Peer-to-peer exchanges court advertisers

Morpheus sets itself apart from Napster Steve Griffin, chairman, Music City

Several recent partnerships highlight the move toward transforming free online communities into something like the Las Vegas strip. On Wednesday, ad sales network 24/7 Media touted the commercial potential of networks that have attracted millions of youthful consumers, signing a deal to sell advertising on MusicCity.com.

Other deals, however, have instead highlighted the potential for a backlash against companies that attempt to harness the free-wheeling anarchy of file-swapping communities, efforts that also risk legal attack from record labels.

In one of the most controversial moves to date, a company called eZula has been working with file-swapping developers such as Kazaa and iMesh on a software add-on that superimposes advertising links over text on Web pages, sparking some harsh complaints.

"It can be confusing and at worst misleading," said Vergil Bushnell, a researcher at the Washington, D.C.-based Consumer Project on Technology, who says Kazaa's eZula advertising add-on placed some links to a recent search he conducted on Google.

Kazaa is among several peer-to-peer companies using advertising software, or "adware," to attempt to walk the marketing tightrope. File-sharing networks Kazaa, BearShare and Audio Galaxy Satellite are bundling third-party software into their default installations to track consumer habits online and pipe in related advertising.

Kazaa, for example, bundles about five enhancement programs in its media desktop download, including eZula, OnFlow, WebEnhancer and Cydoor Technologies--a program to deliver targeted advertising.

Free Peers Chief Executive Vincent Falco, whose company is behind BearShare, said advertising is a legitimate way for companies such as his to make a living.

"In the end, someone has to pay for bandwidth and software development," he said. "We don't want to charge the users money, so we are constantly searching for creative and sustainable ways to keep delivering the free product."

Some analysts said such networks pose unique problems for marketers, which could detract from their success as advertising platforms. Advertising analysts, for example, say that consumers who are visiting file-sharing networks are focused on specific tasks, such as downloading songs, and generally are not receptive to a promotion if unrelated.

"If you're in the middle of swapping a heavy-metal MP3 and you put in a Barry Manilow ad, it's going to be ignored," said Jim Nail, an analyst at Forrester Research.

And even if file-swapping services solve the commercial problems with advertising, they may still run afoul of copyright laws that have been used by the record labels to effectively shut down Napster. As the labels prepare to launch paid music subscription services, they're unlikely to turn a blind eye to companies like BearShare.

From the frying pan into the fire?
In an attempt to work around the advertising aversion of file-swappers, some developers are trying the subtle approach. BearShare and others use what critics call "spyware"--behind-the-scenes software that helps determine the interests of consumers to better target ads.

Kazaa and iMesh also use software that consumers download when installing their file-sharing products. Called TopText, the add-on program allows the companies to sell advertisers contextual links to popular keywords such as "real estate" or "cars." The TopText program attaches itself to the consumers' Web browser and works on all Web pages.

Its golden-highlighted links, seen by Web surfers using Internet Explorer browsers 4.0 and higher, highlight more than 7,000 keywords sold through eZula's network, the maker of TopText. A Kazaa or iMesh subscriber searching Yahoo, for example, might see a yellow link on the word "travel," which if clicked on, would take him to Expedia.com if that were the advertiser.

Microsoft has developed a similar technology, called Smart Tags, which is included in Office XP. However, the company decided to exclude Smart Tags from its newest operating system Windows XP because of concern that the tags give Microsoft greater control over consumers' Internet use.

Unlike Microsoft's technology, which is bundled in its browser technology, the TopText program is a plug-in application. It runs from the consumer's computer and does not manipulate another company's Web site from the server side. The links merely appear on top of the site's design, much like other linking programs such as NBCi's QuickClicks.

TopText software has prompted heated discussion on online bulletin boards and drawn criticism from people who say that it could violate intellectual property rights of company Web pages, among other things.

Bill Silverstein, a software developer from Boston, compared the program to "getting the San Francisco Chronicle and covering up the pages with your own advertising."

"I suspect there will be lawsuits over that because it's modified material. And part of the problem is that people won't realize it's advertising," he said.

Other critics of TopText say that the program is installed nefariously, neglecting to give consumers notice of what the program does or how it's used. Because consumers don't often comb through license agreements when installing software, they can easily miss notices. They also say that it can cause Web surfers a great deal of confusion if they aren't aware that it's installed.

"Kazaa makes no effort to explain what this pre-selected optional add-on (or piggyback) software does when you install it. So when people see the yellow highlighting in their Web browser, it is easy for them to assume that the site author intended it," said John Fitzpatrick, a college student from Las Vegas.

"Many people...will not realize that the optional add-ons have nothing to do with the Kazaa service and will install them simply because they want to make the most of Kazaa. It's deceptive to make it an opt-out option like this."

Consumer Project on Technology's Bushnell said that he did a search for "small business" on Google, and the top link was for the U.S. Small Business Administration. Other links on the page, however, took him to Charge.com, a credit card supplier to small businesses. He also said the installation of Kazaa didn't explain if TopText was essential to the software or give a prominent choice to opt out of the program.

Kazaa's parent company Fastrack, based in the Netherlands, could not be immediately reached for comment.

Henit Vitos, a co-founder of 2-year-old eZula, said that consumers are able to opt out of receiving the software during the installation process of Kazaa and iMesh, another file-sharing partner.

"We don't want users who don't want our product. It's the same way you're going to buy an apartment or anything else. The assumption is the person needs to read the contract."

Advertising road warriors
For marketers, such contextual advertising is the final destination because it's like a road sign in the middle of the street.

"It's relevant and cost-effective for us," said Dan Martin, vice president of business development for HomeGain, which has bought keyword terms such as "home buying" through eZula.

The deals are based on a cost per click, meaning that the advertiser pays only when a consumer clicks on the link. Vitos said that the cost for a click ranges between 30 cents and $1.

Peer-to-peer networks' share in this profit is anywhere from 20 percent to 50 percent, Vitos said, adding that the company is signing deals with companies every week. This is due largely to the fact that advertisers are happy with the software and are seeing a quarter of consumers who return to related Web pages click on an ad link, she said.

"We all know that advertising today is limping. But we also know that it is effective when it's viewed as information and based on the context."

Despite such positive results, peer-to-peer networks such as Kazaa and MusicCity may have an upward battle to attract advertisers during a time when marketers are slashing budgets and competition is heating up.

Digital marketing company Avenue A, which boasts clients such as Lanc?me, Eddie Bauer and AT&T Wireless, said it buys space on 24/7 Media's network, but does not plan to allot funds for file-sharing networks because of legal issues that could arise.

"We have a policy that there are sites we will not advertise on--hate sites, pornographic sites, (or) any sites that deal with anything illegal and blatantly illegal. In the case of peer-to-peer networks, we may defer to our clients' judgments (but) our clients are big companies. They're very conservative," said Teri Franklin, spokeswoman for Seattle-based Avenue A.

DoubleClick, the Internet's largest online sales network, does not represent any file-sharing networks.

Still, 24/7 Media sees the addition of MusicCity as a boon to its service. 24/7 Media's advertising clients will be able to advertise on MusicCity's Web site as well as through MusicCity's software. 24/7 Media said it can filter ads through MusicCity's Morpheus application so that when people are listening to a song, they'll also see a banner ad or other ad format appear on their computers.

"We believe that MusicCity in a lot of ways represents a very competitive demographic. And with their technology and the peer-to-peer concepts that are happening in the industry today, we believe that they're cutting-edge, and we definitely want to be a part of the future," said Kerim Kfuri, business development manager for 24/7 Media.