Yahoo! Escalates Privacy Battle With Microsoft

The worst fights always seem to be the ones that happen between old friends.

Over the weekend, Yahoo! (Nasdaq: YHOO  ) took a dig at longtime search partner Microsoft (Nasdaq: MSFT  ) over the latter's new IE 10 web browser. In a sharply worded blog post Friday evening, Yahoo! blasted Mr. Softy for no less than: "abus[ing]" web privacy standards, acting "unilaterally," and aiming to "degrad[e]" the experience of Yahoo!'s millions of users. In response to those alleged offenses, Yahoo! said that it will ignore Internet Explorer's privacy setting across all of its web properties.

As Yahoo!'s riposte makes clear, this scuffle is about more than just an obscure setting in a web browser. In the name of protecting users' privacy, Microsoft has plucked some sensitive nerves around the web. And the company doesn't look set to win anything -- including more user privacy -- for its trouble.

Getting off track
The disagreement with Yahoo! centers on the "do not track" setting in the new Internet Explorer browser, which Microsoft developed to work with Windows 8. The company took the unusual step of making the browser's tracking setting default to "no," meaning that users will have to opt in if they want certain information shared with third parties.

In promoting its new browser, Microsoft has tried to differentiate itself from the competition, like Google's (Nasdaq: GOOG  ) Chrome, by touting its enhanced privacy options. As the company puts it: "With the Do Not Track feature built into Internet Explorer, you can send a signal to marketers and websites requesting them to not collect data that enables them to track you on the web."

But Yahoo! has its own goals, too, and none of them involve collecting less information about its users. The company has staked a lot on its strategy of offering personalized content -- like stock quotes and local weather -- and Microsoft's move threatens that goal. It's no wonder, then that Yahoo! has taken Microsoft's move, ahem, personally.

The friction is made worse by the fact that IE holds a large share of the web browsing market, making the prospect of a drop in data collection a big pocketbook concern for website owners. Because they often use anonymous tracking information to serve targeted ads to users, data collection is critical to many of their services, including the one that pays the bills: advertising.

A public battle over privacy
And on that score, Yahoo! has plenty of company in its condemnation of Microsoft's privacy posture. The Association of National Advertisers sent Microsoft its own tough letter in early October, calling the company's position "shocking" and "outrageous."

Individual brand owners who signed onto the letter, including Coca Cola (NYSE: KO  ) and Proctor & Gamble, also complained about Microsoft's move and its potential to damage the user's online experience. Coca Cola executive Wendy Clark told Advertising Age "one of the things lost in this debate is consumers will have a materially different experience online" if strict privacy settings are adopted.

Agree to disagree
Microsoft and Yahoo! have been cooperating on search since 2009, when they signed a wide-reaching search agreement. Under the terms of that deal, Microsoft's Bing engine became Yahoo!'s exclusive provider of search services. In exchange, Mr. Softy gets a cut of the search revenue generated on all Yahoo! properties.

The partnership has clearly boosted Microsoft's online services. The company's Bing search engine market share clocked in at 26% recently, as compared to Google's dominant 70%. But without Yahoo!'s properties included in that tally, Microsoft's share would have been just 16%.

Yahoo! hinted in its posting over the weekend to a way out of this mess for its search partner, saying that the company would recognize the browser's privacy setting as long as it reflected user intent. So Mr. Softy could end the controversy by defaulting the setting to "yes" and allowing users to adjust it themselves.

Foolish bottom line
I don't see Microsoft making that change. The company has held on through too much public pressure to switch stances now. So investors can expect no quick end to this simmering controversy.

What we know for sure is that Microsoft's hard-line stance hasn't worked, as website owners can follow Yahoo!'s lead and just ignore the privacy setting altogether. The company has ticked off advertisers, brand owners, and its own search partner. But ironically, users now look set to lose their ability to manage that privacy setting through the IE browser at all.

Microsoft should get together with its partners and work out a compromise that avoids that scenario. That's what friends are for.

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