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Phorm to use BT customers to test precision advertising system on net

By Sarah Arnott
Friday, 20 June 2008

The first live trial of the controversial Phorm internet advertising system is expected to start imminently with the participation of up to 10,000 BT broadband customers.

The technology, to be launched by BT as "Webwise", allows sites to run ads based on individuals' surfing history rather than the content of the page being viewed. If successful, its unprecedented precision in tailoring commercial content to its audience could turn the standard advertising model on its head, and open up a new revenue stream for internet service providers (ISPs).

BT's test will confirm the system can cope with large numbers of users and is due to end before the autumn. It will be closely watched by TalkTalk and Virgin, which are both also considering Phorm's potential.

The system works by using ISP data about a customer's movements to build up a profile. It links to an ad exchange that runs two parallel auctions – one between advertisers and one between websites – in order to set the cost of each slot, and the differences between the two prices is the cut taken by Phorm and the ISP.

If successful, Phorm could give the broadband providers a cut of online ad revenues for the first time, just as the industry is caught between downwards pressure on prices and the need for major network upgrades to cope with video services such as the BBC iPlayer.

Francesco Caio, who is conducting the Government's broadband review, has said that ISP-funded "backhaul" is the main bottleneck in infrastructure, and there have been suggestions that content providers should contribute to bandwidth costs. "Phorm's model... brings ISPs into a value chain that didn't exist before," said Nicki Lynas, from PricewaterhouseCoopers.

Phorm could also bring more money into the ad market. By targeting surfers rather than pages, the system enables small sites that lack a broad user base – the fabled "long tail" – to run commercial content. About 60 advertising agencies are interested in signing up.

"Accurate behavioural targeting is worth a fortune because it cuts out the wastage," Nigel Gwilliam, from the Institute of Practitioners of Advertising, said. "Instead of buying 1,000 impressions to find the one you want, you can just buy 10, which leaves the remainder to be sold elsewhere."

Privacy concerns are the biggest hurdle because the system tracks people's movements. Earlier this year critics branded the system "illegal", but the Information Commissioner says that, while developments will be monitored, "there does not appear to be any detriment to users".

Kent Ertugrul, Phorm's chief executive, says all data is held against a randomly generated number, rather than identifying a name or computer address. "We are not tracking everywhere you go or everything you do," he said. "The purpose is not to understand who you are, but only to distinguish one individual from another."