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msnbc.com
updated 11/20/2003 11:23:05 AM ET 2003-11-20T16:23:05

Call it spyware, or adware, or just plain annoying — but it’s everywhere. Programs designed to deliver pop-up advertising have multiplied like viruses in recent months and consumers should get used to it: Companies behind the pop-ups are signing up brand-name advertisers, winning court battles and rolling in cash.

Bob Sullivan
AT A MINIMUM, pop-ups — even legitimate ones from the site a consumer is visiting, such as a coupon offer as a shopper clicks away — are usually an unwanted interruption of Internet surfing. Throw in a few “adware” programs that anonymously follow consumers online in order to offer them context-sensitive ads and performance can slow to a crawl. And then there’s “spyware”: programs that secretly watch every move consumers make and every word they type — a clear invasion of privacy.

As with spam, technology firms and legislators are hard at work trying to beat back pop-up ads. But slowing down pop-ups may ultimately prove a more daunting problem than fighting spam. Spammers now often struggle to make profits, and sometimes face stiff government fines. But pop-up networks have attracted brand-name advertisers like Dell, eBay, Expedia, and Orbitz. Adware firms have won two victories in court. And most important, at least for now, they are making money.

n-CASE: SUDDENLY, 13 MILLION USERS

Take tiny 180Solutions, a 70-employee startup in the Seattle suburb of Kirkland, Wash. Its office, bustling with recent college graduates working late hours, seems stuck in time, perhaps 1998. The CEO, Keith Smith, is already planning the second company-wide party, a free trip for all to Las Vegas.

Few consumers would recognize the name of 180Solution’s only product, an adware program called n-CASE, but it has quietly been installed on some 21 million computers around the world, most in the United States. About 13 million of those are active users, Smith said. According to Network Associates Inc., which earlier this year began detecting the presence of adware with its antivirus software, n-CASE was recently found on over 3 percent of all PCs in a study. In the world of adware, it is second only to Gator — and in the study, was more common than all but seven computer viruses.

The widespread reach makes n-CASE attractive to advertisers. The firm claims it will make $18 million in revenue this year. A huge-flat screen monitor in 180Solutions’ office counts and displays revenues by the second. Some $50,000 was earned by 7 p.m. on a recent day, still short of the firm’s $75,000 daily goal. Still, Smith claims revenues are jumping 10 percent a month.

It’s a remarkable turnaround for 180Solutions, which was sued by Washington state early last year over an earlier ad service, Epipo.com, that offered to pay users to look at ads. The company settled with the state in October 2002, but barely escaped bankruptcy, Smith said.

But now, as a big-time player in the adware world, the Smith thinks his firm is sitting on a gold mine — an Internet traffic hose that can be turned on at any time, delivering thousands of ready-to-buy consumers to electronic commerce firms by interrupting them just as they are about to make a purchase somewhere else. It’s an advertiser’s dream, Smith says.

The business model also sounds pretty dreamy.

“Think about revenues vs. cost,” said Ben Edelman, an industry observer and expert witness who has testified in two lawsuits against adware companies. “They are making a lot of money. What are their costs? They’ve got to write some software and trick some users into installing the software.”

WHO BUYS ADS?

N-CASE, which stands for Comparison Alternative Shopping Engine, works like all adware programs. It watches users as they surf, and interrupts Web site visits by popping up context-sensitive advertising right atop their screens. In one example, the firm shows shoppers clicking to a woman’s blouse at Nordstrom.com, only to have a window pop-up — over Nordstrom’s site —— with similar offerings from Spiegel.com. Advertisers love it, Smith said. “We have a 90 percent retention rate.”

In September, consumers nudged toward Dell.com by n-CASE purchased nearly $4 million worth of computers, Smith said, netting 180Solutions over $100,000 in finder’s fees. A spokeswoman from Dell said the company does not discuss its marketing deals publicly.

180Solutions has also signed up eBay.com, Monster.com, and about 5,000 other firms, Smith said.

Big-name advertisers have been dabbling in pop-ups for a while. The largest adware network, known to most as Gator, has attracted clients ranging from Disneyland to ING Direct to the University of Phoenix, according to Edelman. Gator, which recently changed its corporate brand to Claria Inc., doesn’t release financial figures, but until recently a note on the firm’s Web site said minimum advertising buys were $25,000. Edelman says the hyper-competitive online travel industry spends the most on pop-ups, and Expedia.com is the largest buyer, spending “hundreds of thousands” on Gator ads each month. An Expedia representative said the company wouldn’t discuss its marketing strategy.

