EU privacy proposal could dent Facebook, Gmail ad revenue

Online messaging services such as WhatsApp, iMessage and Gmail will face tougher rules on how they can track users under a proposal presented by the European Union executive on Tuesday which could hurt companies reliant on advertising.

The web companies would have to guarantee the confidentiality of their customers' conversations and get their consent before tracking them online to target them with personalized advertisements.

For example, email services such as Gmail and Hotmail will not be able to scan customers' emails to serve them with targeted advertisements without getting their explicit agreement.

Most free online services rely on advertising to fund themselves.

Spending on online advertising in 2015 was 36.4 billion euros, according to the Internet Advertising Bureau (IAB).

The proposal by the European Commission extends some rules that now apply to telecom operators to web companies offering calls and messages using the internet, known as "Over-The-Top" (OTT) services, and seeks to close a perceived regulatory gap between the telecoms industry and mainly U.S. Internet giants such as Facebook, Google and Microsoft.

It would allow telecoms companies to use customer metadata, such as the duration and location of calls, as well as content to provide additional services and so make more money, although the telecoms lobby group ETNO said they remain more constrained than their tech competitors.

The proposal will also require web browsers to ask users upon installation whether they want to allow websites to place cookies on their browsers to deliver personalized advertisements.

A previous version of the proposal would have forced browsers to set the default settings as not allowing cookies which are the small files placed on people's computers when they visit a website containing information about their browsing activity.

"It's up to our people to say yes or no," said Andrus Ansip, Commission vice-president for the digital single market.

Online advertisers say such rules would undermine many websites' ability to fund themselves and keep offering free services.

"It will particularly hit those companies that ... find it most difficult to talk directly to end users and what I mean by that is tech companies that operate in the background and sort of facilitate the buying and selling of advertising rather than the ones that the user directly engages with," said Yves Schwarzbart, head of policy and regulatory affairs at the IAB.

But the CEO of advertising tech company Appnext, whose revenues come entirely from advertising spending, said the new rules would bring clarity and would not have a significant impact on business models or revenue.

"There is no doubt that it is time for the entire ecosystem to become more transparent and fair to all of the stakeholders. Users want easy access to trustworthy sources of information while feeling safe with the data they share," Elad Natanson said.

Companies falling foul of the new law will face fines of up to 4.0 percent of their global turnover, in line with a separate data protection law set to enter into force in 2018.

The proposal will need to be approved by the European Parliament and member states before becoming law.

(Additional reporting by Esha Vaish in Bangalore; Editing by Alison Williams/Ruth Pitchford)