The Federal Trade Commission wants to take out the mashers and grifters it sees lurking in online ads, but in the process it might slaughter that business in its crib.

Evoking the Do Not Call telemarketing program, the FTC's Do Not Track concept has goosed Congress into action and stoked consumer paranoia that every banner and display ad is cover for identity theft Al-Qaeda. As privacy groups high five, the online ad community shudders as the apocalypse looms.

At stake is the burgeoning behavioral targeting (BT) segment, a more than $1.1 billion business growing at a double-digit clip, according to eMarketer. Factor in the use of data to determine marketing efficiencies and that figure could be as high as $7 billion to $8 billion of the $25 billion online ad spend.

BT uses complex algorithms to analyze (albeit anonymously) individual click-by-click Internet activity to serve up relevant ads in near real time. The practice is a scary proposition to consumers worried that Web companies are noodling with personal data (like health and insurance information) they'd rather keep private. Just last week, one woman in New York filed suit against Interclick for monitoring her Internet activity, fueling the government's case that something needs to be done.

Despite the online ad industry's fall launch of a self-regulatory program that allows consumers to opt out of tracking for about 90 percent of all ads, and the development of browser privacy features from companies such as Microsoft, self-regulation hasn't moved fast enough for regulators.

"Companies in the online ad space are being treated like tobacco salesmen, to their great surprise," said Jules Polonetsky, director of the Future of Privacy Forum.

Advertisers and other experts dismiss what they call media scare tactics and warn that heavy regulation of the Internet is a bad idea for both consumers and advertisers, and could cut the heart out of a business that has thrived on entrepreneurial innovation.

Heavy-handed privacy legislation could actually curb competition by crippling ad networks that serve ads to niche Web sites dependent on advertising to fund content. Web sites would have to resort to pay models in a medium where free content is the norm. No doubt the big brands would still draw contextual advertising, but that would come at the expense of new, emerging brands, thus squelching competition in a space that has thrived on it.

"There would be less venture capital money flowing into the space," predicted John Montgomery, COO of GroupM Interaction. Just the specter of regulation could stunt the growth of behaviorally targeted advertising even when companies are beginning to adopt it because of improved return on investment. According to a May survey from Ponemon Institute, 90 percent of companies have held back million of dollars because of privacy concerns. "It could scare advertisers away from working with companies that have the right policies in place," said Grace Liau, svp of VivaKi Nerve Center.

All this comes at a time when Procter & Gamble is shifting dollars from TV into social media. "It's the Fortune 1000 companies that see [BT] as a way to spend money more efficiently that are really going to be upset. It will take away a more efficient way to bring products and services to market," said Joe Apprendi, CEO of online ad network Collective.

For the consumer, the personalized Internet experience could quickly disappear. Heavy regulation will not stop ads, but they will become more like spam, warned Dan Jaffe, ANA's evp, government relations. "Do Not Track is deceptive advertising," he said. "With the Do Not Call [telemarketing program], consumers get fewer phone calls, but with DNT, the exact opposite happens. Consumers will hear from more advertisers about products and services in which they have no interest."

For an industry that has thrived on no regulation to be suddenly faced with the heavy hand of the Fed, Do Not Track is a frightening prospect. "It could lead to a slippery slope," said Doug Wood, a partner with Reed Firm, the law practice representing the Interactive Advertising Bureau, which spearheaded the ad industry's self-regulatory program. "Once you get a federal agency involved, they don't go away."