Few smart-phone users realize it, but mobile-ad companies track them as they use many free apps. They do this in order to fine-tune the ads the users see. But now that Apple has started to restrict a common way of tracking users, ad companies are scrambling for alternatives, and hoping to “teach” consumers to appreciate the targeted ads that support free apps.

This week, a large consortium of mobile-ad firms launched a new technical approach to tracking users of free apps. The consortium says the new method protects users’ privacy, and will allow people to opt out if they prefer not to have their behavior logged. That opt-out mechanism would be modeled on those offered by online-ad companies for people who do not want their browsing history used to tailor ads.

Previously, mobile ads tracked users on iPhones and iPads by noting their unique device identifier, or UDID, a code assigned to every Apple device and made available to apps installed on them to help those apps store settings and other features. By comparing UDIDs across different apps serving their ads, a company could know how many people had seen a particular campaign. It could also build a database of UDIDs to avoid showing one person the same ads in different apps, or to target users with ads based on the apps they use.

Apple warned late last year it would eventually phase out such use of UDID. Last month, it began rejecting apps that didn’t first get a user’s permission before passing a UDID to ad companies.

Nasdaq-listed mobile-ad technology company Velti this week teamed up with seven other ad companies to suggest a UDID alternative known as an ODIN. An ODIN code is created from a smart phone’s MAC address, a unique code associated with a device’s Wi-Fi chip. “It will ID unique [ad views] but not tie them to devices or to people,” says Velti’s Krishna Subramanian, because an ODIN is a “cryptographic hash”—a scrambled version of a device’s MAC address. Some users might still object, since the ODIN is linked to a particular handset.

Subramanian says mobile users will benefit from Velti’s efforts to reinvent mobile-ad tracking. “It is a critical component of targeting for ad networks,” he says. “We need a solution that allows everything to work without ad dollars disappearing.” Ad revenue is what allows developers to release free apps, says Subramanian, and if Apple doesn’t help ad networks target ads well, then consumers will get fewer free apps. ODIN is intended to be used on Android phones, too, although apps on those devices can still access the unique IMEI of a device, similar to a UDID.

The ODIN companies want to make it possible for people to opt out of having ads targeted using the technology. Some online ad networks, including the two largest, operated by Google (opt out here) and Yahoo (opt out here), already offer this option.

Subramanian believes few people would opt out of mobile ads. He says studies have shown that less than 6 percent of users opt out of Web advertising or frequently delete their cookies. He adds that the ODIN group would also try to “educate” mobile users about the value of not opting out. “If you saw ads that were entirely misaligned with your interests or you always saw the same ads in every app you used, you would have a worse experience,” he argues.

The voluntary efforts of online advertisers to provide opt-outs are generally seen as an effort to deter government regulation on behavioral advertising. However, a study last year by Stanford researchers found that many companies failed to live up to their own opt-out commitments. For example, half of all companies did not delete tracking cookies from the machines of users who opted out.

Ouriel Ohayon, founder and CEO of Appsfire, whose free app helps smart-phone users discover new apps to download and also shows ads to users, doesn’t believe any approach that logs the MAC address from a user’s phone, even ODIN, will be allowed for long. “Using the MAC address is, at best, a temporary buffer until a definitive solution comes up. It is an identifier which, like the UDID, provides private information about the device,” he says. “If Apple is consistent with their policy, it will be deprecated at some point.”

Ohayon’s company is promoting its own alternative, called OpenUDID, which some companies have already publicly backed. OpenUDID uses a random code generated by software that is not linked to the physical characteristics of a device. The first time that code is generated, it is stored—via the operating system’s copy and paste functionality—in a custom clipboard for other apps to access. “We opted for a solution that we believe has more chances to last,” says Ohayon. OpenUDID also has a built-in opt-out mechanism. However, some critics of OpenUDID say Apple may decide that copy and paste functions aren’t suitable for ad tracking either.

Subramanian believes Apple will approve of the ODIN design, and notes that some apps already use it.

But Ohayon says that, even though ODIN appears to have greater support than any of the competing ideas, its supporters are still a minority in the mobile-ad industry. He says the best solution would be for Apple to go further than just blocking use of UDID and to propose its own solution. Similar calls for Apple to build privacy controls into its mobile operating system were made after the social network Path and other apps were found to be copying address books without asking permission.