RIP Adware? Lessons Learned from an Revenue Driven Industry

Adware: defined generally as companies with a business model of spending money on direct response ads promoting downloadable software where the business model was showing ads to those new users as the means for monetization; the software bundles almost always included a toolbar added to the browser and a separate application that delivered pop-up ads.

Adware companies have raised a lot of money, made select people "FU" wealthy, and spent as much time in legal battles as running their operations. One thing they haven't managed to do is stay in business for the long-run, as evidenced by the latest casualty, Zango. For those who worked in the performance-marketing between 2000 and 2006, the names Gator, Hotbar, WhenU, 180 Solutions, and Direct Revenue, or their rebranded versions, i.e. Gator -> Claria -> Jelly Fish and 180 Solutions + Hotbar -> Zango, will elicit strong memories of a time period not all that different from the Wild West of today's flog/review sites.

In hindsight adware's challenges mirror every highly profitable, easy to copy, and equally easy to abuse method of advertising, and it's lessons from their rise and fall, especially in light of those marketing methods that followed which inspire this post.

On one level you could say that the adware space helped create the ad-supported software boom, operating on the premise that the value of the bundled software makes up for any perceived inconvenience from advertisements. It's a premise that works for multi-billion dollar firms (Google for instance), but the early pioneers got too caught up in the money. That focus created an environment with the following issues:

A. The nature of their free software - Users love free things. Reader's of Dan Ariely's Predictably Irrational will recall empirical data showing not just the value of free but that some of the smartest, most logical people still fall victim to the power of free. As the saying goes, you can fool some of the people some of the time but not all of the people all of time. So, while free, the software given away to consumers didn't quite measure up to the non-monetary cost of using it (see point B). The free screensavers, emoticons, wallpapers, etc. weren't necessarily bad, but they weren't exactly ambitious undertakings of value. In other words, after seeing them, few would seek them out or recommend them to a friend.

B. The way they display their ads -  Adware companies started when access to users was cheap and monetization of those users limited. When the ad market turned around and websites began offering great products for free with non-intrusive advertising, antiquated software programs with intrusive ads didn't stand a chance. For those that haven't installed adware, ads weren't especially innocuous. They popped-up on your computer at unexpected times and with a regularity sure to annoy. The best of the bunch limited the frequency, but alas there is no way to make pop-up ads tolerable. (If only IAC would learn that with their travel properties. Do we really need an Away.com pop when performing a search on Orbitz?) The rarest of the bunch got rid of pops all together (ironically an IAC company), but only one had strong enough alternate monetization to survive the implosion. 

C. The way they obtained their users - It's one thing if the majority of users entered into the pop-up ad-supported model understanding knowingly what they would get, but most didn't. Those companies acting on better behavior had clear disclosures that users didn't have to (and didn't) read. Presenting users disclosures they might not read doesn't imply any wrongdoing; the issue at hand comes from the generally aggressive manner in which the ads were displayed. If you thought the exit pops that the majority of continuity companies use to try and keep users were annoying, you haven't experienced an ActiveX ad. It's an ad disguised in an operating system prompt. It is common to see them when installing software, but it takes a trained eye to recognize a prompt for download triggered from ad code and a prompt triggered by deliberate action (clicking "Download" for instance). In the usual ad paradox, savvy users don't make advertisers money, so whether they didn't instinctively hit "OK" didn't matter to them. The money came from the non-savvy user who did and would then keep it installed a beyond average length of time for they didn't understand what they had installed or how to remove it.

The players in revenue driven businesses aren't all bad, and they more than other types form two distcint groups. Here is how the adware players fit into those types:

1. Legitimate - While some people would contend that a legitimate adware company is an oxymoron at best, several of the better funded companies could sleep well at night feeling that they did in fact offer a fair value to the consumers. The difference between legitimate and infamous are the exact things that meant the legitimate would struggle to survive - infrastructure. The legitimate players invested heavily in compliance, customer service, and didn't obfuscate their identity. Over time, they even made it relatively easy for users to figure out whether they had the software and how to uninstall it if they wished. Each step adds costs and lowers their revenue per user. It also makes puts them on the radar as a target for any small issues and allows any who want to criticize them to follow their moves easily. It's unfortunate, as some of them weren't that far off from success, and some of the products people did like. They were simply a little too stuck in their ways from a revenue perspective to make the switch to one that had longevity.

