises made by Predictive and other Internet companies. They say Predictive does not properly get ''opt-in'' consent from consumers and does not have a strict privacy policy.

      Privacy experts also fear that Predictive's software will be widely accepted by ISPs and, later, cable companies. The small company has signed on six American ISPs, including AT&T WorldNet, IDT Corp., PSINet Inc., and three others it declined to identify. Advertisers also are lining up, impressed by Predictive's ability to dramatically improve customer response to ads.

      Predictive plans to announce this week that it has received $45 million in a second round of funding led by venture capital firms Battery Ventures and Advent International. Investors who have taken smaller stakes include Nippon Telegraph & Telephone Corp., the Internet telephony carrier Net2Phone Inc. and the Internet researcher Nielsen/NetRatings.

      By the end of 2001, Predictive projects that 10 million Internet users will be on the receiving end of its software.

      America Online Inc. and Microsoft Corp., two giants in Internet service, declined to comment on whether they might use Predictive's software or any similar technology in the future.

      Mr. Hosea's software is downloaded when customers receive their ISP service. Using artificial intelligence, Predictive does its best to match Internet users with compatible advertisements. It works by scoring consumers on 120 different demographic and preference categories based on Web sites visited. Clicking on a video-game site, for instance, could result in a low score for age. But visiting the Web site of the discount brokerage Charles Schwab Corp. might translate into higher age and income ratings.

      Internet companies argue that such digital profiling limits the number of advertising misfires - those banner ads that consumers consider annoying and that advertisers find ineffective. Fewer than 1 percent of customers click on banner advertisements, according to industry figures. But on IDT, one of Predictive's partners, ads have drawn 18 percent of Internet users.

      ''The end users say it's a much more pleasurable experience,'' said Michael Packer, domestic-operations director for New Jersey-based IDT.

      Mr. Hosea argues that Web users will let Predictive, which shares ad revenue with ISPs, watch their every move online in return for lower Internet-service rates. It does not send them ads for alcohol, tobacco, firearms or pornography. Medical self-help sites and hate-monger sites also are banned.

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