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Claria: The Napster Of Pop-Up Advertising


What's Chip Morris to do? On one level, the money manager at Integral Capital Partners looks at Claria Corp., the No. 1 company in pop-up advertising, and instinctively wants a stake in its planned initial public offering. After all, Claria made $34.9 million on 2003 revenues of $90 million. But then, if critics have their way, Claria's practices will soon be illegal. "It might make a quick shot to zero, or it might go up 10 or 20 times if pop-ups don't go away," Morris says.

Claria is a bit like the Napster of old: In a few years, it could either be huge or just outta luck. In its Apr. 8 filing with the Securities & Exchange Commission, Claria details dazzling numbers and a dizzying array of risk factors, from a new Utah law outlawing its business to proposed federal regulation and suits by a half-dozen companies. The likely outcome in Congress is legislation compelling the adware industry to warn consumers more clearly that they're about to download adware.

Lawsuits represent the more immediate danger. They charge that Claria's ads represent unfair competition, deceptive trade practices, and trademark violation by eclipsing the plaintiffs' own Web sites. L.L. Bean Inc. first wrote a cease and desist letter to Claria when it discovered that surfers who downloaded Claria software would see Eddie Bauer Inc. pop-up ads when they went to LLBean.com. L.L. Bean lawyer Peter Brann says Claria or its advertisers have settled several cases already. Citing SEC rules barring pre-IPO statements, Claria declined comment.

But an adware company won the only suit that has come to a final ruling. In a case last September between Claria's rival, WhenU.com Inc., and UHaul International (UHAL), a federal judge in Virginia ruled that WhenU's ads didn't violate UHaul's trademark or unfair competition statutes. Why? Consumers had agreed to being "detoured" from UHaul.com to competitors' ads when they downloaded Claria's software.

But that Virginia ruling is not binding on other adware cases. That means Claria's prospects will likely stay murky for a while -- possibly delaying the IPO or driving down its price. This would deprive Claria of capital for acquisitions or growth. The smart course may be to let the risks play out before the IPO, letting investors know whether they'll buy a rocket or a dud.

By Timothy J. Mullaney in New York


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