The Internet Danger List: stocks at risk from Spitzer's attack on Adware

by: David Jackson

The attack on the illegal disemination of spyware and adware may not end with Eliot Spitzer's suit against Intermix Media (ticker: MIX). This report outlines why and provides a tentative list of other Internet stocks at risk. Stocks mentioned: ASKJ, CD, CNET, FLWS, FWHT, IACI, ICGE, INPC, SPRK, TFSM, THK, TSG, VLCK, and YHOO.

Why the attack on Adware and Spyware won't stop with MIX

  1. A win against Intermix will set a precedent for suing other companies.
  2. The attack on adware and spyware will be politically popular.
  3. There's a lot of Adware and Spyware about. Note this excerpt from the press release issued by the NY AG's office:
Ari Schwartz, the Associate Director of the Center for Democracy and Technology in Washington D.C. said, "One of Internet users' biggest frustrations today is unwanted software that sneaks onto computers without their owner's consent and cannot be uninstalled. Companies have gotten away with unethical and illegal software download practices for too long. The practices alleged in this case are widespread on the Internet and we hope that both federal and state authorities follow Attorney General Spitzer's lead in making this a priority, "

A tentative list of other stocks that could be impacted

1. Other creators of Adware and Spyware

Ask Jeeves (ticker: ASKJ, being acquired by IAC, ticker: IACI) purchased Interactive Holdings for $343 million in March 2004. According to Spyware Confidential, "Interactive Holdings was a front for iWon, My Search, My Way, and My Web Search", making Ask Jeeves "a fairly big player in the adware market".

Could this pose a problem for the IAC-ASKJ merger? The merger agreement states:

To the Knowledge of the Company, neither the Company nor any of its Subsidiaries distributes Spyware or Adware in connection with the businesses they conduct. " Spyware " means any software that covertly gathers information regarding user online activity through the user's Internet connection ( i.e, without notice that such information may be gathered), whether or not such software is bundled as a hidden component of the Company's toolbar or like applications, other than information (i) reasonably gathered in connection with services or information provided by Company or its Subsidiaries to such users, or (ii) that is not associated with personally identifiable information. " Adware " means any software that causes advertising to pop-up as a new window (over or under) on the user's computer based on the user's online activity (other than advertisements that Company serves to visitors to the Company's web site domains while those customers are visiting or exiting such domains) or which is used to distribute Spyware. Each of the Company's applications can be readily uninstalled by users using commercially available uninstall utilities, and no such application, if uninstalled, can reinstall itself without the consent of such users; provided that Company makes no representation or warranty that such uninstall process will always operate without error.

FindWhat (ticker: FWHT) owns Comet Systems. According to Computer Associates' Spyware Information Center, Comet's software falls into the following categories: hijacker, browser helper object and search hijacker. Details here.

Of note: Potential damages and penalties for the Adware vendors are signficant. Eliot Spitzer is suing Intermix for $500 damages per user who unknowingly downloaded Adware/Spyware, plus penalties. His initial estimate is that Intermix infected over 60,000 users' PCs in New York alone.

2. Distributors of Adware and Spyware

CNET Networks (ticker: CNET) owns, which until now was used by numerous Adware and Spyware vendors to disseminate their products. CNET recently announced that it was removing over 500 products from the site and instituting a "zero tolerance Adware policy".

Two questions: (1) Does CNET have any liability for its tolerance of Adware on until now? (2) Will association with legal action against Spyware and Adware damage CNET's brand and reduce traffic to and other sites?

3. Providers of paid search and affiliate ads to Spyware and Adware creators

The larger producers of Adware and Spyware, such as Claria, deal directly with advertisers. But smaller vendors use providers of paid search and affiliate marketing programs to monetize their products. Adware may redirect you to a paid search page, or generate popups ads that generate revenue through affiliate programs, for example.

It's not clear that providers of paid search and affiliate ads to the Adware companies have legal liability, in addition to the Adware providers themselves. Claria's S-1 describes law suits it faces, for example for providing competitors' ads to be superimposed on companies' web sites. The S-1 states:

The claims asserted by the various Claimants essentially allege that the display of our advertisements at the same time as our users are viewing the Claimants’ web pages and the means by which those advertisements are displayed violate federal laws relating to trademark, copyright and unfair competition, as well as similar state laws. Under the trademark infringement claims, the Claimants allege that our use of website addresses, or URLs, to trigger the display of advertisements, regardless of the form of the advertisement, is an unauthorized use of the Claimants’ trademarks to the extent those URLs also include the Claimants’ trademark terms, and also that the display of the advertisements is likely to cause confusion in the marketplace or that they constitute false advertising, resulting either in direct or contributory infringement and unfair competition by us.

