Spyware developers make big bucks

[gonzo]

Consumers have strong opinions about Direct Revenue's software. "If I ever meet anyone from your company, I will kill you," a person who identified himself as James Chang said in an e-mail to Direct Revenue last summer. "I will f------ kill you and your families." Such sentiments aren't unusual. "You people are EVIL personified," Kevin Horton wrote around the same time. "I would like the four hours of my life back I have wasted trying to get your stupid uninvited software off my now crippled system."

Sifting through a stack of customer complaints in June, 2005, a Direct Revenue employee decided to tally the most frequently used words of aggression: "die" (103 times), "f------" (44), and "kill" (15). Douglas Kee, then Direct Revenue's chief of quality assurance (QA), ribbed colleagues in an e-mail that with all the death threats, it was a "good thing QA sits farthest away from the entrance."

According to angry consumers and the New York State Attorney General, Direct Revenue makes "spyware." These programs track where you go on the Internet and clutter your screen with annoying pop-up advertisements for everything from pornography to wireless phone plans. Spyware can get stuck in your computer's hard drive as you shop, chat, or download a song. It might arrive attached to that clever video you just nabbed at no charge. Web security company McAfee Inc. estimates that nearly three-quarters of all sites listed in response to Internet searches for popular phrases like "free screen savers" or "digital music" attempt to install some form of advertising software in visitors' computers. Once lodged there, spyware can sap a PC's processing power, slow its functioning, and even cause it to crash.

This explains the vitriol aimed at Direct Revenue. The company, located in a loft above a clothing boutique in New York's hip SoHo district, has been a pioneer in a seamy corner of the booming Net advertising industry. Although it is small by some corporate standards, having generated sales of about $100 million since its start in 2002, its programs have burrowed into nearly 100 million computers and produced billions of pop-up ads.

Direct Revenue's swift rise illustrates the intertwining of spyware and mainstream online marketing. The Web is the hottest game in advertising, but what's rarely acknowledged is the extent to which unsavory pop-ups boost the returns. Here's how it often works: Sellers of advertising, ranging from giant Yahoo! Inc. to much smaller networks, recruit clients, tally the clicks their ads generate, and charge accordingly. But then Yahoo and the other advertising companies sign up partners that distribute the ads beyond their own sites in return for a fee, and those partners sign up other partners.

Down the line, a big piece of the business winds up in the hands of outfits like Direct Revenue, which disseminate the ads as pop-ups and share revenue with their more mainstream partners. Some advertisers say their messages have appeared in pop-ups without their permission. Others seek out pop-ups, and Direct Revenue frequently sells ads directly to such advertisers.

Spyware rakes in an estimated $2 billion a year in revenue, or about 11percent of all Internet ad business, says the research firm IT-Harvest. Direct Revenue's direct customers have included such giants as Delta Air Lines and Cingular Wireless. It has sold millions of dollars of advertising passed along by Yahoo. And Direct Revenue has received venture capital from the likes of Insight Venture Partners, a respected New York investment firm.