It seems that Google (NASDAQ:GOOG) will get a little less nosy. The online giant plans to "anonymize" the search data it collects after a certain period of time. Shareholders should be glad to hear that Google's heeding privacy concerns that could otherwise hamper its business, but it could do plenty more beyond this gesture.

Although Google will still retain search information, after 18 to 24 months it will sweep out some identifiers in the data, unless specific governments require it to keep the information longer. It will anonymize the data by automatically erasing the last set of numbers in users' IP addresses, as well as altering cookie information. Previously, that information in the logs could lead back to specific computers and users. Google plans to make the changes to its retention policy by the end of 2007.

I've long considered privacy concerns a significant risk for Google, given the vast repository of user information it retains. The question's especially tricky because Google needs that user data, both to improve its searches and to serve up targeted advertising.

The privacy debate heated up last year. Early in 2006, Google refused to comply with a U.S. government subpoena for user data, recognizing that losing its users' trust would harm its business. (The move wasn't entirely altruistic; complying would also have revealed some of Google's trade secrets.)

Last August, Time Warner's (NYSE:TWX) AOL accidentally leaked search data to the public. That earned AOL an embarrassing PR debacle, as savvy online sleuths' identification of some users from their search information underlined the dangers inherent in the practice of saving such data. Yahoo! (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) haven't faced specific trouble yet, but they're hardly immune to these concerns, either.

Potential Achilles heels can create a competitive advantage for other companies. Several small search companies tout their tighter privacy policies; luckily for Google, Yahoo!, and Microsoft, none of them seem to offer sufficiently compelling search quality to convince many users to switch. Some programs can also cloak Web surfers' identities, and a few more high-profile privacy breaches might drive users' demand for some degree of online anonymity higher still.

Google's gesture is considerate, but two years remains an awfully long time to keep sensitive data intact, especially given the fast pace of technology. Furthermore, even after stripping out its more sensitive aspects, Google still keeps the search data. The AOL situation also showed that search threads can be excellent identifiers themselves.

It's good that Google's proactively addressing the privacy risk, but shareholders should closely monitor how the search giant balances customers' concerns with its need to improve the quality of its own services.

Yahoo! and Time Warner are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value pick.

Alyce Lomax does not own shares of any of the companies mentioned.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.