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  1. #1
    ABW Founder Haiko de Poel, Jr.'s Avatar
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    New Software Quietly Diverts Sales Commissions
    By JOHN SCHWARTZ and BOB TEDESCHI

    Some popular online services are using a new kind of software to divert sales commissions that would otherwise be paid to small online merchants by big sites like Amazon and eToys.

    Critics call the software parasite-ware and stealware. But the sites that use the software, which is made by nearly 20 companies and used by dozens, say that it is perfectly legal, because their users agree to the diversion.

    The amounts involved are estimated by those in the industry to have mounted into the hundreds of thousands of dollars and are likely to continue to grow — in part because most users are unaware that the software is operating on their computers.

    There is no cost to the customer, but those who run small Web sites that funnel sales to the big merchants say that they are being hurt. "It's painful when someone walks in and takes sales right from under me," said Shawn Collins, who runs a number of sites that feed customers to Amazon and other merchants. "I probably saw a drop-off of 30 percent in income for the past six months."

    The diversion begins when consumers get software from the Internet that helps them swap music or other files, or find bargains online. As they install the software, they are asked whether they would also like to show support for the software maker by shopping through an online affiliate program. These programs typically give a percentage of each purchase back to the affiliate — in this case, the software maker — as a commission.

    What the consumers are not told clearly is that if they agree to participate, their computers may be electronically marked: all future purchases will look as if they were made through the software maker's site, even if they were not.

    In many versions of the software, a purchase will look as if it was made through the software maker's site even if the shopper came in through another site that has its own affiliate agreement with the online store in question. Those affiliate sites include small businesses and even charities that use affiliate links as fund-raisers.

    Some version of the diversion software is used by some of the most popular music trading sites that have tried to fill the void left by the collapse of Napster, including Morpheus, Kazaa and LimeWire. The companies say their software has been downloaded by tens of millions of Web surfers.

    Although estimates are hard to come by, those in the business say that the amount of money involved could be large. The affiliate market, in which smaller sites funnel sales to larger ones in return for commissions, accounts for roughly 15 to 20 percent of the estimated $72 billion online market, said Carrie Johnson, an analyst with Forrester Research. A successful affiliate Web site can make $60,000 a month from referrals alone, said Haiko De Poel Jr., chief executive of Abestweb, an online forum devoted to affiliate marketing. He has organized owners of sites to fight Morpheus and others.

    A spokeswoman for Amazon, which has 800,000 affiliate sites feeding it customers, said the company worked to protect those sites from hijacking. "We don't allow sites that use a download or a tool to redirect a shopping session to their account if they do not initiate the shopping session," said the spokeswoman, Patty Smith. "We've kicked out a number of sites for doing that."
    Last week, Amazon cut off affiliate payments to Morpheus, one site that employs the shopping software, said an online executive. Coldwater Creek, an online clothing store, has also blocked Morpheus.

    Some companies that make and use the diversion software said they were rewriting the programs so that they would no longer take money intended for others. But these changes may not affect copies of the software already installed on millions of computers. "We're not interested in stealing any Web site's revenue," said Greg Bildson, chief operating officer for LimeWire. "We know that this is sort of a new and sort of strange area, but we're interested in doing the right thing." He referred calls to TopMoxie, the maker of the software that LimeWire uses to get affiliate money.

    Patrick Toland, a vice president for sales and marketing at TopMoxie, said that the company did not intend for its software to displace other affiliates' rights and that his company had altered the software in the last two weeks to stop substituting its affiliate identification code for those of other sites. "The second we realized this is a problem, we turned that boat around and said, `Let's get this out,' " he said. He added that the amount of money involved was minuscule.

    Mr. Toland attributed the losses that the Web sites claimed to a tougher marketplace for small players.

    Morpheus referred inquiries to Wurld Media, which operates its shopping rebates program. Kirk H. Feathers, the chief technical officer of Wurld Media, said that it had been wrongly accused of stealing and that the company would readily go to court to defend itself.

