People are freaking out about online privacy. That’s the message of a report released today entitled “Americans Reject Tailored Advertising and Three Activities that Enable It.” (Advertising, Stephanie Clifford, “Two-Thirds of Americans Object to Online Tracking,” New York Times, September 29, 2009)

Why the sudden freakout? It’s not because tailoring content and advertising online based on consumer data is a new phenomenon. Indeed, the vision of such targeting have driven online content from its earliest days. (Disclosure: I led the team that launched the first banner-ad-supported Web site, Hotwired, for Wiredmagazine in 1994.) Anyone familiar with online media knows that the privacy / personal information cow has been out of the barn for a long time: Big companies like Google, Microsoft, and Yahoo! depend on data collected about what consumers look at online to target advertising appropriately. And emerging companies like AudienceScience and BlueKai are working to enhance targeting of ads based on online users’ behavior across multiple Web sites.

No, consumers are freaking out  because an important choice has been made for them — the choice that they would prefer to pay for online media with their privacy and their attention, rather than good old cash money. They are annoyed because what’s been chosen for them isn’t necessarily the choice they wanted, and they’re downright pissed off because nobody even bothered to ask their preferences.

Newspapers and other media have always assumed that consumers “won’t pay for online content,” but what they haven’t considered is that consumers know there’s there’s more than one kind of kind of currency they can use to pay, and that they are actually willing to pony up, as long as they can choose the way they pay.

Let me explain: Consumers are used to making decisions about what they want to buy and how they want to pay for it. They walk up to the cash register, pull out their wallets, and can pay with cash, credit, or debit. Worried about who will know what you bought? Pay cash. Looking for those frequent flier miles? Credit. A discount on your next Ikea purchase? Debit.

The media world is different. Media content has always been paid for through a mixture of advertising, subscription fees, and per-use content fees. Different media properties adjust this mix in ways that we have come to take for granted: Most magazines charge subscription fees but also include advertising; premium TV channels like HBO and Showtime charge subscription fees.

Consumers have been encouraged to think of many kinds of media as “free” because they come without direct cash cost. Indeed, Wired editor Chris Anderson has posited that “$0.00 is the future of business.” But even seemingly-free media still have a cost — just not a cash cost. Instead, consumers are asked to pay with the other two currencies in their virtual wallets — their attention and their personal information. Over-the-air broadcast TV — “free TV” — is paid for with attention, by consumers watching ads that interrupt programs (and yes, DVRs provide a threat to this revenue stream). Industry-specific magazines (say,Information Week or Poultry International) offer no-cash-cost subscriptions to anyone who fills out a form that shows they are “in the business”; advertisers, in turn, are willing to pay the full cost of reaching their highly-targeted audiences. These audiences are much more likely to be interested in the products / services offered by their advertisers than the general market: No money changes hands, but subscribers are still paying with a combination of their attention and their personal information. They know and accept this deal—they don’t think they are getting “something for nothing.”

The UPenn/UCBerkeley study shows that companies have been wrong about what consumers value. It’s not only money; it’s privacy. The study shows that consumers value their personal information to a much greater degree than many have assumed. Consumers want transparency about what data are being collected and how these data are being used, and they want the opportunity to control who, if anyone, is allowed to hold their data over time: what the study authors call “information respect” from marketers. It is also clear that they feel strongly that those who fail to offer this respect be dealt with harshly (70% of respondents said that the penalty for misusing a person’s information should be more than $2,500, and 35% said that executives responsible should face jail time).

Conventional wisdom in the online world has held that “free” is the only business model that works; that consumers simply won’t pay cash money for media they get online. However, few have put this “wisdom” to the test. Meanwhile, “free” content has resulted in significant revenue declines in revenue for media companies of all kinds, threatening (among other things) the future of news as we know it. Who will pay for reporting in the new media ecosystem? Will unbiased news survive? And now we learn that the targeted advertisements that provide the bulk of revenue in most “free” online media channels are reviled by consumers. It seems media companies are damned if they do, and damned if they don’t.

Is it possible to make everyone — media companies, marketers, and consumers — happy here? Perhaps. It won’t be easy, but a couple of key principles hold the key to success for media and marketers:

• Choice: Make it easy for consumers to pay for their online media experiences with the currency / currencies of their choice: money, attention, or privacy.
• Transparency: Make it easy for consumers to understand how their data are being collected and used. A good place to start would be a common dashboard to replace the current absurdly complex privacy policies most Web users now simply ignore.
• Control: Make it easy for consumers to manage the flow of their personal information for tailoring both content and marketing messages.

Consumers may be panicking about online privacy, but they can be talked down off the ledge. Media companies need to offer consumers a real choice not just in what media they consume, but also in how they pay for it. Marketers and media suppliers need to be transparent about what data they collect and how they use it. Armed with the both the tools and the power to choose, consumers will bargain for what they want online, rather than freaking out that something has been taken from them.