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Microsoft, Apple, and Amazon: Market Leaders on a New, Competitive Frontier

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As Web companies party with your data, Microsoft opts for a more sober approach.

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Microsoft (NASDAQ:MSFT) wants your trust. Last Monday, the tech giant fought back against a court ruling that would have required it to hand over user data to federal prosecutors. The New York Times described the decision as "the first time a corporation has challenged a domestic search warrant seeking digital information overseas." Successful or not, Microsoft's lawsuit is part of a broader strategy to recast the quasi-monopolist as a guardian of consumer rights. Case in point: On Friday, Redmond updated its terms of service to emphasize customer privacy. This was a direct shot at Google (NASDAQ:GOOG), and one that follows on the heels of an 18-month-long 'Scroogled' advertising campaign.
 
Microsoft's track record as consumer advocate is hardly perfect, but the company's change of heart highlights the growing importance of customer trust and its emergence as a major competitive frontier. Last fall, Amazon (NASDAQ:AMZN) CEO Jeff Bezos told 60 Minutes that he refused to heed studies which told him to raise prices, because "doing so would erode trust"; the fallout over Amazon's dispute with book publisher Hachette shows just how fine the line can be between "beloved brand" and "scary corporation."

Similarly, while Apple (NASDAQ:AAPL) and Amazon both sell advertising, each keeps a tight lid on user data -- much to the dismay of advertisers. As one marketer told Advertising Age this year, in a metaphor wonderfully designed to reinforce stereotypes about marketers: Apple is "the best-looking girl at the party, forced to wear a bag over her head." Privacy-oriented changes in this fall's iOS 8 indicate that Apple has no intention of removing the bag anytime soon.
 
According to AdAge, Amazon execs are concerned about the possibility of ads disrupting the consumer experience. They may have been right; there is something disruptive about the parade of negative headlines that follows ad giants Facebook (NASDAQ:FB) and Google.

Earlier this month, Google was in the spotlight after European regulators insisted on offering its citizens the "right to be forgotten." Not long before that, Facebook drew fire over a "listening" feature for its mobile app, which resulted in an online petition that quickly collected half a million signatures. Last week, Facebook was in the news again after revealing that it won't honor browser do-not-track requests -- a negative headline that the social network tried, and failed, to bury in an announcement about new privacy features.
 
Accountability isn't the Web's strong point, and it's not just consumers who are worried. The Wall Street Journal raised the alarm in March over "ad fraud," claiming that one-third of online ad traffic is bogus. In April, a study out of eBay (NASDAQ:EBAY) Research Labs found "no measurable short-term value in brand keyword advertising." When paid results were eliminated from a search query, researchers found that "almost all of the forgone click traffic and attributed sales were captured by natural search." In other words, ad exchanges have been profiting handsomely from fake traffic, while marketing departments take credit for sales that would have taken place anyway. The Web's lack of transparency has been good for those in the know, but poses a problem for business leaders and consumers alike.
 
Last year's news about the NSA showed that, for many tech companies, privacy is only an issue when users are aware that it's being violated. Ditto for security; smartphone owners are generally ignorant of the dangers that come with mobile technology, so you won't be shocked to hear that NPR's Morning Edition found vulnerabilities in handsets from AT&T (NYSE:T) and Verizon (NYSE:VZ).

Even Snapchat, whose claim to fame is that it offers users ironclad control over their photos, was found by the FTC last month to have raided customers' data. New technologies like the Internet of things -- incomprehensible to most people -- promise even more opacity, and even greater opportunities for negligence and malfeasance.
 
"Out of sight, out of mind" isn't good enough. EMC's 2014 Privacy Index found that a majority of respondents around the world prefer, or say they prefer, privacy over convenience. The study also found that private firms are viewed as the greatest threat to privacy, with 87% of those polled favoring laws restricting the trade of customer data. This negative sentiment not only raises the likelihood of regulation, it presents a bull's-eye for competitors.
 
Apple, Amazon, and Microsoft have a singular advantage in that they still sell products the old-fashioned way: for a price, rather than an ad impression. Twitter (NYSE:TWTR) has also staked out a position on the "good" side of privacy, but this may hold back the company's efforts at monetization. Many current-generation tech firms will face the same dilemma, given the faddishness of free services and ad- and information-based revenue streams. The last five years may have gone to companies that moved fast and broke things, but the next five will go to those that can clean up the mess.
No positions in stocks mentioned.
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