    He acknowledged that an earlier version of the company's software did divert commissions away from other affiliate sites but said that new versions dealt with that situation. Now, the company said, the softwareoffers a choice to the consumer before each purchase: whether to give the commission to the affiliate or to himself in the form of a rebate, with a portion of the rebate going to Morpheus. The software does not misrepresent the user's computer to sellers' sites, Mr. Feathers said.

    Arguments that the diversions are somehow the fault of an unintentional flaw do not persuade Erik Petersen, the chief technical officer at an Internet security company, Polar Cove, in Providence, R.I. Mr. Petersen said that he had received complaints about TopMoxie and LimeWire from friends and took a closer look. After conducting a detailed analysis of the software, he concluded that the TopMoxie program was intricately designed to substitute its affiliate identification code for that of other sites as transactions were made. He said that the program remained on the computer even if the user removed the original LimeWire music sharing software. "I don't buy their explanation," he said. "What kind of accident is that?"

    Mr. Petersen also pointed to a statement made in an online forum where the technology was discussed, in which a LimeWire developer characterized accusations that the software diverts money as "pretty accurate," but said, "While I agree that this is really a bit of a scam, it is a way for us to pay salaries while not adversely affecting our users."

    A chief executive of one software company was similarly unapologetic about the diversion of commissions. "We look at affiliates as competitors," said Avi Naider, the chief executive of WhenU.com, which makes the diversion software used by the music swapping services Kazaa and BearShare. The software, he said, provides services to users and money to each company "so it doesn't have to charge" for the currently free software and services.

    The companies also argue that consumers give consent to the terms of the contract when they download the software, whether they read the agreement carefully or not. An expert in online consumer protection said the companies had a point. In the case of the LimeWire agreement, for example, "there does seem to be some indication to the user of what's going on," said David Medine, a Washington lawyer and former Federal Trade Commission official.

    Mr. Medine said that he was, however, uncomfortable with the degree of disclosure. "The question is whether the quality of the notice is as good as it could be," he said. "They don't tell you that it's interfering with other business relationships."

    Jeff Pullen, the president of Commission Junction, a company that helps link affiliates with Web sites, said that he was not inclined to cut off companies that divert commissions if the customer has agreed to the diversion. "The tactics that they use, maybe they're on the edge," he said. "Maybe, personally, I don't find them particularly attractive. But if they aren't illegal, it's hard for me to point to my public service agreement and say, `I have a reason to kick you off my network.' "

    Still, other online merchants are taking action after being confronted by angry affiliates — and they find that they are dealing with a moving target. TigerDirect, an online computer and electronics store, blocked Morpheus from its program earlier this year after discovering that the company was diverting online commissions. "I obviously thought it wasn't honorable," said Andy Rodriguez, the company's manager of affiliate marketing. "They said, `It's our right.' I said, `It's our right to remove you.' "

    Morpheus changed its software, Mr. Rodriguez said, but a few weeks ago TigerDirect noticed that sales through Morpheus were "going through the roof" at the same time that many affiliates were complaining of a drop in commissions. So he blocked them again. "Guys at Morphus wanted a piece of the pie for each of our sales," he said. "I'm sorry. Absolutely not.

    The diversion programs have made life difficult for affiliate marketers in the last year, said Steve Messer, chief executive of LinkShare, a company that runs a major affiliate network. But he sees a silver lining. "It's showed affiliate marketing has come of age," Mr. Messer said. "If you look at it, the volume of transactions passing through LinkShare's affiliate marketing got so big that when affiliates get upset, the largest merchants in the world react. If it's just a few dollars, nobody would've noticed."

