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I am an independent research analyst with deep experience in the search and online advertising industry.
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  • How IAC Makes $250 Million/Year From Online Piracy

    Part Three of a Muddy Insights Special Report on the Toolbar Industry

    • 60 million Ask Toolbars/year are delivered by P2P & piracy websites
    • At least $240 million in revenue generated by illegal distribution partners
    • Our target price for IAC is $14 due to undisclosed risks to the business

    Our previous report on Perion (NASDAQ:PERI) exposed a vast underground advertising network of movie piracy and torrent sites that is being actively used to distribute Perion's search toolbars. During our investigation, we also noticed the parallel distribution of IAC/InterActiveCorp's (NASDAQ:IACI) Ask toolbar through copyright infringing channels with products like, which buys so much traffic from pirate sites that they are an Alexa top 500 website, and FrostWire, a popular P2P file sharing program with millions of users. We estimate at least 15% of's traffic comes from toolbar distribution partnerships with these channels. IAC's search division makes about $400 million in revenue/quarter so this channel drives almost one-quarter of a billion dollars in revenue/year. IAC categorizes search revenue into two segments: application and website revenue. The application segment covers toolbars and generates $800 million/year in revenue so we estimate that 30% of their application revenue is generated by P2P and piracy. Management's guidance is $400 million of EBITDA/year, and if we believe that this channel is pure contribution due to an abnormally low cost of traffic, up to 60% of EBITDA could be coming from this business, which is one letter of breach away from evaporating once Google decides to enforce its contractual rights.

    Given IAC Chairman Barry Diller's investment in Aereo, which is being sued by content creators for re-transmitting television programs without authorization, it is perhaps not too surprising to see a track record building with IAC's permissive attitude toward other people's intellectual property. After all, P2P programs like FrostWire are simply novel and revolutionary means of transmitting content. But it would be a stretch to believe that Google (NASDAQ:GOOG), which has strict guidelines on how its partners distribute toolbars, would see things the same way.

    (click to enlarge)

    Simply put, IAC has been using their $1.6 billion Google search syndication partnership to do business with pirates. IAC is very selective in what companies they partner with. They don't do small deals. Like Perion, IAC is no stranger to working hand-in-hand with pirates with a direct distribution relationship with FrostWire, a notorious P2P file sharing software. The business model of FrostWire needs no explanation even to the average consumer. It's only purpose is to facilitate piracy. A button on the Ask toolbar for FrostWire allows the user to launch FrostWire with one-click. It might be possible to argue that this is an isolated incident, but FrostWire is not the only P2P software that IAC is working with. IAC also has direct deals with Ares Galaxy, BearShare, and iMesh to distribute Ask toolbars. IAC may claim that BearShare and iMesh are "legal" P2P programs with RIAA legal settlements behind them, but the same cannot be said for FrostWire and Ares, which are still rogue P2P programs. Users of Web of Trust discovered that iLivid, BearShare, and iMesh are all owned by one company, which goes by various names such as "Bandoo Media", "Musiclab, LLC", and "iMesh Inc". IAC acts like the PayPal of piracy and essentially launders the profits from piracy. These deals amount to IAC's "organic" toolbar distribution through copyright infringing channels.

    On the other end of the spectrum, a partner like iLivid actively buys advertising on movie streaming and torrent sites for its video downloader program. A customized "Movies" toolbar by Ask is included with iLivid, indicating that IAC knows very well where the traffic is coming from. iLivid buys traffic directly from one of the most popular torrent sites, The Pirate Bay, and buys so much of it that a Pirate Bay user pleaded for mercy on Facebook (NASDAQ:FB), "Could you kindly stop advertising Ilivid on your site?" The Pirate Bay uses an anonymous advertising network to place ads on its site , which has been linked to spreading malware, and all media buys on the site must be negotiated through email so it is not possible for a buyer to claim ignorance of who they are buying advertising from.

    To illustrate the scale of P2P toolbar distribution, we examined the P2P software Ares, which had almost 4 million downloads in October 2013, according to SourceForge. We noted during our investigation that IAC is directly hosting the Ares installer on one of its own servers (click "download" on SourceForge and the installer is delivered from, which is owned by IAC). If we assume, conservatively, that only 25% of downloaders accept the Ask toolbar, then Ares contributes at least 1 million Ask toolbars per month. If we further assume that Ares (hosted on SourceForge so impossible to rank via Alexa), BearShare (Alexa rank 4524), FrostWire (Alexa rank 64608: this is probably an Alexa sampling error since FrostWire is one of the most popular P2P programs), iLivid (Alexa rank 473), and iMesh (Alexa rank 1664) all average 1 million toolbar installs/month, then over 60 million toolbars/year are delivered through the channel. It is important to note that the official websites are not the sole distribution points for the software so these are minimum numbers. IAC also has deals with other partners who promote via pirate sites which we have not included in this analysis.

