Updated The Guardian has pulled out of its targeted advertising talks with Phorm, following a public outcry over plans for the UK's three largest ISPs to report the browsing habits of their customers in exchange for a cut of revenues.

The national newspaper had confirmed its involvement with Phorm in a story on 14 February.

The U-turn makes The Guardian the first commercial partner to dump Phorm since launch (although it is still months before the system is due to go live). If it had remained signed up as a publisher, readers would have been served targeted advertising based on the content of other websites they visit.

But since Valentine's Day, disquiet over the privacy, security and ethical implications of profiling people's web use has built, and the UK liberal's newspaper of choice has now decided it does not want to be associated with Phorm.

In an email to a concerned reader, advertising manager Simon Kilby revealed the retreat:

It is true that we have had conversations with them [Phorm] regarding their services but we have concluded at this time that we do not want to be part of the network. Our decision was in no small part down to the conversations we had internally about how this product sits with the values of our company.



I hope you appreciate that the quality of the Guardian's editorial is funded by our advertising sales operation and it is our duty to keep abreast of all developments in this sector. In this instance, however, I agree with you that this is not something that we should be partnering.

A spokeswoman confirmed the email's veracity on Tuesday afternoon.

The withdrawl of the UK's most popular newspaper website* from its publisher network is a massive blow for Phorm and its investors, already bloodied by ferocious public opposition to involvement by BT, Virgin Media and Carphone Warehouse.

The increase in the value of Phorm stock prompted by the ISPs signing on has been wiped out by controversy over its history as a spyware developer, and secret trials conducted by BT on customer data last summer. Web inventor Sir Tim Berners-Lee has also criticised moves to opt users in automatically, and a group of internet law experts has written to the Information Commissioner to argue that the technology is an illegal wiretap.

Phorm responded to a request for comment on being dumped by its biggest news publishing partner with this statement:

Guardian Newspapers has reiterated to us its goal of participating in the OIX. They have told us that, from an immediate resource perspective, and prior to the full deployment of the OIX, they are simply focused on more urgent projects.

Known as 121Media in its spyware days, Phorm sells its new venture as a win-win-win for ISPs, advertisers and publishers. By profiling a web browser's interests, and then using that information to target an advertisment when he visits a site that is a member of Phorm's Open Internet Exchange (OIX) - so the pitch goes - he is more likely to click. That means the advertiser gets more potential sales, the publisher's ad space is worth more, and the ISP and Phorm gets their cut for providing the profile. As well as The Guardian , the Financial Times and MySpace have joined OIX as publishers.

Cries that consumers' privacy and ability to trust their ISP will be screwed by the win-win-win have naturally chimed with Guardian readers.

In response to its technology section's first coverage of the escalating row, commenter "xenosphilos" wrote: "It's such a shame that the Guardian have signed up to Phorm's proposition. I would have hoped that this venture would have been a prime concern for the journalistic side of the business but it's hard to see how a hard-nosed commercial decision can be challenged from within the organisation."

As the row intensified through March, a defence** of ISP-level targeting by Neil McIntosh, the head of editorial development for The Guardian website, was published. Suspicious commenters immediately blasted him for failing to disclose the commercial relationship with Phorm in the piece. He admitted fault, but maintained his argument that the system will be useful to readers, comparing it to Facebook.

Yet today's news means The Guardian won't be part of any "utility" emerging from Phorm.

Phorm's unprecedented PR rearguard also argues that "less irrelevant advertising" will be a boon for the online public.®

*With 19.52 million visitors in February, The Guardian is the UK's most popular newspaper website according to the industry standard ABCe audit system.

**Following publication of this story, Neil McIntosh got in touch to say he's no fan of Phorm, rather was he making a weary comment on the inevitability of such systems. We regret the misunderstanding.

Update

Following publication of our story, Phorm got in touch to say that contrary to reports, MySpace is not a partner in the OIX.