Carrier IQ is software that manufacturers and/or carriers stealthily embed in mobile devices in order to collect everything from location to behavioral (usage) data. How much data they collect, and to what level of granularity, it's hard to tell, as is what they do with it both locally on the device and transmitted back to their servers.
It's in the news recently because it's been discovered on Android and iOS devices, but Carrier IQ, and stuff like it, have been used for years. Knowledge is power, after all, and the moment a company can do something that they think gives them tactical advantage, they likely will.
They might use it to try and detect crashes, loss of signal or packets, or other technical information that could help them make better products or services. They might use it to see which OS features you use most and least often, how you typically enter or exit apps and features, how many apps you download and how often, and for how long, you use them. They might sell this information to to partners and third party developers so they can improve and adjust their products, or learn about their competitors' users. (I explained how this works in more detail a while back in regards to Siri.)
They might anonymize it, aggregate it, and runs metrics or analytics off terabytes of the stuff. They might drill down to a single, known user, Person of Interest -- or Big Brother -- style. We don't know, and that's a big part of the problem. Lack of disclosure leads to uncertainty about the motives and that leads to feelings of violation.
Does that mean it's wrong to feel violated? Certainly not, but right now a lot of the attention is being focused on Carrier IQ and that's a lot like blaming a gun -- what you really want is the shooter. It's the carriers and the manufacturers who are implementing Carrier IQ.
And they're not alone. Think some game companies don't monitor your behavior while you're playing, figure out when you leave the game, then try to adjust levels so you keep playing longer? Think apps don't provide accounts and online services so that you get online and use them, and they can compile data based on your usage.
At the end of the day, they really don't care who you are, it's just collateral damage from figuring out how to take more of your money. That's customer insight and it's being done more and more often, in more and more sophisticated ways. Carrier IQ is just making headlines, but it's a much bigger, much more important issue than any one vendor.
You want the shooter, and you want to know why and at what they're shooting. And you want them to tell us up front what exactly it is they're packing onto our devices.
Sources: Android Central, chpwn
Disclosure: I worked for many years in cutting edge customer insight analytics