    To do a sanity check on our estimates, we used another approach and looked at the unique visitors per month that each website received. has uniques for only US visitors, but that still gives us a starting point: BearShare (1.6M unique US visitors), FrostWire (700K), iLivid (4.4M), iMesh (2.8M). This totals 9.5 million visitors/month. Add in Ares, which had 166K US downloads in October, and we get almost 10 million monthly US uniques. This completely excludes international visitors, which in some cases make up the majority of the traffic that these sites get. Using this methodology also implies that tens of millions of Ask toolbars are delivered through the channel every year. only has 73 million monthly US uniques so we believe that almost 15% of Ask's traffic comes from this channel which amounts to almost $250 million in revenue every year.

    On the Q3 conference call, IAC CEO Gregory Blatt claims to play by a different set of rules, stating that competitors employ "a mix of download practices and monetization techniques we don't employ." We wondered why IAC's CPCs dropped during the quarter after Blatt explained away the drop as due to having "a user base with less disposable income than the average Internet audience." Could it be because IAC is signing deals with P2P file sharing software where the average user is a child without a credit card?

    More embarrassingly, IAC board members include Chelsea Clinton, Michael Eisner, former Disney (NYSE:DIS) chairman, Edgar Bronfman, former Warner Music (NYSE:TWX) chairman, and Bryan Lourd, partner at Creative Artists Agency, who appear to have no idea what is going on. One would think that these respected industry figures would be providing independent oversight of the company, but IAC is literally robbing Mickey Mouse to pay movie pirates. The only plausible explanation is that this distinguished group of directors had no idea the company they were supposed to oversee was profiting from piracy, and that management has succeeded in pulling a veil over their eyes over a period of many years. After all, why question a winning formula that is delivering this embarrassment of riches? "It's going to grow next year, it's almost $400 million of EBITDA or whatever it is," according to Mr. Blatt. That is IAC's plan, as long as Google is willing to tolerate their creative toolbar distribution practices. Former Google partners like Babylon have found out the hard way after losing both its Google deal and 75% of its market capitalization due to its non-compliant toolbar distribution strategy. We anticipate that IAC's most-favored nation status as a Google partner will come under intense scrutiny once the true nature of IAC's toolbar practices come to light.

    Shareholders may also want to consider the possibility of action taken by Hollywood movie studios against P2P programs like Ares and FrostWire and their financial backers such as IAC. Now that the $200M LimeWire lawsuit has been formally dropped due to LimeWire's bankruptcy and a recent $110M victory against intransigent torrent site Isohunt has been won, rightsholders are surely looking for their next litigation target. While it would surely be difficult to enforce a judgment against the developers of FrostWire, the same could not be said for a multinational conglomerate like IAC that does business with file sharing programs and movie pirates. The piracy ecosystem has many players from the most obvious operators of movie piracy sites to the middlemen who supply the advertising to the end advertisers who ultimately fund the entire operation. That ecosystem is gradually being disassembled, but so far, despite legal victories against sites like Isohunt, Hollywood studios have not made a dent in online piracy because the ultimate financiers of piracy have been free to operate without interference.

    Investors are not baking in the downside. We see only two outcomes for IAC: either IAC is forced to shut down its illegal distribution partnerships, or IAC loses its Google deal entirely. In scenario one, IAC's revenue from search will drop from $1.6 billion to $1.36 billion. In scenario two, IAC loses its deal with Google entirely. If we assume they manage to strike or retain a partnership with Microsoft or Yahoo, then their search revenue would be lower by at least 30-40% due to poorer monetization of the Bing advertising platform. Add in the shut down of their illegal distribution partnerships, and we estimate revenues would shrink to $800 million/year, half of what management is guiding and what analysts have been baking into their models.

    Perion trades at 6x EBITDA, and Babylon trades at 3x EBITDA. Both of these are very challenged businesses. We believe IAC will face similar challenges. Even if we give them the benefit of the doubt, this is a 6x EBITDA business. Without this channel, EBITDA drops to $160 million, and applying a 6x multiple gives a value of $960 million. The company has $200 million of net cash so the total value would be $1.16 billion. The current market cap is $4.7 billion so there is a 75% downside risk to IAC that has not been realized by investors. We believe a fair value for IAC is $14. There will also be knock-on effects from slowing cash flow that will affect other lines of business that are funded by their search division. If IAC is unable to finance their expenditures using ill-gotten gains, then IAC will be forced to cut investment in areas like other segments which will further reduce growth and apply pressure on their growth thesis. Like Babylon, IAC is at risk of losing three-quarters of its market cap overnight.

    We have reached out to Google for comment, but have not received a response by press time.

