Adware under the microscope

Balancing privacy concerns against valuable customer information, big-name companies are struggling with the concept of "adware"--programs that serve ads based on consumers' Web browsing habits.
Written by Rachel Konrad, Contributor

Toyota Motor executives are adamant about respecting their customers' privacy, and they say they won't alienate buyers with Web monitoring and other controversial online marketing tactics.

So they were understandably caught off guard when informed by a reporter that some visitors to Ford.com were greeted with a prominent pop-up ad offering to redirect them to Toyota.com, a practice that seemed clearly at odds with the company's stated opposition to aggressive online advertising.

Spokeswoman Jennifer Chung speculated that Toyota, which spent $1.27 billion on U.S. advertising in 2000, purchased the ad through an agency or some other partner that didn't share her company's views. But she repeated that such practices were not Toyota's "preferred form" of online marketing.

If the gap between Toyota's marketing philosophy and actual practices appears hypocritical, it certainly is not unique. Companies from General Motors to retail behemoths J.C. Penney and Target are struggling with the concept of "adware"--programs bundled with other downloaded software that monitor consumers' Web browsing and serve them ads based on their online habits.

Only a handful of companies or their ad agencies have developed consistent marketing strategies incorporating adware, and still fewer have determined whether the newest online marketing trend even works. Cynics say they're confident that corporations will dismiss adware as little more than a niche strategy for a smattering of consumer-products industries catering to a limited number of people willing to give up personal data.

Even those companies that believe in adware are proceeding with well-founded caution. Privacy advocates strongly oppose the practice, fearing that corporations will embrace adware and soon be monitoring millions of potential consumers, gleaning sensitive password and financial information in the process.

"There's virtually no authoritative research to point (to in support) for or against adware, so companies are feeling as they go," said Deborah Moscardelli, assistant professor of marketing at Central Michigan University and one of the few academics to study the effectiveness of so-called interstitial ads such as pop-up and pop-under ads. "So far all we can say is that it may aid in brand awareness, but it also has an irritation factor because some consumers feel it's intrusive. You could say adware is a lot like TV advertising in that way."

Large corporations rarely authorize adware campaigns outright, instead farming out "new media" purchases through agencies specializing in Internet advertising. Through this indirect model, many stalwarts of corporate America are investing in adware--especially industries whose customers use the Internet for research before making a purchase, such as the travel, financial services and automotive businesses.

Fearful of a backlash from privacy advocates, representatives at dozens of the nation's top advertisers refused to talk about adware or said they were unsure whether their companies used it. But consumers who have downloaded ad-supported software on the Internet will quickly notice pop-up ads from Travelocity, Priceline.com, Thrifty, United Airlines, American Express, Honda, DaimlerChrysler and Toyota. Retail companies such as Lancome and L'Oreal are experimenting with the trend, as are technology heavyweights like Microsoft, Oracle, Sprint and Verizon.

"I'd say almost without exception our clients view it as here to stay," said Jeff Lanctot, chief media strategist for Seattle-based interactive ad agency Avenue A, the third-largest buyer of online advertising. It has incorporated adware into the online campaigns of clients such as Best Buy, AT&T Wireless and Microsoft.

Lanctot said the "brilliance" of adware is that it touches consumers proactively whenever they're online, especially while they are at work--a period of time that traditionally has been off-limits to advertisers.

Unlike prime-time television slots or peak commute times, when many consumers are a captive audience for commercials, work hours were considered off-limits to advertising for years. That thinking changed quickly with the popularization of the Web, but the initial rush to buy banner ads fizzled along with the dot-com bust as marketers recorded typical click-through rates of 0.01 percent or less.

Marketers are hopeful that adware will be a more effective way to capture consumers during work. "Imagine a third of the day where consumers were pretty much unreachable. And now it can be a vital part of any marketer's campaign," Lanctot said.

One of the earliest and most popular adware companies is Redwood City, Calif.-based Gator, which offers an "eWallet" service to store financial data and purchase preferences on individuals' hard drives. Roughly 9 million people have subscribed to its free, ad-supported service, which fills in their credit card numbers and other information each time they purchase items online. Gator software was automatically installed on the hard drives of another 9 million people when they downloaded other programs bundled with it.

In exchange for eWallet, Gator solicits voluntary demographic information and funnels people into thousands of consumer categories, such as affluent travelers or new mothers. It also classifies hundreds of thousands of Web sites and monitors visitors' browsing habits to determine so-called psychographic categories such as beauty-conscious women (who frequent makeup and fashion sites), would-be sport-utility vehicle purchasers (who go to truck sites for specifications and prices), or people who trade stocks and bank online.

The ability to target specific groups while people shop online makes its advertising much more effective than blanket banner ads, said Gator Chief Marketing Officer Scott Eagle. For instance, a recent Gator campaign for an international, high-end cosmetics company identified people who met three standards: They were mothers, they considered themselves beauty conscious, and they were affluent. Click-through rates averaged 24 percent, compared with the industry average of roughly 0.2 percent for general pop-up ads and roughly 0.01 percent for banners.