    LinkShare is working with other companies in their market to come up with industry standards to govern ethical practices in online advertising, Mr. Messer said. "For some people, WWW stands for the Wild, Wild West," he said. "Hopefully, that's coming to an end."

    http://www.nytimes.com/2002/09/27/te...gy/27FREE.html

    Haiko


    The secret of success is constancy of purpose. ~ Disraeli


  2. #2
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    First tim here and Wow! I'm feeling like I must be working too hard and am missing things. The times article was my first awareness of the problem. I'm already very irritated by programs installed on my computer without my knowledge.
    Anyway, as an attorney, I wish to comment on the statement that's being made by these guys that this is a legal practice. It's legal in the same way that pyramid schemes are legal. ie If it sounds like its illegal than it is illegal even though the guy who is selling you on it is telling you that it is. Do you really believe that the one who has the biggest interest is going to say otherwise.
    The argument that they use that "it is legal because the user is giving permission" is the real topper. That is like saying that its legal for me to sell my neighbors TV. The customer doesnt have the ownership right to give permission. The commission doesn't belong to him. The commission is payment for a service provided to advertise and belongs to the person or site providing that service in complience with that agreement.
    I find it incredulous that Morphius and limeshop are so willing to go to court on this. I'd like to make a few comments in that session. If it were me I'd bring an action for fraud and consprircy to defraud against both the companies selling and using paracyteware. I might even name a bunch of their more high profile customers. Lets see how long the software lasts when the customers hear that they could be sued for using it.

  3. #3
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    Welcome to ABW, mrgl.

    This quiet little war has been going on for months, and we're glad that more people are hearing about the issues.

    Stick around ... we can use all the intelligent input you can contribute!

  4. #4
    ABW Ambassador mousejockey's Avatar
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    Welcome mrgl:)
    Glad to hear your thoughts on this issue.

    "I haven't failed, I've just found 10,000 reasons why it doesn't work"
    Thomas Edison

  5. #5
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    Very interesting point of view coming from an attorney.
    quote:
    The commission is payment for a service provided to advertise and belongs to the person or site providing that service in complience with that agreement.

    quote:
    Lets see how long the software lasts when the customers hear that they could be sued for using it.

    We need your input mrgl. Welcome, stay around here. You can really help us.

    It's not the big that eat the small... it's the fast that eat the slow. Jennings & Haughton

  6. #6
    Super Sh!t Stirrer SSanf's Avatar
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    Yes, please stay and help!

    The Wolf Credo: Respect the elders. Teach the young. Cooperate with the pack. Play when you can. Hunt when you must. Rest in between. Share your affections. Voice your feelings. Leave your mark.

  7. #7
    ABW Ambassador Nova's Avatar
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    Welcome aboard Mr. Lawman


    Yipeeee we have a Lawyer on board now!
    The bad guy better watch it!

    Your expertise in law could be a big help for all of us Affiliate.

    Again welcome aboard !

    Love Life to the fullest. we only get ONE chance! :-)

  8. #8
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    Thanks to everyone for the kind responses, I don't have alot of time, but I'm glad to help where I can.

    A little bit about myself, My specialty is intellectual property law. Specifically, biotechnology and molecular biology patents. In order to qualify for this work I got a PhD in Immunology and worked for about ten years as a research scientist. I got tired of being poor, so about seven years ago I got a job writing patents at a law firm and went to law school at night. I've been on my own now for about 4 years. IP issues are common in internet law but not exactly the same as the commercial law issues.

    Last year I prepared a course on legal issues for internet commerce for our local community college, but the course was cancelled because not enough people signed up. So I didn't get the benefit of that interaction.

    I am also myself an inventor, and currently have 82 inventions catalogued. I'm working on a web site to publish my invention catalog and interact with other inventors.

    My attitude about internet advertising is that I want to see the products and services offered and believe they should be made available in a convenient readily available format. In my inventor role I'm regularly looking for hard to find items. I often utilize specialty product directory-type sites and regularly make purchases from the linked suppliers. However, I despise having my e-space invaded and being inundated with commercial e-mail. My computer is a work tool for me and when I'm working I want to be left alone. So banners are irritating, popups are infuriating, and spyware is totally unacceptable. I fight this unwanted advertising by as many software means available, and by never never clicking on a popup or banner and never buying anything from anyone who uses them.

    Anyway, thanks for the welcome. I'll put some more thought into it and write another post soon.

    Regards
    Mark

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