Spyware/Malware/Adware graph. Courtesy Wall Street Journal The New York Times' Steve Lohr and Gary Rivlin report that Microsoft is in talks with spyware / malware / adware purveyor and developer Claria (Gator) for $500 million. Claria was formerly named Gator until an image makeover and re-branding effort in advance of an aborted IPO in 2004. The name Gator had become synonymous with unethical practices, intrusive spyware and aggressive pop-up ads -- a notorious reputation that just wouldn't do for the dog and pony show that precedes IPOs.

The Wall Street Journal's Mylene Mangalindan and Robert A. Guth attempt to explain Why Microsoft May Wade Into 'Adware' in one of its handful of daily free features.

The New York Times broke the story on June 30, just before the Canada Day/Independence Day long weekend.

Some might be surprised to learn that there is apparently a faction within Microsoft that is against the deal, but as in any large organization, there is a diversity of opinion.

One person briefed on the deal said there was opposition within Microsoft to the acquisition.

The anti-deal group, the person said, fears the move could bring an outcry as critics portray Microsoft as a corporate Big Brother, trying to track every mouse click on the Web and profit from it.

Those in favor of the deal, this person said, believe Microsoft could help clean up the adware field, establish rules to protect privacy and benefit from the anticipated increase in personalized advertising.

Both Steven A. Ballmer, Microsoft's chief executive, and Bill Gates, the chairman, have been involved in that debate inside the company



Presumably, Ballmer and Gates are in the camp that favours the deal.

If Microsoft does clean up the adware field, that would be a welcome boon, but given the company's history of aggressive business practices the concerns of the anti-deal group are well-founded.

More importantly, Microsoft has made great efforts and spent millions trying to improve its reputation in the privacy and security realms, from its much-publicized code review, partnering with Computer Associates (CA) to offer end-users security software, as well as acquisitions in the security software space, including its latest effort, the Microsoft Windows AntiSpyware Beta add-on tool, which it acquired along with Giant earlier this year.

By acquiring one of the most odious spyware/adware/malware companies, Microsoft is undermining its reputation and brand, not to mention its business strategy to convince computer users that Microsoft products -- particularly the Windows operating system -- are secure, or at least safe enough to use.

The message that Microsoft would send with the Claria/Gator deal would confirm what critics have been saying since Microsoft "discovered" security a few years ago: that the whole security campaign and newfound commitment to securing Microsoft-based computers and networks was a massive marketing and public relations effort and that the company is not truly serious about security.

Microsoft Internet Explorer (IE) is a notoriously insecure Web browser with so many vulnerabilities and attack vectors that it has become synonymous with poorly-designed and poorly-implemented software. Because IE ties into the Windows operating system so deeply, it effectively is Windows, making the OS inherently insecure. This is the reason that open source and alternative Web browsers like Mozilla, Firefox and Opera have been gaining market share against IE, something that hasn't been seen in years. Similiarly, Microsoft server vulnerabilities have led to massive adoption and growth of open source Linux-based servers on the Internet, now accounting for 69.6% of Web servers, according to the Netcraft July 2005 Web Server Survey.


The debate inside Microsoft highlights the sometimes-conflicting agendas at the Redmond, Wash., company and comes as it is trying to curb flaws in its software that permit the spread of viruses, worms and other electronic threats. Among these threats is "spyware," which can track users online and capture passwords and other personal details as users enter them. Earlier this year Microsoft acquired Giant Company Software Inc., which makes software to find and eliminate spyware.


Why risk a backlash and why risk undermining the work that the company has done to counter the negative perception of its products by closing a Microsoft-Claria deal? The answer is simple: Google and Yahoo.

"In order for Microsoft to monetize search anywhere as effectively as Google, Microsoft had to find a way to get around the [Google] patents," said David Moll, chief executive of antispyware software company Webroot Software Inc. "Claria has been accumulating consumer behavior data. That information is central to what Microsoft wants to use in lieu of treading on Google's patents."


Both Google and Yahoo have very effective online advertising services, Google with AdWords, and Yahoo through its acquisition of Overture. Microsoft has been using Overture to deliver contextual advertising on its MSN network of Web sites.
 

Claria approached Microsoft about using one of Claria's new services, called BehaviorLink. The service would track the surfing patterns of the 40 million people who have Claria software installed on their PC's, but would use that information to buy ads directly from publishers. Publishers would be paid for showing the ads; Claria would be paid by marketers who want to reach consumers; and users would see fewer pop-ups.

Mr. Ballmer, according to the person briefed on the talks, had been pushing Yusuf Mehdi, the senior vice president in charge of MSN and Microsoft's search business, to be more aggressive in closing the gap with Google, including making acquisitions. And Mr. Ballmer, this person said, gave approval to begin negotiations with Claria two weeks ago.


This deal jeopardizes the company's reputation, which had been improving in recent years. In this context, security is ultimately about trust. Will Microsoft's current and potential customers trust the company enough to continue using its products in the future?

Even to casual observers it is obvious that Microsoft can't afford to ignore the lucrative revenue stream from personalized contextual advertising, especially when its main competitors, Google and Yahoo, have a head start. But a Microsoft-Claria deal is the wrong way to go about it.

This is one case where I think long-term risk exceeds the short-term reward.