HolidayBuyer's Guide

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.

More stories on adware

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 mainstream publishers. Kazaa countered that Claria was "not performing" up to agreed standards.

Some large advertisers--an adware company's real customers--have also threatened to pull campaigns if changes aren't made. They pay adware companies to get those ads out to consumers, and they're catching heat for being connected to the practice.

What's more, PC users fear being "infected" by adware and its cousin, spyware, which is designed to steal private information such as credit card numbers. As a result, Web surfers are starting to avoid software downloads altogether, according to a recent study by the Pew Internet and American Life Project. In fact, Pew reported that 21 percent of Web surfers said that they would agree to download adware with adequate disclosure in exchange for other free software they wanted.

Besides avoiding legal entanglements, there's huge potential upside to going legit. Large adware makers are jockeying for a bigger piece of online advertising, which has rebounded in recent years and is expected to net sales between $10 billion and $12 billion this year. Right now researchers estimate that the adware business is worth $500 million annually.

Thanks to their close ties to consumer desktops, some adware execs believe they've cultivated expertise in behavioral advertising, or the practice of watching an individual's surfing patterns and serving them related ads in real time. For example, if a user has visited several car sites in the last two days, the software might display a promotion for Cars.com or the Kelley Blue Book.

That's got the attention of major Internet outfits such as Google, Microsoft and Yahoo. The Net giants are laying the foundation for desktop and behavioral advertising, introducing downloadable software for PC and Web search, as well as personalized search engines. Microsoft has been in talks to buy Claria, according to sources, but the software giant reportedly has reservations about an acquisition because of the company's reputation.

Taken together, it's a recipe for change. Since January, in addition to Claria and WhenU, other adware companies, such as 180Solutions and Direct Revenue, have been changing the way they do business.

But some anti-spyware technologists doubt the adware companies will be able to change and still make a go of it.

"We're starting to see adware vendors fall in line with public pressure, but they're also starting to hurt their business model," said Richard Stiennon, vice president of threat research at the anti-spyware company Webroot.

In the first quarter of 2005, the penetration rate of 180Solutions and Claria dropped from 2.6 percent to 2.4 percent of all computers--meaning they lost access to several million PCs, Stiennon said.

Ari Schwartz, the associate director of the Center for Democracy and Technology in Washington, D.C., said the adware companies have to retrace their steps and make amends. Because many people obtained adware on their PC unwittingly, adware makers must return to their customer base to notify them and obtain consent.

"They have to go back and address the issue. They can't just run this on illegitimate means," Schwartz said.

180Solutions, for example, recently sent pop-up alerts to its PC users, notifying them that its software was installed. Schwartz said that for the company to be thorough, however, it should also get their consent to continue running the software.

Claria is attempting a far more ambitious transformation. In addition to cutting--this past February--its license agreement from "Constitution" lengths to 2,500 words, the company is courting major publishers to bundle its ad software with search toolbars, IM clients and other mainstream applications.

WhenU, which has gone the furthest to newly notify consumers of its software downloads, eventually plans to approach mainstream publishers in the same way. But first it will continue to transform the way it co-brands advertisements on its network and be selective about its distribution partners.

WhenU has also had some other good fortune. The company recently won a trademark infringement case brought by 1-800 Contacts, a vision-care company that alleged ads from a rival company sold by WhenU violated its trademark. The case makes it clear that consumers own their desktop and can install whatever software to deliver ads. WhenU raised $15 million in funding in recent weeks.

With upcoming legislation in the works to establish best practices, and more lawsuits likely in the works at Spitzer's office, adware makers of all stripes may have little choice but to make such radical changes.

"It's like if you're on a cliff and a truck is coming toward you and someone hands you a flimsy rope," Dyson said. "It might be risky, but you'd probably take it."

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