• by Ross Fadner , June 8, 2004

Claria's Corp.'s initial public offering (IPO) is looming. WhenU has recruited an investment banking firm, Perseus Group, to help it secure a partner or other strategic options. The online ad industry's two most visible adware companies appear to have announced to the world: "we want funding."

Adware is ad-serving software that is downloaded by consumers in exchange for granting them free access to premium content or software that would otherwise require a fee. Such programs require disclosure statements and policies explaining the company's practices in order to be considered adware. Online programs that don't properly disclose these practices are often referred to as spyware.

WhenU and Claria have each been involved in legal disputes regarding their practices. Will heightened public scrutiny of adware companies and spyware providers have a detrimental effect on Claria and WhenU's ability to raise funds and attract investors? Proposed regulation of spyware providers has already crept into the public policy agenda in the states of California and Utah. Pending legal actions by online retailers and marketers also plague the category.

According to a WhenU spokesperson, the company's recent decision to hire Perseus Group was directly related to the attention attracted by Claria's S-1 filing and overall financial interest in the burgeoning online software and applications market. In April, Claria, WhenU's chief competitor, filed for a $150 million IPO, disclosing the company's financial situation for the first time, and subsequently attracting interest in the space from the venture capital community.

"The company anticipates this market segment to grow as fast as paid search over the next few years," a spokesperson from WhenU said, in a statement.

Various lawsuits are pending, and in several instances, companies whose Web sites WhenU and Claria pop-up ads appear over have gone after the advertisers directly instead of WhenU and Claria--each of whom have had several court decisions rule in their favor. In the last month, WhenU has lost advertiser eDiets--and Claria has lost Atkins Nutritionals--as a result of such lawsuits. These controversial disputes could cause advertisers to reconsider dealing with adware companies, despite the noted effectiveness of adware programs at driving sales for advertisers.

Chris Jay Hoofnagle, associate director of the Electronic Privacy Information Center, says that "ultimately, legislators will determine the fate of these adware companies." Legislation efforts, he notes, are somewhat disjointed. Pending federal legislation called Spyblock is currently pending, but a clause in the bill says that federal legislation will cede to state legislation.

WhenU and Claria's practices are already banned in the state of Utah, whose hard-nosed approach and broad-reaching definition of spyware has drawn the ire of adware and Internet technology companies alike.

However, Hoofnagle says that despite the efforts of WhenU and Claria with regard to notice and consent, "the majority of adware users are unaware these programs are installed on their computers." Notice and consent, he says, needs to be "more clearly established." He believes that WhenU's notice and consent is "substantively" better than that of Claria's GAIN network disclosure.

"At the end of the day, I'm not sure what value these adware companies provide from a consumer standpoint," Hoofnagle adds. If that's true, consumers, via advocacy and trade groups, the public markets, and government agencies such as the Federal Trade Commission, could have the final say over the fate of adware companies and their products.