Definition:
A technology that assists in gathering information about a person or organization without their knowledge. On the Internet, "spyware is programming that is put in someone's computer to secretly gather information about the user and relay it to advertisers or other interested parties." As such, spyware is cause for public concern about privacy on the Internet
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HISTORY OF SPYWARE ... continued
Virtual money laundering
To really explode, adware required two forces: the rise of peer-to-peer applications and the rise of cost-per-click advertising. Imagine you own a peer-to-peer file-sharing application (for example, Kazaa) that is being used for copyright infringement en masse. People will do almost anything to get it, short of paying for it directly. So you get an adware distributor (say Claria, formerly Gator) to pay per installation of your application if you will bundle its adware. Claria spent about $19.3 million in 2003 on distribution arrangements such as this, or about 43 cents per active user.
To cover the installation payment, the adware watches the user's Web surfing and advertises accordingly, usually with a pop-up ad. For example, when we visited the Dish Network home page with Claria installed, an advertisement for DirecTV popped up. This is politely called "contextual advertising."
The aggressive tactics of some advertising-supported software has given the whole sector a bad name. |
The advertiser, DirecTV in this case, often has a contract directly with the adware distributer, but often indirectly through a cost-per-click network such as Overture. (Claria derived 31 percent of its revenue from Overture in 2003.) Note that Overture, in their final public filing before the Yahoo acquisition, averaged over 43 cents per click, thus covering Claria's user acquisition costs on the first click.
Thus the process starts with the file-sharing taint, but gets washed by the adware vendor and the cost-per-click vendor until it is finally clean enough for the advertiser to buy into.
Legal purgatory
As one can imagine, this is controversial for a number of reasons. As stated in the introduction, Dante's Nine Circles of Hell provides a framework for describing spyware. In part this is reflected in the fact that the most religious (namely the Utah legislature) are the most fervent objectors. Utah passed an antispyware law, the Spyware Control Act, that prohibits contextual advertising, or pop-ups based on what Web sites a person visits--unless at install time, everything ranging from what data is transmitted to representative ad examples are disclosed. In addition, any software would have to be obviously removable and could not send back personal information without full disclosure.
The U.S. Congress has gone a step further and is considering outlawing many of the practices used in spyware as did the state of Utah. To get a more granular understanding of this controversial software, I believe an older paradigm is needed--Dante's "Inferno." It may seem extreme, but as anyone who has ever downloaded some of these programs can attest, it is apt. In addition to ordering the level of sin, I have added what House Resolution 2929--the Spy Act--says about the software.
At BA Venture Partners, we would not consider any application that uses pop-ups, is distributed through file sharing such as Kazaa or is not removable. Beyond that, we would look for applications that provide consumers value and would be installed on their own if people knew about them.
The aggressive tactics of some advertising-supported software has given the whole sector a bad name. But if the software is fully disclosed and doesn't rely on intrusive methods such as pop-ups, the consumer should have a choice to view ads in return for software. What's more, the developer should have a right to make money. Beyond these guidelines, the legal risks and moral problems become clear, and legitimate businesses should stay away from these practices. So we certainly would not consider anything beyond Circle 3.
It is a fitting conclusion that we venture capitalists are comfortable with Circle 3: It is where the gluttons go.
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