ISP Ad Partners NebuAd and Phorm Eye Overseas Expansions

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Last week, three of the U.K.'s largest Internet Service Providers, BT, TalkTalk and Virgin Media, agreed to use a new ad platform from U.K.-based company Phorm, while U.S.-based competitor NebuAd has begun ramping up its U.K. operations. Phorm may also be eyeing the U.S. market. ISPs are adopting technologies that track users' surfing habits in order to deliver behaviorally-targeted ads and take a slice of ad revenue.

Although the technologies differ slightly between the two companies, both systems essentially observe users' online interactions, such as which sites they visit and which search terms they use, and deliver targeted ads based on this behavioral data.

"ISPs have been the losers in the online advertising boom so far, but this technology will provide them with a valuable new revenue stream," said Paul Goad, NebuAd's U.K. Managing Director. Goad, who previously worked at AOL-owned behavioral targeting firm Tacoda, joined NebuAd in January to run the London office. The company acts like an ad network, reselling low-cost display ad inventory from other networks to advertisers and agencies.

According to research firm Screen Digest, BT, TalkTalk and Virgin media currently serve at least 50 percent of U.K. Internet users. However, this does not necessitate that Phorm will have access to that portion of the market. Phorm Communications Director David Sawday would not reveal whether Phorm's agreements with the ISPs are exclusive.

With NebuAd up and running in the U.S. and building its U.K. operation, Phorm may fancy a slice of the pie across the pond in the U.S. The company already has a New York address, and although Sawday did not explicitly state that Phorm is eyeing the U.S. market, he did tell ClickZ News that senior U.K. staff are currently in the U.S.

NebuAd's Goad said the firm is currently continuing discussions with a number of U.K. ISPs, and suggested he wasn't overly concerned about competition from Phorm. "I don't think it's a winner-takes-all market," he said. "Different ISPs have different needs and different business models. There's definitely space for more than one company."

NebuAd has had a presence in the U.K. since late last year, and Goad said he hopes NebuAd will launch in the U.K. this year. The company claims to track Internet usage of about 10 percent of the U.S. online audience.

The deciding factor in the success of these companies is likely to be consumer tolerance. In theory, ISPs have the power to construct extremely detailed profiles of their subscribers, a practice that clearly raises privacy concerns.

According to Phorm, user data is observed entirely anonymously, and the system does not log or store any personal information or IP addresses at any point. Users that demonstrate an interest in certain products or services through their browsing will be assigned a number, placed in "channels", and served ads accordingly.

Sawday said users can opt-out of the system fully at any time, and no data will be collected. "Users can visit Webwise.com to switch the service on or off at any point," he continued. "It's ironic that the discussions surrounding this are about privacy considering the standard is so high."

Google, MSN and Yahoo currently store information on user searches for at least a year, partly in response to concerns from EU regulators.

Though Goad acknowledged the potential privacy issues with systems like NebuAd's, he stressed, "We have gone to great lengths to validate our model in terms of privacy."

UPDATE: In the original story, ClickZ reported NebuAd reaches between 10,000 and 30,000 U.S. users, which is incorrect. The company claims to track Internet usage of millions of U.S. users, or about 10 percent of the U.S. online audience.