2. Infamous - The infamous adware companies are the same group of people (sometimes literally) insuring that flogs will live a short lifespan. They have no staff, no infrastructure, no customer service, and no real concern. The infamous ones ruined it for the rest by taking the shortest route to profit. Why offer free software and attempt to add value when you can simply get a user to install the adware. They realized early on that an ActiveX ad didn't have to say much to get a user to install a program which simply showed ads. These are the ones that stopped installing a toolbar as well once they realized that a) the major ppc engines didn't want the traffic and b) it made it that much easier for users to figure out they had installed something. This group perfected the "drive-by" install where in the early days the software could install without a prompt depending on the user's computer permission settings. And, unlike the legitimate group, they didn't have investors, weren't looking for an exit. They had a skeleton crew enjoying the six figure revenue days of high profit, and when it was a little too costly to stay around, they just took the millions and left. 

This is usually where I try to end the post, already a meaty 1000+ words. But, adware provides such an amazing lesson for those running, considering investing, joining, etc. a revenue driven business with some questionable tactics. The second part of the article focuses on extrapolating more broadly conditions to evaluate other businesses. Chances are that all of the following are not necessary for failure, but having all is sufficient. 

• Advertiser Hesitancy - The advertiser's pay the bills. Mentioning the importance of advertisers liking the vehicle by which their ads get shown is like saying wash your hands before eating or touching you face to minimize the risk of getting sick. Advertiser hesitancy is a challenge for any new platform, even something as popular as Facebook applications. But, there is a difference between the hesitancy that comes from novelty and hesitancy that comes from bad press. Amazingly, the top-tier firms, e.g. Claria, did a stellar job of convincing media buyers for top agencies that they should spend their dollars with them. Like any ad business, the top-tier advertisers made up only a small percentage, but it was a bigger percentage than the casual observer would expect. What the adware companies had going for them though was being able to a) focus on targeting and b) play into competitive nature of certain advertisers all in an environment where high scale options that met both of those didn't exist. Because the ads were pop-up, they covered the real-estate of the site, not an ideal format unless you wanted your company's ad to show on top of your competitor's page. In this scenario, you the advertiser would overlook the user experience just for the satisfaction of potentially one-upping your rival. Such behavior is ultimately short-lived, especially when enough users complain about the experience. While it might not seem that much different than bidding on a rival company's keywords in paid search, the experience was just off-putting enough that it didn't have the same level of plausible deniability and value that Google enjoys. (Even with paid search though, we see that avenue being slowly choked.)
• Publisher Hesitation and Frustration - Since adware consumers didn't download the software after seeking it out, they had to come across it somewhere. As it wasn't a visit to download.com that did it, most users installed the programs after visiting some other website. For that website, displaying adware promotions was a Catch-22. They ads provided solid monetization, but it also had the likelihood of cannibalizing future revenue. The long tail of sites, those that simply wanted to make as much possible from their ad inventory, didn't have a problem running campaigns for adware. But, those who took a longer-term view of their users and especially those that felt a responsibility to show only socially acceptable ads became heavily against running anything adware related. Much like many of the mobile subscription marketing campaigns of today (and now flogs), adware started to face an uphill battle for distribution. Their source of either unsuspecting publishers or lenient (like the Facebook app guys of today) ultimately dried up. And, with both the browser's and publishers' battle against the once dominant ActiveX, they had to work that much harder to get installs.
• Consumer Backlash - It is difficult enough when advertisers and publishers start to have reservations about the product and process. It's another thing when the consumers do as well. Not surprisingly, the consumer leg only adds to the advertiser and publisher ones. When they complain, it makes the others even more weary. Adware had a special property in that it often angered the end user enough to take action. People might not mean to sign up for a quiz/crush service, but when they do, the transaction (including ongoing delivery of content) takes place on the phone, not the web. Not so with adware. When users received a pop and didn't understand why they did, they took their complaints to the nearest person - either the advertiser being promoted or the site that triggered it. The latter only fueled the fire against adware from a publisher's point of view. It's one thing to play a part in promoting the downloading of adware for profit, quite another to feel taken advantage of, i.e., have an ad shown on your site that you didn't approve yet one your user blames you for seeing. And, similar to advertisers backing out and publishers no longer wanting to show the ads, the consumer sentiment only added to the negative feedback loop of lower lifetime value and increased costs to service the business. Ultimately, it's this one that will undermine any attempt to truly succeed. If you run a product or service that user's don't really want when they fully grasp what they get, you will fail. You might be able to run a highly profitable business, but you will run one that will forever face headwinds. The length of your survival becomes a formula based on the strength of those headwinds.
• Competition a.k.a. Perceived Returns for Little Effort - Speaking of headwinds, nothing will cripple a business trying to survive in an already problematic area like competition from and an invasion by the infamous group. It's the same thing that happened with mobile subscription services to some degree and especially with the flogs. While there are legitimate players, ones who have listed phone numbers, addresses, customer service and so on, they must compete (in business and industry reputation) with companies who carry none of that cost structure and have none of the same concerns about how to treat the consumers. The challenge wasn't making adware as a whole legitimate, it was differentiation between the legitimate and non-legitimate players. In the end, it wasn't the model so much as the ease of entry by those without the vested interest. And, this is something we see time and again especially in the performance marketing space. Flogs can very easily be legitimate, but the legitimate ones will not be allowed the chance to thrive so long as the perception among the non-compliant is that there is easy money to be made without having to do much to earn it. If you are trying to build a legitimate company in a space with that perception, think twice.