HOW MUCH DO CONSUMERS KNOW?

Following in Gator’s footsteps, n-CASE slips onto most consumers’ machines quietly, bundled with popular, free shareware programs. According to marketing e-mails sent by 180Solutions agents to software developers, shareware writers earn 7 cents for each time a consumer downloads and installs n-CASE via their software. “Currently, over 60 percent of users, when prompted, opt to install n-CASE,” the e-mail says.

Adware defenders say the model finally gives free software developers a reason to continue working. On his Web site, the developer of Rosoft says he made $40,000 last year thanks to his adware deals; he didn’t respond to e-mails.

Critics say most consumers have no idea when they download free software that they are signing up for an endless stream of pop-up ads, even if warnings are included in the small print of the software’s end user license agreement.

“In exchange for getting (the software) users purportedly agree to receive pop-up ads forever. That’s insanity,” said Edelman. “Anyone who agreed to that can’t have understood it.”

Something else consumers may not understand is the amount of information they are sharing by allowing the programs to run on their systems.

“When are people going to get it, that every time they look at something they are being watched?” said one industry watcher, who asked not to be named.

Smith and others in the adware side of the industry insist there is no privacy invasion when consumers are watched anonymously. To the contrary, consumers enjoy having the chance to do last-minute comparison shopping before they finish the checkout procedure at an e-commerce site, he said.

“I would challenge anyone to make the case that giving consumers more options at the point of sale is bad,” he said.

Consumers do understand that the adware programs can be hard to remove — so hard that a cottage industry of anti-adware programs has sprung up.

Technology is also being used at the other end of the battle: stopping pop-ups from showing up in the first place. Many Internet providers, including Earthlink and America Online, already offer pop-up blocking software; so does Web search engine Google. But the biggest blow for pop-up firms was this month’s announcement by Microsoft that the next update of Windows, due in the middle of next year, will include features that disable pop-ups.

LEGAL VICTORIES

That sounds like throwing the baby out with the bath water to Richard LeFurgy, who is chairing a committee that will develop voluntary advertising standards for pop-ups at the Internet Advertising Bureau, an industry trade group. Web firms should be able to use pop-ups on their own sites to hawk products and solicit consumer participation, he said. MSNBC.com, for example, uses pop-ups to recommend that users enter their zip code so they can receive personalized news. But while that use of pop-ups might seem benign, consumers don’t make distinctions between those ads and other kinds of pop-ups. And now, too many pop-ups threaten to saturate consumers and kill the format, he said.

“People click on pop-ups. Advertisers wouldn’t want to use them if they didn’t,” LeFurgy said.

The adware industry also thinks there are some clear distinctions, and bristles at being associated with the seedier practices of spyware firms. Earlier this year, Gator sued a Web site operator for libel and defamation for calling its program spyware.

The legal offensive has given pause to the anti-spyware industry. Network Associates’ McAfee antivirus software, for example, doesn’t automatically delete adware programs when it detects them, and the company is careful to label them “potentially unwanted programs.”

“There are some legitimate business models where companies do some of this stuff, and some that aren’t legitimate,” said Christine Stevenson, spokeswoman for anti-spyware firm Webroot. “Everybody is trying to cover their legal behinds right now.”

The adware industry has received a big boost from two recent federal court rulings which declared pop-up ads don’t infringe Web site owners’ rights. In September, a federal judge dismissed a trademark lawsuit brought by U-haul International against WhenU.com, maker of adware software called SaveNow. And this week, a second judge ruled in favor of WhenU in a similar case brought by Wells Fargo & Co. and Quicken Loans.

A number of other lawsuits are still pending in federal court, but the adware firms have been emboldened by WhenU’s legal successes.

“In the last two months the amount of adware has exploded,” said Anthony Porter, co-founder of SpyWareGuide.com.

Despite their popularity, industry adviser LeFurgy said “there are a lot of reasons why this should be reigned in. Just because we can do things doesn’t mean we should.”

To 180Solutions’ Smith, all that means his company has to find a way to convince consumer they should keep his n-CASE software on their machines.

“I admit we haven’t done a good job of figuring out what the value proposition is for consumers,” Smith said. “We’re working on having software that consumers not only want but really need. ... We’re calling 2004 the year of the consumer here.”

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