Facebook’s massive business was built on its ability to track users across the internet. But now, thanks to looming regulation and other moves to restrict such data collection, that is changing. Hundreds of engineers are rebuilding how Facebook’s ads work to place more value on user privacy, according to Graham Mudd, a top ad executive at the company.

The moves by Facebook, which are still in their infancy, illustrate how the ad-supported internet economy is in the process of being fundamentally reshaped. Along with Google, Facebook is examining several privacy-enhancing techniques to deliver personalized ads without knowing anything about the specific individuals who view them. That’s an about-face from how ad targeting has worked online to date.

“We definitely see that [ads] personalization will evolve very meaningfully over the course of the next five years,” said Mudd, Facebook’s VP of product marketing for ads, in an exclusive interview with The Verge. “And that investing well ahead of that will benefit all of our customers and enable us to help shape that future state of the ads ecosystem.”

The stakes couldn’t be higher for Facebook to get this right

The stakes couldn’t be higher for Facebook to get this right. Apple recently introduced a prompt to iPhones that makes developers ask for permission to track users across other apps for targeting ads. Facebook has said the prompt will likely hurt its revenue growth. Google is planning something similar for Android phones. The European Union is considering a ban on microtargeted ads as part of a sweeping legislative proposal called the Digital Services Act, and the Biden administration recently signaled interest in policing the “surveillance of users” by “dominant Internet platforms.”

Facebook’s new rhetoric about making advertising more privacy-conscious is also, in a sense, admitting defeat. Last year, it mounted a loud PR campaign in objection to Apple’s ad tracking prompt, arguing that Apple was acting anti-competitively and harming small businesses that relied on ads to reach customers. But the campaign ultimately fell flat, and now Facebook is working on some of the same privacy-conscious approaches to data collection that Apple uses. One example is “differential privacy,” a technique that intentionally messes with datasets to obfuscate individual identities.

A spokesperson for Facebook disagreed with the assertion that this privacy shift for ads marks a defeat in its fight with Apple. “We are advocating for a different and better approach to advancing privacy in advertising,” the spokesperson said. “One that is based on industry collaboration and a focus on supporting small businesses and an open internet economy. Apple’s approach is exactly the opposite: exerting its control over the App Store to benefit its own bottom line.”

Facebook’s problems with Apple, which is currently building up its own ads business, are far from over. Given …….