Is adware dead?
The short answer is no, and just like email marketing, it will prove hard to eradicate completely even if almost every card in the deck is stacked against it. As mentioned above, the adware tale is not just one of profit and potential but ultimately trying to turn a service into something it wasn't. That profit and potential, though, mean others will continue, some following the lower-hanging fruit routes of copying an idea that made it in the past with others attempting to innovate and improve upon the weaknesses in the original purveyors of adware. In thinking about the survivors and innovators, two companies come to mind - MindSpark (formerly FunWebProducts) and GameVance. The former is the clear winner in what was once called "cute"ware. Unlike the more nefarious adware, the installation of a MindSpark product doesn't come with the pop-ups. They install a toolbar and have various hooks into the user so that they won't be tempted to uninstall, but early on, they rid themselves of the behavior that led to the majority of complaints. Thanks to their strength in monetization, savvy in marketing, and persistence, they outlasted their competitors who could not afford to continue buying user and monetizing them. MindSpark continues to thrive even in an environment that doesn't fully understand their product. The same can be said for relative upstart GameVance, whose casual gaming services seem like an improved version of one of Zango's endeavors. Users can play GameVance's offerings for free, including the chance to win prize money, but it comes with the classic adware monetization tool, pop-ups. With fewer bad players still around and better global help removing them (thus no triple serving of ads because people have more than one installed) along with much clearer disclosures to the users, they have continued to grow and minimize the advertiser / publisher / consumer challenge. Theirs is a lesson in not just doing things transparently but what users will do for the continued chance to win money. For the time being, neither company looks in danger, but neither have the luxury of the buzz like Twitter.

Comments

[Chester Ng]

Awesome post Jay; you nailed it.

The software world is a funny one, albeit ripe with lessons learned that indeed do transfer to other online advertising sectors.

Many folks seem to get caught up only in the malicious (spyware, malware) but underestimate the just plain crappy (products and experiences that aren't "exactly ambitious undertakings of value" as you put it). Clearly, there is a slippery slope between crappy and malicious that "infamous" companies have taken advantage of with deceptive practices.

We find ourselves in a position of being the "white hat" fighting the good fight against our share of "grey hats" so I'd be curious to hear if you have any additional guidance, case studies about that inherent challenge as well as the related ad paradox you mention.