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Claria Goes Public
June 3, 2004
Claria Corporation (formerly Gator Corporation) has filed an S-1 statement, the first step in the United States for an initial public offering (IPO) of stock. The S-1 is a very useful document because it requires the company to be very clear and honest about its business prospects. Potential investors use the S-1 to determine whether to buy stock, and to determine a fair price for that stock.
In Claria's case, the S-1 filing is particularly revealing. As part of its enumerations of risks to future business prospects, Claria has essentially laid out all the things that have been said about it over the years and admitted that they are real threats to its business. Really, this is not news to the rest of the world, but it's good to hear some echoes of reality coming directly from Claria headquarters.
We've excerpted several interesting quotes from the S-1 here, but you can also see the the full S-1 filing (Note: 4 megabyte document!) if you want to read more.
There Ought To Be A Law
"Bills have been introduced in the U.S. Congress to prohibit the installation of software on a computer unless the user of the computer is notified and consents to the installation, such as the Safeguard Against Privacy Invasions Act in the House of Representatives and the SPY BLOCK Act in the Senate. ... It is possible that this or any future legislation intended to regulate spyware could bring some or all of our services within its purview, which could prevent us from operating or distributing some or all of our services or which could require us to change our business practices."
How would these laws affect Claria? They have always claimed that their software is installed with user notification and consent. Is Claria now saying they know they have a problem here?
Escaping User Base
"We experience a high rate of user turnover ... If one of our users replaces the computer on which our GAIN AdServer software is installed, the user will no longer be part of our user base unless the user installs a software product that includes our GAIN AdServer software on the new computer."
At first, this seems like a very odd statement. If users installed a piece of software on the old computer and found it useful, then why wouldn't they install it on the new computer? Perhaps users didn't know Claria's software was there, that would be a good reason. Right, maybe they didn't install it, or at least they didn't know they installed it. This would be in perfect agreement with PC Pitstop's findings. But unfortunately for Claria, this contradicts many past statements the company has made about their users.
"We depend on the technology within the existing Microsoft Windows operating system and Microsoft's Internet Explorer web browser that permits consumers to download software from the Internet to run on their personal computers. ... Modifications by Microsoft can substantially impair our ability to display advertisements, distribute products including our GAIN AdServer software, collect data, or otherwise adversely affect our business."
It doesn't take much of a crystal ball to see that this is going to happen. Windows XP Service Pack 2 is scheduled to be released this summer. It eliminates the drive-by download by default, and that is one of the ways Claria has managed to "increase its installed base," euphemistically speaking. The upcoming service pack also lets users block specific publishers from installing anything on their systems, and Claria is certain to be on the publisher blacklists that will circulate on user forums.
Yet again, this quote screams out for someone to recognize that Claria might be using technology in a consumer-unfriendly way. You wouldn't expect that Microsoft plugging some security holes in Windows would cause a legitimate company to tank. These same Windows security improvements affect the ActiveX controls on the PC Pitstop site, for example, and we welcome them.
The Yahoo Contradiction
"We derived 31% of our revenue in 2003 through our relationship with Overture Services ... Our agreement with Overture expires in September 2007, but Overture can terminate it earlier for a number of reasons, including our failure to achieve specified levels of performance, breach of the agreement and litigation."
In 2003, Overture was acquired by Yahoo. With that deal, Yahoo is now responsible for one third of Claria's revenue. Yahoo is a grand old name on the Internet, probably second only to Google in having a clean reputation. The company knows the kind of trouble that spyware and adware can cause; since they are a popular destination, it's likely that sites like Yahoo Shopping are common targets. Their latest toolbar even includes spyware scanner, although they have curiously made detection of Claria's software an optional feature. It's puzzling why Yahoo would still hand millions of dollars to Claria each year when it seems contrary to their own best business interests.
The wording in the S-1 seems to imply it might be difficult for Yahoo/Overture to just walk away from this contract--assuming they would like to do so. With nearly $30 million at stake, Claria isn't going to want to let Overture out of this deal and would probably go to court to make it stick. Who knows, maybe Yahoo doesn't want out--but it should beat a path for the door if it values its reputation.
"We currently acquire a substantial portion of our new users through downloads of the KaZaA Media Desktop. We expect that our relationship with Sharman Networks will continue to be responsible for a substantial portion of the new installations of our GAIN AdServer software in the future. We may be unable to maintain our existing user base and attract new users if there is a decline in the downloading or use of the KaZaA Media Desktop for any reason, including as a result of regulatory actions or litigation, such as the lawsuits brought by the Recording Industry Association of America against certain users of the KaZaA Media Desktop and other actions brought against Sharman Networks."
Claria didn't quantify "substantial" but it must be pretty big to mention it in the S-1 filing. Clearly, the possibility that the RIAA could shut down Kazaa would put a big dent in Claria's draft plans for new users. But there is another disturbing issue here. Is Claria targeting kids with its bundling deals, and if so how can they give consent? Sharman Networks does collect demographic information including ages according to their privacy agreements, so it's something that could be determined, for example in a legal proceeding against Claria. It seems reasonable that Kazaa attracts a younger audience; this survey indicates a high degree of Kazaa participation by the under-18 crowd. It would certainly undercut Claria's argument that the software is legitimately installed if it turned out that the majority of installations were being done by kids.