September 20, 2004

Barbarians at the Digital Gate

By TIMOTHY L. O'BRIEN and SAUL HANSELL



Jeff Crosby Dan Krauss for The New York Times Jeffrey McFadden, Claria's chief executive, says, "Consumers find value in relevant advertising." KARSTEN M. SELF, who oversees a children's computer lab at a youth center in Napa, Calif., spends about a half-hour each morning electronically scanning 10 PC's. He is searching for files and traces of code that threaten to hijack the computers by silently monitoring the children's online activities or by plastering their screens with dizzying - and nearly unstoppable - onslaughts of pop-up advertisements. To safeguard the children's computers, Mr. Self has installed a battery of protective software products and new Web browsers. That has kept some - but by no means all - of the youth center's digital intruders at bay. "You would expect that you could use these systems in a safe and sane way, but the fact of the matter is that you can't unless you have a fair amount of knowledge, time to fix the problems and paranoia," he said. The parasitic files that have beset Mr. Self and other frustrated computer users are known, in tech argot, as spyware and adware. The rapid proliferation of such programs has brought Internet use to a stark crossroads, as many consumers now see the Web as a battlefield strewn with land mines. At the same time, major advertisers and big Internet sites are increasingly tempted by adware's singular ability to display pop-up ads exactly when a user has shown interest in a particular service or product. "Adware has its place, but to grab market share I think a lot of companies are doing things that make consumers feel betrayed," said Wayne Porter, co-founder of Spyware-Guide.com, a Web site that tracks adware and spyware abuses. "I think we're at a very important inflection point that is going to decide how the Internet operates." The exact definitions of spyware and adware, like many things in the ever-changing world of the Internet, remain open to debate. But spyware generally refers to programs that reside in hidden corners of a computer's hard drive and record confidential information like keystrokes, passwords and the user's history of Web site visits. Some of the most insidious versions have to be installed on a computer by someone other than the user - maybe a jealous spouse or lover. Adware, for its part, marries old-fashioned highway billboard pitches to online distribution and the possibility of immediate response. Adware vendors range from fly-by-night operators who hawk pornography and gambling, wherever they can, to more legitimate companies like the Claria Corporation, which tries to aim its ads at the consumers deemed most likely to respond, based on their surfing habits. Claria alone has about 29 million users running its adware products on their computers, according to comScore MediaMetrix, an Internet research firm. That compares with 1.5 million users in early 2000, according to the company. Some spyware creeps onto a computer's hard drive unannounced, often by piggybacking onto other software programs that people download or by sneaking through backdoor security gaps in Web browsers when consumers visit certain sites. In other cases, consumers technically agree to download the software, but critics say that the disclosures are hard to find. FOR all the differences between spyware and adware, their impact on computers is pretty much the same: screens transformed into digital versions of Times Square, and overburdened PC's that operate much more slowly as they struggle with random and uncontrollable processes prompted by the hard drive. Small wonder that consumers are throwing up their hands in despair. "From what consumers are telling us, they feel like their computers are being taken away from them," Mr. Porter said. "We have some consumers saying it makes them hesitant to use the Internet at all because of what an annoyance it has become." Reliable data about the booming adware market is scant, but consumer complaints have become frequent and vociferous. Privacy watchdogs like the Center for Technology and Democracy in Washington have called for closer regulatory scrutiny of the industry. Legislation seeking to protect consumers from abusive adware and spyware has been introduced in Congress. One state, Utah, has even outlawed the installation of any software without users' consent. Consumers can use some tools to fight adware and spyware themselves. Software products like Spybot-Search & Destroy, Spy Sweeper and Adaware can zap some intrusive programs on a hard drive and block attempts to trespass onto a PC. And many analysts like Mr. Porter recommend that consumers switch from Microsoft's Internet Explorer to Mozilla Firefox, a free browser that they say has fewer security vulnerabilities. (Microsoft has issued software patches for Explorer and released an update to Windows XP that makes it harder for consumers to download software unknowingly.) But critics of the adware industry say solutions to the problems ultimately must come from vendors themselves. Against this landscape, companies that still hope to mine the lucrative promises of adware have choices to make: to abandon the pop-up promotions that consumers find so annoying or to overhaul their practices so thoroughly that they are seen as responsible online citizens. Some companies seem unlikely to follow the second path. Perhaps the most infamous adware purveyor is an elusive enterprise alternately known as CoolWWWSearch or CoolWebSearch. The company operates from computer servers in the United States as well as far-flung places like Russia, Britain, the Virgin Islands and Spain. It has developed adware that can change its name and its location on a hijacked computer several times a day - making it virtually impossible to track. The company did not reply to an e-mail message seeking comment. Spyware Labs Inc., a Hawaiian company, promotes itself as a vendor of anti-spyware tools but peddles a product called Virtual Bouncer that experts like Mr. Porter say functions as spyware and adware once it is installed on a computer. Spyware Labs also did not answer an e-mail message seeking comment. Spyware companies are considered some of the most disreputable players in the industry, because their products can be used for illicit purposes. While many adware companies engage in some of the same practices as spyware companies - both track users' browsing habits, for example - adware tends to occupy a less nefarious position. In the realm of more mainstream adware vendors stands Claria, based in Redwood City, Calif. The company, founded as Gator in 1998, is trying to recast adware as a more consumer-friendly addition to computers. Smart minds and smart money surrounded Claria from the beginning. It was founded by Denis Coleman, a Silicon Valley entrepreneur who was a co-founder of the company that became Symantec. Among Claria's earliest investors were Scott D. Cook, founder of Intuit Inc. ; Andy Bechtolsheim, a co-founder of Sun Microsystems ; and Philip M. Young, an investor with U.S. Venture Partners, a venture capital firm in Menlo Park, Calif. Claria piggybacks its adware on popular programs like Kazaa, the music file-sharing