• by Ross Fadner , May 10, 2004

Adware has been a controversial marketing vehicle for a few years now, but the consumer backlash against adware and its more infamous cousin, spyware, with which it is often confused, is relatively new. Nevertheless, adware presents advertisers with a cost-effective, high-precision means of targeting users through their online behavior. The results often present great returns for advertisers, but they often trigger consumer ire.

For advertisers, adware simply refers to placing advertisements in software. For consumers, adware is software that tracks their online behavior: They accept this proposition in exchange for free software downloads. Once they agree, they are served pop-up ads and other promotional messages that are targeted to their interests.

Adware is effective for advertisers because it attaches itself to consumers as they browse the Web, tracking their online history in order to serve targeted messages directly to individual Web addresses. Per a licensing agreement, the ad-serving instructions are downloaded by users as they download the free software. User surfing data is sent to the adware company's server, which then decides which ad to serve based on the information.

Perhaps the most recognizable example of adware is the illegal music file-sharing program KaZaa, used by college students nationwide. Users who download KaZaa's free software also agree to receive messages from the Claria Corp.'s GAIN network of advertisers, as well as Cydoor, another software-based marketing program. Users cannot download KaZaa for free without agreeing to accept ads from Claria and Cydoor.

Adware's effectiveness is underscored by the success of the industry's two most visible players, Claria, which recently filed for an initial public offering, and WhenU. Claria says that its ads are clicked through 20 to 40 times more than traditional banners, which typically average click-through rates of under 1 percent. WhenU claims its click-through rates are as high as 20 percent and its conversions range from .8 to 7 percent. Because of these figures, WhenU says, it is able to maintain a 90 percent advertiser retention rate.

Jeff Lanctot, VP media, Avenue A, confirms that Claria has been a good buy for his clients, but says that adware is a better buy for some marketers than others. "A handful of our clients have really embraced [adware]," he says. "Travel and retail are two categories that have seen a lot of success," but the majority of advertisers will "stay on the sidelines," he says, until legal issues and consumer concerns have been settled. Lanctot says that despite the medium's noted effectiveness, most of his clients are reticent about spending on software-based marketing because of the stigma that still surrounds it. The industry still needs to offer marketers "more structure and clarity," he says.

Data collected by Jupiter Research reflects this. Citing the negative media frenzy surrounding spyware and the skepticism with which most marketers greet the idea of pop-up advertising, Gary Stein, principal analyst for Jupiter Research, says that a quarter of the advertisers Jupiter surveyed are "philosophically opposed" to adware. Furthermore, 7 percent said their respective companies issued mandates prohibiting them from buying adware.

Another problem is that too often, marketers, as well as consumers, confuse spyware and adware, when spyware actually goes a step further in the information collection process. These software companies often bundle their affiliates' data-collecting software without establishing user consent, sometimes altering browser settings or collecting personal information (which is frowned upon by the adware community). These programs are usually difficult to uninstall.

Download.com's Patrick Baggatta warns, "Even the tiniest applications you download, such as media player skins, download assistants, or FTP clients, can house spyware." Further trouble lies in identifying where to place blame, as software-marketing rings can include scores of affiliates.

As complicated as the ethics of this are, legitimate adware companies have made a concerted effort to clean up their images, says Jupiter's Stein, particularly by being more candid about what they do and supporting anti-spyware initiatives. In turn, Stein says, the adware industry as a whole is currently experiencing something of a critical makeover, which he says is underscored by Claria's recent IPO filing.

Disclosure has long been at the forefront of the spyware/adware debate. The trouble, says Ari Schwartz, associate director for the Center for Democracy and Technology, is that most users don't read licensing agreements, which in the case of adware can be upwards of 20 pages long.

Schwartz says the average consumer doesn't understand the connection between the software they download and the barrage of pop-ups they receive. "They don't get GAIN ads when they're using KaZaa," says Schwartz, "they get them browsing the Web. This is confusing to people." In other words, users are not receiving messages while using the application they download; they receive messages while they are doing something else completely. The ad serving component bears no direct relationship to the free software application.

From a legal standpoint, Douglas J. Wood, partner for legal firm Reed Smith Hall Dickler LLP, notes, "consumer ignorance is not necessarily indicative of a bad practice." He says that full disclosure is seen as something unique to the Internet, but in the offline world, full disclosure is not a required marketing practice. "People have been selling and buying your name long before the advent of the Internet," says Wood.

While privacy issues still linger over the adware industry, consumer privacy concerns are a lot less pronounced for legitimate players WhenU and Claria. Their main legal problem stems from court battles with Web publishers, who allege that WhenU and Claria's programs cut into their ad revenue. The pop-up ads served by these companies appear over the Web browser, and often at a point when consumers are most likely to click through for more information.

SaveNow, for example, one of WhenU's products, shows users lower-price options while they are shopping for products online. A user looking for a book at Amazon.com might be alerted about a lower-price offering at another site through the WhenU ad engine.

As yet, there has been no definitive ruling about whether or not this is legal. WhenU most recently lost its case in Utah against 1-800-Contacts, prompting the swift passage of the Spyware Control Act through the Utah state legislature. Since then, the company has countersued on the grounds that the law serves to protect online merchants from competition. WhenU recently won a similar case against U-Haul in Michigan last November. Claria is involved in a series of lawsuits that have been consolidated under one umbrella in the Northern District of Georgia.