Claria Comes Out of the Shadows

Controversial ad-supported software player Claria, formerly known as Gator, filed for an initial public offering with the Securities and Exchange Commission (SEC) this week. The company is hoping to raise $150 million.

Claria had net income of about $35 million on revenue of $90 million in 2003, according to documents filed with the SEC. Despite the controversy, the company’s filings also reveal it has won over well-known brands and well-respected names in the Internet advertising industry.

In 2002, Avenue A accounted for 21 percent of the company’s revenue. In 2003, Yahoo’s Overture Services helped Claria bring in 31 percent of its revenue, through a deal to syndicate Overture listings through Claria’s SearchScout software.

But Claria noted that new state laws, proposed federal legislation and lawsuits against it may hamper its future.

The company’s business model involves distributing its advertising software by bundling it with other applications — both its own and third-party software. (It gets a significant amount of distribution through bundling with Sharman Networks’ Kazaa.)

Once the “adware” is installed, Claria is able to observe users’ surfing behavior. It uses that behavioral information to target ads, which pop up while users are surfing Web sites. That tracking of surfing behavior, and Claria’s past questionable distribution practices — which it insists it has since given up — have given the company a bad reputation with some privacy advocates and some consumers.

Still, some believe the disclosure requirements that come with being a public company will help legitimize the “adware” sector as a whole.

“Claria going public will pull away the veil of secrecy and mystery that surrounds the whole [adware] industry,” said Gary Stein, analyst for Jupiter Research, owned by the parent of this publication. “Mainstream advertisers have long wanted to do behavioral advertising, but hesitated because they weren’t sure how to do it. As these companies shed their negative images, behavioral advertising will come into its own.”

Stein admitted the company faces some challenges, however.

Most notably, Claria faces legal problems. The company has been involved in a great deal of litigation. In fact, the company’s list of pending civil suits includes cases involving the Hertz Corporation, L.L. Bean, Six Continent Hotels Inc. and Inter-Continental Hotels Corporation, TigerDirect, True Communication, Wells Fargo & Company, WFC Holdings Corporation and Quicken Loans. The primary allegations against Claria are that it violates trademarks and copyrights, and engages is unfair competition and unfair trade practices.

“There are risk factors, just as there are with any company. It is significant that Claria is involved in lawsuits that threaten the very nature of their business,” Stein said. “But they have a good solid legal department and are trying to change opinions about their company.”

New state legislation and pending federal legislation also pose risks, the company noted in its filing. Last month, U.S. Sens. Conrad Burns and Barbara Boxer introduced legislation to prohibit spyware, adware and other intrusive software. The proposed act, known as Spyblock, would make it illegal to install software on a user’s computer without notice and consent. Also, Utah recently passed an anti-spyware law that will prohibit the company from operating in that state.

Claria has worked to clean up its image. Among other things, the company changed its name from Gator to Claria in late 2003. It’s been successful in attracting big name advertisers to its GAIN Network.

According to the company, its direct and indirect customers in 2003 include about 425 advertisers. Cendant Corp., FTD.com, Netflix and Orbitz are among them.

“When you talk to media buying companies, they love Claria. They’re happy to use them because they get great results,” Stein said. “Only 10 percent of ad agencies are using behavioral advertising, but 50 percent are optimistic about using it in 2004.”

In Stein’s estimation, 2004 is the year behavioral advertising will come of age, and the IPO reinforces this opinion.

Another analyst saw the IPO as a reinforcement of the recovery of interactive advertising.

“At Fulcrum we believe traditional online advertising, excluding search, should be up 15 percent in 2004,” said Imran Khan of Fulcrum Global Partners. “This IPO is another indicator of the strong growth of the interactive ad market.”

Khan cited Yahoo’s strong earnings report this week as another indicator. Yahoo reported net income of $101 million, beat Wall Street estimates by three cents per share and revised its guidance for 2004 upward.

Other companies in the sector such as Brightmail and Shopping.com are also preparing for IPOs, giving rise to speculation that another bubble similar to that of the late 1990s is in the offing. But industry experts say this time around, growth is founded on strong business principles.

Pamela Parker contributed to this report.

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