Trends – Spitzer v. Adware Aftermath

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Seemingly hard to believe, it has been less than two weeks since Elliot Spitzer launched the most public case against desktop software to date. Last week’s Trends Report looked into some of the issues surrounding the case both from a global market perspective and the company named in the suit. The case as expected, or feared, depending on whom you ask increased the attention being paid to the desktop space and indirectly our space. In this week’s Trends we review some of the press dedicated to the topic of desktop software and the impact, if any, it has had.

Desktop software consists of four components, the software creator, the distributor, the advertiser, and the end user. The software creator does not always have a role or play a part in the distribution, but more often than not they do. The distributor either commissions the software from a company experienced in desktop applications or has it made in house. The programs can either be pure adware distributed with or without permission or they can fall into the spyware category if they collect and transmit personally identifiable information without consent. The advertiser can either be a direct advertiser or some third party, be it a broker or network. The creator, distributor, and advertiser all have a financial interest in the desktop product, and it’s significant enough, and the lines murky enough, that one can only anticipate lawmakers will follow the money rather than focusing on the makers. Whether they do or not is to be determined. One thing we can see now is the market’s reaction.

From a stock market perspective, the pending litigation along with the threat of more litigation impacts not only those who might create the software but those who offer revenue streams supporting it. As mentioned last week, Ask Jeeves found itself on the defensive when the Intermix suit came out. While they produce one of the cleanest, least intrusive pieces of adware, their distribution methods were questioned. Perhaps as a result their stock price has fallen about 10% in the past 10 days but remains at the same level as four weeks ago. Intermix whose stock fell roughly 20% when the suit came out is now trading at roughly 50% of what they were one month ago. Fastclick, arguably the most well known, public ad network does not appear directly impacted by the suit, but their shares have fallen gradually over the past three weeks, off almost one-third since a recent peak. Findwhat, the Tier 2 pay per click search engine, that has powered more than a few of what the market might deem questionable desktop applications with paid search results, has seen a 30% drop in its share price over the past ten days and is off 50% from four-weeks ago.

That the suit has had a potential impact on those four companies seems straightforward enough. Of the four companies mentioned, Fastclick, Intermix, AskJeeves and Findwhat, two of them – Findwhat and Fastclick are trading at or very near their 52 week lows. In the case of Fastclick, their stock has arguably suffered from bad timing as opposed to the market’s reflection of exposure to continued litigation. Findwhat operates in arguably the most highly competitive space of online advertising right now. Their being at a 52-week low might reflect a market perception of vulnerability to continued pressure in the desktop space and a reflection of their industry in general. Both Intermix, who was named in the suit, and AskJeeves who has received sufficient press not just for also being a public company that makes desktop software applications but also due to the pending billion dollar plus price tag on them, are trading lower than they have, but still 30% to 50% above their 52 week lows. It is as though the market believes these companies still possess some value not exposed to litigation.

No doubt, the coming weeks and months will prove interesting not just for those entrenched in the day to day of our industry, but also those looking to see what the market thinks of our business. Like an earthquake, the impacts of the lawsuit and threat of future lawsuits have shaken the business. What remains to be seen is what, if any, aftershocks occur, as they could pose the biggest threat. We are not alone though. Companies from Fortune 500 advertisers to brokers use desktop software for advertising. Litigation, like a force of nature, has struck and only time will tell whether this round of litigation is a thunderstorm, hurricane, earthquake or tornado.

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