Google and Facebook Are Watching You

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Consumer activists dressed as mimes silently "tracked" Google executive Eric Schmidt all the way to his Senate hearing on Wednesday. And while the hearings were focused on the company's alleged anti-competitive practices, the protesters following Schmidt through the capitol were more interested in driving home a message about consumer privacy.

Internet companies like Google and Facebook stand to make billions by using users' data to predict buying behavior and suggest products to them. But many privacy advocates are concerned that companies have become too invasive and are pushing for an Internet "" law, a rule that would require companies to give customers the option to opt out of behavioral tracking programs.

Websites that track your behavior might accidentally spill the beans to an unexpected third party. For example: Facebook got in trouble in 2007 for sharing secret Christmas purchases with "Facebook Friends" ruining surprise gifts for unsuspecting recipients. The company dropped the features in 2009 in light of a class action lawsuit.

Under its current authority, the Federal Trade Commission can do little to regulate online targeting, so it is working with the industry on a list of voluntary measures that companies would take to protect consumer privacy.

But industry watchers point out that companies will be in no rush to restrict profitable practices.

"Voluntarily placing restrictions on how they can use that data may not be in their economic self interest," said Tom Smedinghoff who is a lawyer who specializes in technology companies.

Tracking user behavior is useful for Internet ad companies. Figuring out what people do online can serve as an accurate barometer for what consumers are looking to buy. Media companies can charge more for ads that are more effective.

Tech companies under scrutiny argue that free services like Gmail are only free because users agree to share their data with advertisers. A group of technology companies that include Google and Facebook have come out strongly against proposed "Do Not Track" legislation in California.

"California Senate Bill 761 would create an unnecessary, unenforceable and unconstitutional regulatory burden on Internet commerce," reads a letter sent to California State Senator Alan Lowenthal who introduced legislation in April.

Tech companies haven't spoken out against any national "Do not Track" law but the Federal Trade Commission and Congress are gearing up in case self regulation does not work.

How Would Self Regulation Work?

In the past companies from the same industries have come together to self-regulate for a common self interest. Companies like Google, Microsoft and Facebook could set up a group that would come together working with government to make voluntary standards.

The entertainment industry famously devised standards to protect children against violent and sexually explicit movies.

But could this method work for the online advertising industry?

"This is a test case to see if self regulation can work," said Justin Brookman who is the director of the Consumer Privacy Project at the Center for Democracy and Technology.

Some have even argued that some privacy breaches are so obvious and offensive that the court of public opinion will be enough to discourage companies from serious breaches of privacy.

"Even in cases where the law doesn't restrict what a company does with personal data, you can certainly see situations where public outrage over what companies have done...have effectively imposed limits on how they use that data," said Smedinghoff.

Legislative Action:

If companies fail to impose rules on their own, "A legislative solution will surely be needed if industry doesn't step up to the plate," warned FTC Chairman Jon Leibowitz on a conference call with reporters in December.

Currently, there are several versions of a bill in Congress that would require web companies to provide opt out features for users. Under the plan browsers would have a button that disabled tracking and websites would cooperate with browser companies to restrict tracking when visited.

Sen. John Rockefeller D-W.V., introduced "Do Not Track" legislation in May and a bi-partisan bill released by Rep. Edward Markey D-Mass., and Rep. Joe Barton R-Texas, focuses solely on protecting children's privacy online. Both bills are being held up in the current legislative gridlock but some critics argue that creating a "do not track" list for kids would be counterproductive as it would require them to compile personal data on children.