    We will conclude, for the purposes of clarity, by sharing a few selected videos of how IAC works with pirate sites to distribute the Ask toolbar:

    Ask Toolbar on KAT: Watch Video
    Ask Toolbar on Watch Video
    Ask Toolbar on TorrentReactor: Watch Video
    Ask Toolbar on Watch Video

    Disclosure: I am short IACI.

    Tags: IACI, GOOG
    Nov 26 11:43 AM | Link | Comment!
  • Perion Continues Funding Copyright Infringement

    After MuddyTorrent's first article on Perion (NASDAQ:PERI), Perion management tried to suppress publication by pressuring SeekingAlpha editors to retract our article, which was previously approved for publication. Our research indicates a conflict of interest on the part of SeekingAlpha as Benchmark Capital is an investor in both SeekingAlpha and Conduit, and Benchmark stands to gain significantly from a successful reverse merger of Perion and Conduit, both large partners for Microsoft's (NASDAQ:MSFT) Bing search engine. Shareholders interested in more balanced coverage of Perion may follow us at We will continue to serve the SeekingAlpha community by cross-posting our articles on our instablog.

    We were surprised that Microsoft is working with partners who are distributing Bing toolbars through these copyright infringing channels. We are seeking comment from Microsoft management on these practices.

    If an independent third-party is able to uncover these activities so easily, it does not speak well of management when they pretend to be unaware of how their toolbars are being distributed. Perion management should not be having back room conversations with SeekingAlpha editors to suppress factually accurate articles. Instead, they should be protecting shareholders by calling for an immediate stop to working with pirate sites.

    We have tracked the half-hearted attempts of Perion to disassociate with movie piracy and torrent sites, and while they have made a token effort to clean up their distribution, we were able to easily uncover dozens of additional pirate sites that continued to distribute Perion and Conduit toolbars. We have created several videos demonstrating how Perion and Conduit continue to work with pirate sites:

    SweetPacks Conduit Toolbar on SeedPeer:

    MixiDJ Conduit Toolbar on ExtraTorrent:

    InternetHelper Conduit Toolbar on Pirate Bay:

    We are happy to privately send a list of pirate sites where Perion continues to distribute toolbars to interested readers and media organizations as we do not want to do Perion's work for them. Please contact us if you are interested.

    Perion shareholders should vote "No" to the merger of Perion and Conduit because both companies are engaged in the same kind of questionable activities and have not shown a conviction to reform their practices.

    Disclosure: I am short PERI.

    Tags: PERI
    Nov 12 10:33 AM | Link | 2 Comments
  • Perion: A House Built On Copyright Infringement And Piracy

    Update: Part Two now available.

    Perion (NASDAQ:PERI) works hand-in-hand with torrent sites and movie pirates to monetize their websites, and these toolbar distribution methods put it in breach of its search partnership agreements with Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO), and Microsoft (NASDAQ:MSFT). In our extensive analysis, we counted thousands of websites that are distributing Perion's and its merger partner Conduit's toolbars. If Megaupload was a pirate, then Perion is the banker. Perion and Conduit's impending merger is fundamentally flawed, simply bringing together two of the largest bankers of online movie and music piracy. Perhaps the mere fact that these two companies are headquartered outside the US give them the illusion that they are beyond the reach of US law and Hollywood lawyers.

    Exhibit A is KickAssTorrents (KAT), one of the most popular torrent sites in the world and merely one of thousands of similar websites that is part of Perion's vast underground advertising network. The website,, is among the top 100 sites in the world, according to Alexa, and enables users around the world to pirate the latest music and movies. The MPAA calls KAT a "notorious market" for piracy. Perion will try to explain away advertising on pirate sites by blaming third-party advertising networks, but we found incontrovertible evidence that Perion is working with the owner of KickAssTorrents and knowingly profiting from copyright infringement. Every page on KAT contains a "download faster" link that is hard-coded to lead to a Perion-powered landing page where users are misled into thinking that they will be downloading copyrighted content for free, but are instead given Perion's SweetPacks product, which is powered by Conduit.

    The Sweetpacks product has a privacy policy link that directs to a Conduit webpage, which indicates how closely Perion and Conduit are working together pre-merger. This could possibly be explained away as an "accidental" media buy gone wrong, but the Perion link is coded directly into the source code the website and is not placed there through a third-party ad server or ad network. Furthermore, the Perion toolbar installer clearly states the title of the pirated content, which is only possible if both the website owner and the toolbar owner are working together to seamlessly move the user through the toolbar installation process by promising copyrighted content, but delivering only a Perion toolbar instead. In the screenshots, the movie title "Thor: The Dark World" is mirrored on both the landing page and in the Perion installer even though the installer does not give the user a copy of the movie.

