Microsoft crippled online privacy protections in the latest version of its Internet Explorer browser, due to vigorous opposition from Microsoft's advertising executives and ad industry representatives, the Wall Street Journal reported.

IE8's architects planned to build sophisticated, default tools into the IE8 browser to thwart online tracking and profiling by advertisers who track users to place targeted ads. These so-called third-party networks use those distributed web sites to place cookies, hidden tracking beacons, and Flash cookies in users' browsers in order to create profiles of a user.

Those profiles, created by dozens of companies most users have never heard of, are used to upsell advertisers on targeted ads, which get a high premium for the ad networks and websites.

To cut down on the tracking, Microsoft engineers came up with the idea of what's called InPrivate Filtering and Browsing, which stymie most online tracking by blocking some tracking beacons and deleting most cookies when a user closes their browser. By default, IE8 users would use this setting, unless they consciously chose to loosen it. Or so they thought, until the business side of Microsoft and the ad industry got wind of their plans.

As the WSJ's Nick Wingfield reports:

When he heard of the ideas, Mr. Brian McAndrews, the executive involved with Microsoft's Internet advertising business, was angry, according to several people familiar with the matter. Mr. McAndrews feared the Explorer group's privacy plans would dramatically reduce the effectiveness of online advertising by curbing the data that could be collected about consumers. The debate widened after executives from Microsoft's advertising team informed outside advertising and online-publishing groups of Microsoft's privacy plans for Explorer. Microsoft Chief Executive Steve Ballmer assigned two senior executives, chief research and strategy officer Craig Mundie and the general counsel, Mr. Smith, to help referee the debate, according to Peter Cullen, Microsoft's chief privacy strategist.

That debate included input from the Interactive Advertising Bureau, the Online Publishers' Association and the American Association of Advertising Agencies, which sent representatives to a half-day meeting in the spring of 2008.

One of the attendees, Interactive Advertising Bureau Chief Executive Randall Rothenberg, says he was worried that Explorer's proposed privacy features would block not just the collection of consumer data, but also the delivery of some Web advertisements themselves. He says the features "seemed to equate the delivery of advertisements with privacy violations." He was especially troubled, he says, by the prospect of Microsoft turning the features on for all consumers, by default. Mr. Cullen, Microsoft's chief privacy strategist, says the input of outsiders helped Microsoft strike a balance between privacy and advertising interests. The browser, he says, "was a better product than when it came off the drawing-room floor of the Internet Explorer group." Advertising groups say they were pleased, too. "They ended up with something pretty excellent," says Mr. Rothenberg of the Interactive Advertising Bureau.

One of the key changes that seems to have come from that meeting was that if a user turned on IE8's anti-tracking InPrivate Filtering, it would be turned off again once the browser was closed. In a post Sunday explaining a bit about how the system works, Dean Hachamovitch, the IE engineer named in the WSJ article as losing the battle, included a link to a third-party site that explained how to make the setting permanent.

The inclusion of outside groups into an engineering decision is striking, and demonstrates the conflicts of interest at play in the makers of the world's dominant browsers. Apple, for instance, now runs iAd, a platform for serving ads to the iPad and iPhone, and also makes Safari. Google, which created the Chrome browser, makes all but the slightest bit of its $25 billion in annual revenue from text and display ads. Microsoft runs its own display and text ad business, as well an online portal dependent on display ads. Meanwhile, the non-profit Mozilla foundation pulls in tens of millions a year from Google for installing it as the browser's default search engine.

One of the groups involved in the discussions was the IAB, whose main purpose, beside setting the standard size for ads online, seems to be fighting regulation of the online advertising industry. Ever since the 1999 DoubleClick debacle – where the company wanted to combine online profiles with real world catalog data that would ID users, the industry has held regulators at arms length with pledges to regulate itself through its little known, and often neglected, online opt-out site, NAI.

To prevent the current unease in D.C. policy circles over online profiling, the IAB and three other groups proposed in 2009 seven new principles for online behavioral ad companies. The guidelines sound nice, but remain largely toothless and weak. For instance, profilers can't collect is data from children under the age of 13 when marketers are certain the target is a child. The only other data the voluntary guidelines bar collecting are "ﬁnancial account numbers, Social Security numbers, pharmaceutical prescriptions, or medical records about speciﬁc individuals."

Note that this doesn't prevent you from being identified – due to your searches or web browsing – as being poor, rich or in bankruptcy; suffering from Lymphoma, diabetes or menopause or as an investor in gold, mutual funds or a 401K. Anything not an account number, SSN, actual prescription or medical record are fair game to be collected, indexed, collated, analyzed, interpreted (often erroneously) and re-sold.

Microsoft hoped at the time that increased privacy features might help it stop the momentum of non-IE browsers, including Firefox, Google Chrome and Apple's Safari. It attempted earlier this year to take the high ground on privacy, criticizing Google, for instance, for how Chrome watches your keystrokes.

None of those include default privacy protection as Microsoft envisioned, though each has varying features to browse incognito.

Those looking for more privacy can investigate the Firefox add-on Better Privacy, use the NAI website controls in each browser you use on a regular basis (though it often fails to work), or try a new Firefox privacy add-on called Abine.

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