"Someone who's about to become a new parent would find information about diaper rash or nurturing an infant as blurring the line between an advertisement and information," Eagle said, noting that in such cases the pop-up ad could include a coupon for diapers or baby clothes. "Same thing if I buy a car or am researching cars online and someone offers me insurance purchase information at the right price and at the right time. It's value-added."

Some direct-to-consumer retailers that use adware say the format works, but they are unwilling to provide specifics.

Jeff Denenholz, director of public relations for Kent, Wash.-based X10 Wireless Technology, says the company serves millions of pop-up ads per month for its surveillance and entertainment cameras. X10 estimates that it is the largest online advertiser, though the private company refuses to provide specific numbers about how many ads it serves, the number of items it has sold as a result of the ads, and how much the advertising costs.

Denenholz also concedes that X10 has received complaints for its ubiquitous pop-up and pop-under ads, which were so prolific that the company's Web site rocketed to one of the most heavily trafficked on the Web shortly after the campaign was launched in spring 2001. He said it was the most effective way that the company could introduce its product to its target audience of "do-it-yourself" equipment installers and people who operate small and home offices.

"We're not naive, and we understand it doesn't work for everybody," Denenholz said. "But it's helped us introduce to a whole new audience...the advantages of the wireless systems we create."

Despite its rising popularity among marketers, adware has yet to become a mainstream tool. Although click-through rates tend to be much higher than for banner ads, it's impossible to say whether the better rates translate into higher sales.

Early research in academia has been inconclusive. Some question whether click-through rates are high because many consumers, tired of enduring unsolicited X10 pop-ups or other ads, simply click on them to find out which company is responsible.

"All I'm getting from students I've interviewed is, 'They're incredibly annoying,'" said Steve Jones, professor of communications at the University of Illinois at Chicago. "If what we consider success is putting a brand name in someone's head, it might do that successfully--but it might not put it in a positive light."

The theory behind adware breaks down especially fast when more than one person uses the same computer. The people who authorized adware to be installed on the machines--often teenagers or children eager for free software to download music and videos--are usually not the relatively affluent, credit card-carrying adults sought most by advertisers.

"The theory goes that you're only exposed to ads that you're interested in," said Central Michigan University's Moscardelli. "The reality is that you're exposed to ads that everyone who uses your computer may be interested in."

Damian Bazadona, an online marketing consultant and founder of New York-based Situation Marketing, also points out that many people--himself included--provide false information during online registration for free e-mail accounts or registration-required content sites.

"People are becoming more nervous about giving their information out, so the only information that you can farm from them is dummy information," Bazadona said. "What's the value in dummy data?"

Beyond market factors, adware faces obstacles in the legal system as well. Although no adware-oriented cases appear to be in courts at the moment, some marketing experts say it's only a matter of time before one corporation sues another for blocking its online ad with a pop-up.

"If you're the agency that placed an ad and ad software places a competitor's ad directly over yours, you're still getting charged for the impression--even though it got far less traction than you thought it would get," said Mark Grimes, president of Eyescream Interactive, an online marketing company in Portland, Ore. "One can only speculate that someone will sue over this sometime soon."

Adware providers know well the weaknesses of their new niche and are working to address them. They say the next generation of adware will be able to target individuals more accurately--and it will perform far more sophisticated functions than merely redirecting shoppers to a competitor's site.

Moreover, future adware could migrate from the Web to wireless devices and instant messaging applications, extremely popular with teenagers and expected to become as important as e-mail as teens age. Dubbed the "ICQ generation" by online marketers, today's teens have shown far fewer worries about online privacy than adults have--though their attitude could change quickly once they get their own credit cards and bank accounts.

Still, it remains unclear whether mainstream advertisers will embrace the next generation of adware, especially those that spent millions on ineffective banner ads throughout the late 1990s.

"Bottom line is it's just a gimmick," said Mitchel Harad, chief executive of San Francisco-based online direct marketing agency GetRelevant. "It's easy to generate lists of people who have worked with you, but a list of people who have paid you and want to do business with you again is harder. It's impossible to say whether adware actually generates any purchases."

According to a survey by trade publication AdAge, the nation's top 100 advertisers spent a total of $350 million in online advertisements in 2000, down 7.7 percent from 1999. The percentage of total ad budgets dedicated to online advertising also shrank, from 0.5 percent of the budget in 1999 to 0.4 percent in 2000. By contrast, advertisers spent $7.04 billion on magazine ads and $14.41 billion on network TV ads in 2000.

Against persistent uncertainty with the economy, as well as new ad technologies, some companies are deciding to invest more in their own sites instead of others. Target, which spent $826.7 million on advertising in 2000, has focused on building Target.com through in-store promotions.

"Adware sounds intrusive, and it's not a strategy we'd even consider," Target spokesman Douglas Kline said. "We have Target.com for guests who want to interact with us. We give credit to those guests to make choices about how they want to be contacted."

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