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By Natalia Drozdiak 

BRUSSELS--The European Union has proposed new rules that would curb how companies like Alphabet Inc.'s Google and Facebook Inc. track users to deliver targeted ads, introducing legislation that could reduce a key revenue stream for online advertisement companies and other website publishers.

The European Commission, the bloc's executive arm, Tuesday proposed rules that would require users to actively consent to the use of cookies: tiny pieces of code deployed on web browsers that track individuals' online activity.

The commission said the draft rules are to protect user privacy and provide more transparency about how companies use individual's data. Around 80% of Europeans say it is important that tools like browser cookies are only allowed with the user's permission, according to the EU.

"Transparency is important. People must know whether information stored in their devices is being accessed or whether their online behavior is tracked," the European Commission said in a press release.

When installing a browser or any other software permitting electronic communications, users would have to choose whether to allow or reject the tracking for advertisement purposes before continuing with the installation.

The settings, which could be changed at any time, would take precedence over any individual consent granted to Google or Facebook via a privacy-policy agreement.

If users reject the tracking, they would still see ads online--but they wouldn't necessarily be personalized to cater to users' potential interests. Still, the measure could deal a blow to tech-ad giants that charge a premium for adverts that are targeted at individual users based on the reams of user data they hold.

The commission's proposal "would undeniably damage the advertising business model--without achieving any real benefits for users from a privacy and data-protection point of view," said Townsend Feehan, chief executive of the Interactive Advertising Bureau Europe.

Google and Facebook declined to comment.

Currently, web users in Europe have to click through banners displayed on individual websites asking for consent to cookies the first time they visit a site. The commission says the new rules would offer "an easy way to allow or refuse cookies."

But the proposals may prompt companies to display pop-ups asking users to switch their settings to allow tracking before they can continue using the services.

"People who thought cookie banners were annoying will be disappointed to hear that things won't get better," Ms. Feehan said.

The EU's rules come at a time when the digital ad industry is growing in Europe. Last year, digital ad spending reached around $35 billion and is set to grow to $45 billion by 2020, according to market-research firm eMarketer. While it is unclear how much of that revenue comes from targeted online ads, if a significant number of users opt out of those premium ads, it could hit the bottom line for big online ad brokers like Google and Facebook.

Companies that don't comply could also be fined as much as 4% the firm's world-wide revenue, the EU said.

In a minor victory for the industry, the commission watered down parts of the proposal from a previous draft that would have defaulted the user's settings to reject the tracking if a choice wasn't made when prompted.

That move has irked some consumer and privacy advocates.

The commission's proposal "is an improvement over what we have now but it is clearly not as good as a 'do not track' setting turned on by default," said Johannes Kleis, head of communications at BEUC, the European Consumer Organization.

Tuesday's proposal would replace a directive, which provides guidelines to member states on how they should implement rules, with a regulation that would be applied the same way in all 28 member states.

The proposed legislation enshrines the guaranteed privacy of communications--both in content and metadata--which provides information on the location and duration of phone calls and messages. The rules are designed to complement the EU's broader data-protection regulation, which regulates privacy around personal information but doesn't specifically deal with privacy of electronic communications.

The proposed regulation would also extend the scope of the rules beyond telecom providers to also guarantee privacy of communications on internet services such as Facebook Inc.'s WhatsApp and Microsoft Corp.'s Skype.

The commission's proposal is now up for debate with European lawmakers and member states, where the proposal could be amended before it is formally adopted. The commission says it hopes the rules are formally adopted by May 2018, when the EU's other data protection regulation will enter into force.

Sam Schechner contributed to this article.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com

(END) Dow Jones Newswires

January 10, 2017 10:09 ET (15:09 GMT)

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