Spyware developers net huge profits, outrage

Spy vs. spy
Once embedded in your hard drive, spyware communicates via the Internet with the company that produced it. The company's computer keeps track of your online meanderings and sends you pop-up ads relevant to the sites you visit. The travel-booking sites Travelocity and Priceline.com have both been direct customers of Direct Revenue. People who picked up Direct Revenue spyware and then perused flights on Travelocity might find their screens obstructed by a pop-up for Priceline, or vice-versa. The travel sites say they stopped doing business with the company earlier this year.

Direct Revenue and other ad software creators struggle to balance an impulse to pump out waves of profitable pop-ups against the danger of enraging consumers who lose control of their computers. "Most of these companies can't overcome their desire to make the most money right away," says Sam Curry, vice-president for product management at Computer Associates International Inc. in Islandia, N.Y.

From early on, a small group of programmers at Direct Revenue focused on how to protect their employer's programs once they were lodged in a computer, current and former employees say. The team called itself Dark Arts after the term for evil magic in the Harry Potter series. One of the biggest threats Dark Arts addressed came from competing software. The presence of multiple spyware programs can so cripple a computer that no ads manage to get seen.

Dark Arts crafted software "torpedoes" that blasted rival spyware off computers' hard drives. Competitors aimed similar weapons back at Direct Revenue's software, but few could match the wizardry of Dark Arts. One adversary, Avenue Media, filed suit in federal court in Seattle in 2004, alleging that in a matter of days, Direct Revenue torpedoes had cut in half the number of people using one of Avenue Media's programs. The suit settled without money changing hands, according to an attorney for Avenue Media, which is based in Curaçao. "This is ad warfare," explains former Direct Revenue product manager Reza Khan. "Only the toughest and stickiest codes survive."

In light of the Dark Arts stratagems, Direct Revenue management in early 2004 procured from its lawyers a modified user agreement that would supposedly be shown to PC owners. Within the densely written seven-page document was a declaration that Direct Revenue "could remove, disable, or render inoperative other adware programs resident on your computer, which, in turn, may...have other adverse impacts on your computer."

Abram presented the new agreement to his troops with an impudence befitting the Dark Arts crew. "It's a lawyer-approved license to kill," the CEO said in a February, 2004, e-mail. He urged some restraint because at the time potential investors were examining the company: "I would think twice about going too aggressively on the offense during [due] diligence." But he added: "Obviously, if we find someone is slaughtering us in the interim, we should not wait to counter."

"It was like a big game of Dungeons & Dragons," a current Direct Revenue manager says, and it was becoming lucrative. An ad software shop generally charges advertisers up to a penny a day for each computer that showcases its ads. A company with access to 10 million computers can make about $100,000 a day. With its "install base" soaring to more than 20 million computers by late 2004, Direct Revenue's annual sales rose 450percent, to $39 million. Its four founders took home a combined $23 million, with Abram enjoying the biggest share: $8.1 million.

This cash geyser drew investors' attention. Insight Venture Partners, which has among its advisers Robert E. Rubin, former Treasury Secretary and now chairman of the executive committee at Citigroup, poured in $27 million, court filings show. Andrew J. Levander, a lawyer for Insight, says the firm's pre- investment due diligence "did not raise any issues concerning the lawfulness of Direct Revenue's disclosure and distribution practices." Rubin wasn't involved with the investment, Levander says. When Insight learns of complaints, he adds, it works with the company to address them.

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