Adware's second act

The controversial companies are trying to make nice with consumers. But in the process, they're suffering self-inflicted wounds.

About nine months ago, newly hired WhenU CEO Bill Day decided he was going to clean up his company's reputation.

WhenU, a 5-year-old, so-called adware company that makes its money by selling targeted advertising delivered to PCs via software that's sometimes unknowingly downloaded by Web surfers, was becoming persona non grata with people tired of unsolicited pop-up ads.

So Day changed his company's policy for installing software and started notifying Web surfers of downloads, weeded out some ad distributors with questionable track records, and even posted a toll-free number on every pop-up ad for customer complaints.

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What's new:
Long the pariahs of the Internet, adware companies are trying to make amends with the tech industry and Web surfers.

Bottom line:
Aside from legal pressures, the companies are sprucing up to try for a bigger piece of online advertising, which is expected to net sales between $10 billion and $12 billion this year. But the plan could backfire: After stepping out of the shadows and coming clean with potential users, WhenU's total number of installations dropped as much as 50 percent.

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As a result, WhenU's total number of installations, an important tally for billing purposes, dropped as much as 50 percent.

"We believe the business can be run with high standards," Day said. "Certainly you have to be willing to tolerate a smaller business to get there."

Long the pariahs of the Internet, adware companies are trying to make amends with the tech industry and Web surfers. But can they go legitimate?

Despite running highly profitable businesses, makers of Internet software that tracks people on their PCs and displays pop-up advertisements or other kinds of promotions have a sullied history. In the past, they have buried download disclosures in lengthy legalese; installed software surreptitiously through security loopholes; disguised their brands, or made it tough for consumers to uninstall the pop-up programs.

Now they're being forced to clean up their act. That means changing many practices in a bid to stay square with the law, form lasting partnerships with mainstream publishers and advertisers, and attract qualified consumers.

In the process, they're stirring up questions about their long-term viability.

"These adware companies have become their own worst enemy by being so sneaky. The question is, Can they come back from the bad branding of themselves?" said Esther Dyson, an investor and editor of Release 1.0. (Release is owned by CNET Networks, publisher of News.com.)

Why would they want to change? Because Congress is fed up and is poised to pass an anti-spyware law this year that establishes baseline standards for software makers. The legislation will effect adware makers by holding them accountable for adequately notifying consumers of what their software does, obtaining consent and allowing people to easily uninstall their programs.

New York Attorney General Eliot Spitzer has already brought successful lawsuits against some companies, such as Intermix, which he alleged was the source of spyware and adware being secretly installed on millions of PCs. (Intermix settled the case for $7.5 million, admitting no wrongdoing or liability.) And a new anti-spyware coalition published on Tuesday its first set of definitions for spyware and adware in the hopes of bringing clarity to an otherwise murky industry.

Adware distributors are also under the microscope, following a Supreme Court ruling against Grokster, a maker of peer-to-peer file-sharing software, that said the company encouraged illegal music downloads. Because adware often supports and comes bundled with such free applications, companies such as Claria and WhenU are being squeezed to find new distribution outlets for their software.

Claria, which is better known by its former name, Gator, reached nearly a quarter of its consumer audience through Kazaa, a popular file-sharing application. But in late June, Claria cut ties with Sharman Networks, owner of Kazaa, saying it's focused on partnering with