Predictive Predicts Major Success

When Devin Hosea started Predictive Networks nearly two years ago, he wanted to take advantage of the Internet’s promise as the “Holy Grail” of advertising and marketing, able to target all consumers who used it and personalize every ad they encountered.

But, building on his background in artificial intelligence studies both as a Princeton undergraduate and as a National Science Foundation fellow (as well as experience on Wall Street and as a venture funder with GE Capital), Hosea had a technological vision different from either online ad networks like Engage or DoubleClick, or ad-driven, subscription-free Internet service providers.

Hosea also believes the vision solves the privacy problems generated by online tracking.

While some have criticized Predictive’s technology, so far Hosea’s vision has enabled the company which unveiled its service in the spring, to sign up channel partners such as AT&T, IDT and PSINet and create a base of 500,000 people using the Cambridge firm’s software to receive targeted online ads.

And today the firm’s technology has led to a third round of funding worth $45 million. The funding, which brought Predictive’s total investment to $54 million, was co-led by Advent International, one of the world’s largest venture firms, and Battery Ventures of Wellesley, Mass., the main second-round investor.

Additional backers included C. E. Unterberg Towbin and network companies Net2Phone, NetRatings, PSINet and Nippon Telephone and Telegraph of Japan, the world’s largest telephone company.

Doug Kingsley, a managing director in Advent’s Boston office, said, “Quite simply, this company has the ability to change the way advertising is conducted on the Internet and across different types of networks, including wireless and cable television.”

So what’s different about Predictive’s technology? Rather than relying on cookies (files planted on user hard drives when users visit individual websites) or creating user data files that reside on an ad network’s or local ISP’s servers, the software tracks users and collects data from the network connection points of major carriers.

Having software that interacts inside the network, rather than with individual computers or servers on the Internet’s “edge,” means that Predictive has to partner with large network players. It also means that the software can track not just Web users but cable television watchers or those using wireless connections. (Hosea says the firm will use more than half its $45 million windfall to attract cable and wireless partners.) The Predictive system tracks visited websites and, using mathematical models and without need of a user’s “real” identity, creates a “digital silhouette” based on more than 100 criteria, such as likely age, income, location and interests. The more websites visited, the more the system “knows” about each user and the better it can predict the kind of messages she wants to see. Since networks using Predictive software are likely to have users click through to more ads, they can charge more to advertisers and less to subscribers. (AT&T, for instance, charges $4.95 for its monthly service that uses Predictive software.). Predictive’s revenue model is based on dividing this extra income with networks. On the privacy issue, Hosea says Predictive addresses the problem in three ways. First, all users must “opt in” to a service using Predictive software. The company requires channel partners to sign up subscribers only upon receiving “express and informed consent” — that is, approval of obvious, easy-to-read language.

Second, the technology allows all users to remain anonymous. Predictive accumulates no permanent user files but instead creates what Hosea calls “nebulous mathematical blobs” with no value outside of the system’s context. Third, the company pledges to tie its system to no other databases.

To demonstrate its commitment to user privacy, Predictive has created an advisory board whose three members have impressive civil rights advocacy, legal and technological credentials: civil rights attorney Harvey Silverglate; Jeffrey Rosen, senior legal editor of The New Republic and author of “Unwanted Gaze: The Destruction of Privacy in America”; and Whit Diffie, a Sun Microsystems distinguished scientist and author of “Privacy on the Line.”

The three members are signed to 18-month contracts that allow them to speak freely to the press, so long as they give Predictive advance notice of any critiques. So far, the board members have been impressed with Predictive’s technology and commitment to user privacy.

In May the company brought in Michael Skarzynski, a former executive with Lucent Technologies‘ software and service provider divisions, as chief executive officer.

Hosea, who remains president, said the company will announce three more channel partners in the coming weeks, while talks continue with “several more.” His prediction: the company will grow its user base to more than 1 million by year’s end and 10-15 million by the end of 2001.

Todd Dagres, general partner at Battery Ventures, said, “This company has what it takes to succeed in this market — an exceptional management team, first-class technology and a winning business model.”

Hosea said. “We want to get rid of all of the network clutter and bring people the information of most interest to them. Ultimately, people will demand of their networks a personalized experience, so they can spend 20 percent of their time searching and 80 percent of their time enjoying themselves, rather than visa versa. That’s the experience we aim to create.”

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