service, and has a lucrative partnership with Yahoo , one of the Internet's busiest sites. Claria's investors and executives say the company has been unfairly grouped with shadier operators and that its goal was never to spy on computer users or to gather personal information surreptitiously. Instead, they say, the aim is to offer useful ads tailored to consumers' real interests and needs, derived from careful monitoring of their Web use. "A technique that provided much more relevant information and advertising to a computer user seemed like a powerful concept," Mr. Young said. "Claria has demonstrated how much more powerful a message is when it's delivered to the right user, and Claria's only scratched the surface of what they're capable of doing when they deploy their software." CLARIA recently canceled plans to take itself public, citing changing business circumstances; it declined to offer a more detailed explanation. But the company's public filings offer evidence of its financial potential. After a few years of losses, the company earned $91,000 in 2002 on $40.5 million in revenue. Last year, it earned about $35 million on $90.5 million in revenue - an enviable profit margin. "At the end of the day it's real simple," said Jeffrey McFadden, a former executive at the Internet portal Excite who is now Claria's chief executive. "Consumers find value in relevant advertising." Advertisers find value in the model, too. Mainstream companies like Verizon , Panasonic and Priceline rely on adware programs because of their power to address people's individual interests. Claria said 425 advertisers - including Cendant , FTD , Netflix and Orbitz - use its adware. Nonetheless, Claria has drawn its share of barbs. Several companies, including The New York Times , have sued Claria, arguing that its pop-up ads violate trademark protections when they appear on the companies' Web sites. Claria has settled most of those suits, including with The Times, but declined to discuss the terms. Claria has also drawn the ire of advocacy groups, partly because of its ubiquity and its role as an industry pioneer. Critics also denounce some of its business practices, particularly the way it bundles its software with other programs and the stealth it has used to land on users' hard drives. "They were very aggressive for a long time, and they turned off a lot of people," said Ari Schwartz, associate director of the Center for Democracy and Technology. "That said, they seem now to be moving in the direction of trying to take steps to make their business more legitimate." It won't be easy, he added: "They still have a long way to go to make their product something people want to have rather than something they're stuck with." Mr. Schwartz said that he believed that Claria's products were not easy to remove from a computer. Claria executives dispute that computer users are "stuck with" their products. They say they have worked closely with Mr. Schwartz and other critics to make their ad programs more visible and palatable to computer users. Scott Eagle, Claria's chief marketing officer, said the company downloads its adware to a user's hard drive only with permission, makes the adware easy to remove and clearly identifies its products. He also says Claria does not collect personal information like last names, phone numbers or e-mail, Internet and home addresses. "We would rather not show you an ad that's not going to be relevant to you, because that doesn't add any value to you or the advertiser," Mr. Eagle said. "The big question is, 'Where does this all go?' Pop-ups and pop-unders are not wildly accepted by consumers." As a result, Mr. Eagle said, Claria will move away from providing pop-ups and will offer more static banner ads on some Web sites. Others in the Internet advertising industry also say that negative reaction has persuaded them to forgo the pop-up route. "Everyone is searching for the magic bullet where the consumer will say yes to pop-ups," said David J. Moore, the chief executive of 24/7 Real Media, a large Internet advertising company. "The average consumer will end up with a few of these adware programs, and it sours them on the entire experience." Mr. Moore said 24/7 had considered buying an adware company but had passed. "We were nervous about the long-term business prospects," he said. "There seems to be a fairly strong groundswell to limit how they do business." WhenU.com, another prominent adware company, began as a comparison-shopping service founded by consultants at the Boston Consulting Group. But the company, based in New York, discovered that comparison-shopping was an unprofitable service, and it, like Claria, began bundling adware with a number of file-sharing companies including, briefly, Kazaa. WhenU, like Claria, uses display ads called sliders - because they slide up from the bottom of the screen. The ads are generated by WhenU's software and can be launched even when a browser is not open - meaning they cannot be stopped by software that blocks pop-up ads. Other WhenU ads appear in front of an open application, interrupting the user, while others hide behind the application until the user closes it. Avi Naider, WhenU's chief executive, says he believes that pop-ups and related intrusive advertising will continue to be viable even if some consumers try to avoid them. "The business spent four years educating advertisers about the performance you can get from these type of ads, and we didn't spend much time educating consumers," Mr. Naider said. "We never talked to consumers about the benefits of software-based advertising." Mr. Naider says WhenU does not keep user information. Instead, he says, the software his company installs on users' machines tracks the Web sites that users have visited and displays relevant advertising. "This is a healthy direction for advertising to go, with a strong set of standards," he said. But he conceded it would be "a battle to transcend the simplistic perception that most consumers have about adware." THE question remains whether a legitimate business can be built on the back of an industry that has annoyed consumers so deeply and has been linked to truly illegitimate practices. "The adware industry has grown so quickly because it works," said Gary A. Kibel, a lawyer in New York who specializes in new media and advertising law. "I'm sure 80 percent of consumers don't want advertising on television, but if you get rid of advertising on television there'd be no more free TV." Mr. Kibel said federal legislation could help formalize and sanitize the business. But some computer users remain unswayed. "Adware and spyware and all the other malwares that are out there just waste a lot of time and make the whole Internet experience a lot less enjoyable," said Orion E. Hill, president of the Napa Valley Personal Computer Users Group, a nonprofit group that educates consumers about PC's. "It's intrusive into your life, and I don't think that's going to change. "The current Internet model is just too wide open, and I don't have any confidence that any of the new models are going to be any better," Mr. Hill added. "The Internet is just too accessible, and it's too easy for people to make anything they want out of it."



