Phorm and ISP Business Models

IanFogg | April 10, 2008, 11:14 AM

Phorm's model is yet another example of ISPs looking for revenue sources beyond the consumer, as consumer broadband prices have been falling. This is a further example of the net neutrality debate, although the various articles about Phorm haven't used the 'n' words.

I've held off writing about Phorm until I had the time to speak to the company and delve a little deeper into how it works.

John and Nate are both right that there is nothing inherently wrong with advertising using behavioural targeting. But there are several key differences that make ISP-level monitoring more scary and intrusive for consumers than the existing approaches of companies like Google:

• An ISP is able to use behavioural modelling to track every site a consumer visits, not just a selection of sites.
• Consumers are often locked in to 12 or 18 month broadband contracts. So, there is a considerably greater switching cost for consumers than there is for current behavioural tracking where consumers may simply choose not to use a particular search engine.
• As we identified in the net neutrality report, the consumers that care most about the performance of their Internet connection are both high value and very vocal.

For these reasons, ISPs that seek to exploit this new advertising revenue opportunity should deploy it differently to the current approach of Phorm and its partners:

• ISPs that are positioned as quality brands, such as BT, must ensure that targeted advertising models do not tarnish their brand. Running a series of trials with tens of thousands of live consumers, without their consent, was a stupid thing to do and should not be repeated.
• ISPs should consider deploying Phorm-style behavioural tracking on lower priced broadband package tiers rather than on higher priced products or on all products. If the ISP has a quality positioning this differentiates the tiers and will assist the ISP in up-selling consumers. ISPs positioned around value and low pricing, such as Carphone Warehouse, are the natural ISP partners for Phorm.
• Opt-out is inherently more scary for consumers than opt-in. The problem for the ISP is that this is a scale business and with an opt-in model, Phorm will need to improve the consumer carrot from its current anti-phishing functionality. ISPs that differentiate on what they do based on package tiers will be better placed - ISPs could have opt-out on lower priced broadband package tiers, and opt-in on quality tiers.
• ISPs need to reconcile different parts of their package and remove contradictions.There is little point in stressing and supplying for free online security and privacy products as part of the bundle on the one hand, and yet separately deploying Phorm-style behavioural modelling which may create privacy worries.