The Internet advertising industry looks to be in for quite a shock, as a powerful trend toward more online privacy is developing in legislative circles. And, as one source puts it, the behavioral advertising industry is in denial.

Online advertising players appear to think that “self regulation” will be the answer even as public sentiment appears to be shifting toward the demand for stricter Internet privacy regulation.This is the fundamental disconnect in the market.

Here are the latest moves that should have ad data players worried:

1) The European Union group called “Article 29 Working Party” has introduced new privacy rules, including Article 5(3), the “Cookie Directive” which will require all advertising companies to obtain opt-in from consumers to insert a tracking cookie on their browser.

2) The U.S. Senate is putting together a new Internet privacy bill. Who knew?

3) U.S. Lawmakers Ed Markey (D-Mass.) and Joe Barton (R-Texas) have been issuing statements expressing “concern” about Internet privacy. Both of them are behind the new drumbeat in Washington to introduce new privacy legislation.

This has some market observers declaring that we have an industry in denial.

“Ad networks, data providers, and behavioral advertising companies should be worried,” says Mark Kapczynski, CEO of Kontrol Media, an advisory firm for technology and interactive media companies. “They are definitely in denial. If [the cookie directive] happens in the U.S., all of the behavioral advertising and ad networks will struggle.”

Lawyers appear to concur that there is reason for Internet marketing companies to be paying attention. A number of law firms have issued briefs in the past few months as the EU efforts have picked up steam.

“U.S. companies should watch for regulatory and technical developments in response to the EU Directive’s restrictions on ‘cookies,’ says a law brief issued earlier in the year by Amy Worlton at Wiley Rein LLP.

Some sort of global “cookie directive” could have a massive impact on the online ad market. Right now, the online ad market is a free-for-all in which dozens ad networks and the many ad data exchanges such as BlueKai, Exelate, and others can exchange transparent  yet anonymous data on Internet users retrieved from cookies implanted in any browser that cruises the Internet.

The introduction of stricter cookies laws and more privacy would instantly shrink this market for data, withdrawing data from millions of Internet users from the market. With data being the fuel that drives this market, it could be severely hampered overnight.

Bottom line: Big changes are likely coming in Internet privacy. The Internet media business, interactive agencies, and behavioral advertising companies had better start paying attention.

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