Whatever the legal exposure, it is possible that the providers of paid search and affiliate ads receive a potentially significant amount of revenue from Adware customers. The following stocks may have exposure in this way:

  • FindWhat (ticker: FWHT) for paid search.
  • Yahoo/Overture (ticker: YHOO) for paid search.
  • CGI Holding (ticker: THK) for affiliate marketing.
  • ValueClick (ticker: VCLK) for affiliate marketing.
  • 24/7 Media (ticker: TFSM) for affiliate marketing.
  • Think Partership (ticker: THK) for affiliate marketing.
  • LinkShare (partially owned by Internet Capital Group, ticker: ICGE) for affiliate marketing.

Of the paid search providers, YHOO seems to have particularly notable exposure. Adware company Claria's S-1 states:

Key Strategic Relationships

Overture Services

Beginning in March 2003, we entered into agreements with Overture, which was subsequently acquired by Yahoo!, under which Overture provides us with paid listings for our SearchScout service. We share the advertising revenue generated by Overture when a user clicks on one of these paid listings. These agreements expire in September 2007, and the parties may terminate the agreements prior to expiration under certain circumstances, including failure to achieve specified levels of performance, breach of the agreement and litigation. For 2003, we derived approximately 31% of our revenue from Overture.

The affilate marketing network providers - VCLK, TFSM, THK and ICGE partially-owned LinkShare - are also exposed in another way. According to Ben Edelman,

Some web sites ("merchants") pay commissions to independent third-party web publishers ("affiliates") who recommend and link to merchants' products. Proper tabulation of affiliate commissions relies on a multi-step process, requiring coordination by merchants, affiliates, and (often) affiliate networks who help track the transactions... Software from 180solutions (also known as MetricsDirect [an Adware/Spyware provider]) interferes with this tracking process, seizing affiliate commissions for 180's benefit and for 180's advertiser partners.

In my testing, 180 software specifically and systematically causes merchants' tracking systems to conclude that users reached merchants' sites thanks to 180's efforts, even when users actually reached merchants on their own or through other affiliates. As a result, merchants pay commissions to 180 even when no commission is properly payable (under affiliate program rules), i.e. when users reach merchants' sites without receiving bona fide recommendations from independent affiliate web sites.

In other words, Spyware providers like 180Solutions generate artificial affiliate commissions. Those commissions go through the affiliate networks, generating revenue for the network operators. Shut down the Spyware, and that revenue disappears.

THK seems to face particular risk. It acquired an affilate network company called PrimaryAds this month, and according to Jeff Molander, " PrimaryAds is well known to be partnered with [Adware provider] MetricsDirect / 180Solutions".

4. Advertisers via Adware

Some advertisers probably advertise via Adware unknowingly; but others do it intentionally. While it's not clear that advertisers via illegally propagated Adware bear legal liability, they do face the risk of negative PR
and the closure of a relatively effective customer acquisition channel. How do we know who are the leading advertisers via Adware? Adware provider Claria filed an S-1 which contains a list of its top advertiser customers in 2003. Ben Edelman has also compiled a list of Gator advertisers. Together, they include the following Internet (or Internet-related) companies:

  • 1-800 Flowers (ticker: FLWS)
  •, owned by Spark Networks (GDR ticker: SPKFF.PK, filed for IPO under ticker SPRK)
  • Cendant (ticker: CD)
  • Expedia, owned by IAC (ticker: IACI)
  • InPhonic (ticker: INPC)
  • Netflix (ticker: NFLX)
  • Orbitz, now owned by Cendant (ticker: CD)
  • Priceline (ticker: PCLN)
  • (ticker: SHOP)
  • Travelocity (owned by The Sabre Group, ticker: TSG)

This discussion is the result of my initial research into the Adware issue. I'd greatly welcome readers' comments plus suggestions of other publicly-traded companies that might have exposure. Thanks to Jeff Molander of for help with research, and to Ben Edelman for his outstanding web site.

Full disclosure: at the time of writing I'm long SHOP and short CNET and VCLK.