Money, mayhem to be found with pop-ups

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Now that spam is about to be corralled by technology, pop-ups have taken its place as the single biggest annoyance on the Internet. Yet pop-up advertising is growing faster than any other form of online advertising.

"Any survey we've seen shows that users dislike pop-ups more than almost any other ad format," said David Hallerman, senior analyst at marketing-research firm eMarketer. "[But] we see online advertising growing 25% this year, and [ad ware] surpassing it by 10%."

Claria Corp. and WhenU.com, the two largest companies that produce the free, downloadable software called "ad ware," are increasing their profits year after year. Claria, the Redwood City, Calif., leader, which filed to go public in April, had $90.5 million in revenue in 2003 and is expected to enjoy a 30% expansion in revenue in 2004. Claria's main competitor, WhenU, is profitable and on its way to $50 million in gross revenue in 2004, according to CEO Avi Naider. The New York firm has hired an investment bank, Perseus, to field offers and help direct future strategy.

careful targeting

That ad-ware purveyors are making money surprises no one. For one thing, they demand attention because of their sheer ubiquity. WhenU and Claria serve up just a fraction of the pop-ups on the Internet, but when they do, they get clicks. And WhenU and Claria deliver a kind of contextual ad that tracks users' behavior on the Web and delivers messages that reflect what the user is shopping for or researching. That careful targeting delivers response rates of at least 3%, both companies claim.

But both are also besieged by lawsuits that equate their products with spy ware, threatened by state and federal legislation, and preoccupied with covering up public-relations black eyes. Still, they serve nearly 1,000 clients between them. Top advertisers across the pop-up space, as compiled by Nielsen/NetRatings AdRelevance, range from bottom feeders such as LowerMyBills to blue-chip brands such as American Express.

Claria and WhenU are also tenacious entrepreneurs, quick to point out in court that what they do is not illegal.

Last week, for example, WhenU won a victory in its lawsuit challenging the constitutionality of a new Utah anti-spy-ware law. Judge Joseph C. Fratto Jr. said the law could not go into effect until the suit is resolved.

"They have exploited the fact that trademark and copyright law has taken 100 years to develop, and until the law catches up, it's kind of a wild, wild West out there," said Joe Zeidner, general counsel for 1-800 Contacts, which is involved in lawsuits against WhenU.

"Characterizing them as entrepreneurs is endorsing what they are doing," said Ben Edelman, a Harvard graduate student and self-appointed privacy advocate who studies the two firms' methods in his work as a consultant for marketers that have sued them. "A trespassing analogy is more accurate."

The lawsuits involve marketers such as L.L. Bean, Weight Watchers and 1-800 Contacts. They charge their competitors, as well as Claria and WhenU, with violating their trademarks by serving ads for competing products on their own Web sites. A related issue, mentioned in court papers, is that the ad-ware firms trick consumers into downloading their products onto their desktops along with free software such as Kazaa.

Claria and WhenU maintain they provide clear notice and opt-in instructions before consumers load products onto their desktops, that they place their brand on each ad, and that each ad presents a way to opt out.

"You, as a consumer, invited L.L. Bean to your screen, and you invited the pop-up software in," said Scott Eagle, chief marketing officer, Claria. "I understand why L.L. Bean doesn't like it, but it's about competition. It's not illegal."

sorting it out

Claria has 43 million consumers signed on, Mr. Eagle said. Claria's Mr. Naider said over 100 million consumers have downloaded his product "since 2001." But he admits, "80% have opted out over time."

Federal trademark law was written before the Internet came into being, trademark lawyers concede. "What it comes down to is [whether] consumer users are now savvy enough to know that when they are confronted with a pop-up, that it has nothing to do with the Web site they are visiting," said trademark attorney David A. Rammelt, partner at Kelley Drye & Warren.

Marketers considering pop-ups must weigh all these factors, warn media professionals.

"You might get a 3% response rate, but how qualified are those leads?" asked Greg Smith, director-media practice, Aegis' Carat Interactive, whose agency does not recommend pop-ups.

When Omnicom Group media buying shop OMD suggests pop-ups to a marketer, the agency is careful to keep clients apprised of events in the industry, said Jeff Minsky, East Coast media director. "We tell them that they are going to end up perturbing a certain percentage of the audience, but they will end up selling products." The most effective use of pop-ups? A niche market or an impulse buy, he said.

Two marketers currently named as defendants in pop-up suits, eDiets and Drugstore.com, decided to stop using the ad units. The litigation and legislation are the result of consumer displeasure, said James Epstein, eDiets general counsel. "Whatever benefits the practice might have had in the past, it turned out not to be worth it."

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