    After completing installation of the Perion product, the user's browser settings are changed to direct to Microsoft's Bing search engine. With Yahoo's recent crackdown on Babylon's practices in toolbar distribution, Perion and Conduit's days of helping monetize the distribution of pirated content are numbered. Google has already terminated Babylon's contract for similar practices. Yahoo in turn has forbidden third-party distribution of Babylon products for their egregious violations of their distribution agreement.

    Perion's distribution practices are exactly the same as Babylon's. Our research encompassed over 1000 copyright infringing websites such as movie piracy and torrent sites, and we reached the undeniable conclusion that Perion's business is a house of cards that is about to collapse. The MPAA recently compiled a list of two dozen piracy websites that it calls "notorious markets" for online piracy and submitted it to the United States Trade Prepresentative, a government body responsible for US trade policy and negotiations. Perion and Conduit are two of the largest advertisers on these sites. Every website we checked contained links and advertising banners distributing Perion and Conduit products which indicates that both companies work very closely with these sites to ensure that their products are well-integrated into the user experience and customized for each site.

    It is impossible for these two companies to deny that they knowingly work with piracy sites. Some of the top pirate sites that Perion and Conduit work with include:

    A key indication that Perion and Conduit knowingly advertise on illegal torrent and movie sites is their use of "download" or "play now" banner ads that appear to be functional buttons on these websites so users believe they will be able to watch or download movies by clicking, but actually lead to landing pages that distribute Perion and Conduit toolbars. These type of advertisements are ubiquitous on piracy sites and are one of the main sources of monetization of such sites, and we have included a representative sampling of Perion's ads below.

    Google, Yahoo, and Microsoft explicitly forbid partners from distributing their search products through prohibited activities like copyright infringement and piracy. Although Perion and Conduit have been able to hide their tracks for a long time, recent changes in enforcement by Google and Yahoo point to a more rigorous scrutiny of distribution practices. It is highly unlikely that Perion and Conduit will be able to continue funding and profiting from online piracy for much longer. Their practices are clear grounds for termination of any existing partnership agreements that Perion or Conduit may have. Perion's Google Search and Advertising Services Agreement clearly states that Perion will not allow any third party to "display on any Site, Approved Client Application or Feed, any content that violates or encourages conduct that would violate any applicable laws, any third party rights, the Google Program Guidelines or Google Technical Protocols applicable to the AdSense Services or Search Services, or the ADX Guidelines applicable to the ADX Services." Noncompliance allows Google to "suspend provision of all (or any part of) the applicable Services." These highly risky sources of revenue put investors at significant risk of capital loss due to the significant concentration of revenue sources from agreements with Google, Yahoo, and Microsoft that account for nearly 100% of Perion's and Conduit's search revenues.

    Perion's and Conduit's consumer email and application products are simply a facade that they present to investors to hide their true source of revenues. We believe they are significantly overvalued since their actual source of revenue will soon be forcibly dismantled and discontinued. Perion has $30M of cash on their balance sheet, which would imply a share price of $2.48. Stripping the company of illegal sources of revenues, the company would quickly burn through cash reserves, and it's viability as an ongoing concern would be threatened. The management teams of Perion and Conduit have hidden behind a mirage supported by private equity investors, including JP Morgan Chase (NYSE:JPM), who have turned a blind eye for the sake of profits. Conduit's investors have smartly engaged Perion in a merger to exit their investment in a last ditch effort to disassociate themselves from an unsavory business. There is no reason shareholders should approve the merger of these two enterprises since it only creates a larger company with even more exposure to these questionable distribution channels. If their search agreements are terminated, Perion and Conduit would have zero residual value. Google has already cracked down on the practices of their search syndication partners, which prompted toolbar companies to seek deals with Yahoo and Microsoft earlier this year. However, Yahoo's warning letter to Babylon indicates that it too is ready to start enforcing the rules. Being forced to follow the rules eviscerated 75% of the value of Babylon. Perion and Conduit are simply a much larger version of Babylon. At best if they are forced to be compliant, they would end up in a situation similar to Babylon. At worst, they are at risk of losing their agreements altogether and left with nothing.

    The entire toolbar industry is riddled with companies who profit from piracy, and Babylon is only the first company to be exposed. USC's Annenberg Innovation Lab publishes a monthly Advertising Transparency Report that named and shamed advertising companies like Google's Doubleclick and Yahoo's Right Media for placing advertisements on illicit file sharing sites, which led to corrective action by Google and Yahoo to police their publishers more carefully. Google and Yahoo are merely middlemen, however. It is only a matter of time before advertisers like Perion and Conduit, who actually pay the bills, are similarly exposed.

    We are seeking comment from Google, Yahoo, and Microsoft.

    Disclosure: I am short PERI.

    Nov 08 5:30 AM | Link | Comment!
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