Yahoo's Pop-Up Connection

Yahoo! Inc. (YHOO ) has become one of the spyware industry's main benefactors. Since 2003 the Sunnyvale (Calif.) titan has indirectly supplied ads to -- and shared millions of revenue dollars with -- Direct Revenue and its rivals.

Yahoo boasts hundreds of thousands of advertising clients. It shows their ads on its own site and, for additional payments, passes some along to other online publishers and distributors. Some of the distributors turn ads over to pop-up artists such as Direct Revenue. Fees are shared along the way.

These advertising daisy chains generally aren't disclosed, and piecing them together is difficult from the outside. Benjamin Edelman, a Web consultant and spyware watchdog, dug through logs of one of his test computers to trace the twisted trail between Yahoo and Direct Revenue. He followed the journey of a Dell Inc. (DELL ) ad carried by Yahoo last year: Yahoo sent the item to distributor InfoSpace Inc. (INSP ), which delivered it to Direct Revenue, which put it in a pop-up.

In another illustration of such connections, San Francisco distributor Walnut Ventures Inc. built a lot of its business by providing a bridge between Yahoo and Direct Revenue. In 2004, Yahoo ads accounted for 91%, or $11.6 million, of Walnut's revenues. Approximately one-third of those sales came from pop-ups that were generated by Walnut's biggest downstream partner, Direct Revenue, according to a federal securities filing last year. InterSearch Group Inc., which acquired Walnut in 2004, terminated its relationship with Direct Revenue in April.

A former sales executive at Yahoo says the company knew that some of its ads were surfacing in spyware pop-ups. "It was a dial we could turn if we needed a little more revenue," the ex-executive says. Court and regulatory filings reveal that even with distributors in the middle, the Yahoo-Direct Revenue connection generated hundreds of thousands of dollars a month for each company for much of 2004 and 2005. Direct Revenue wanted to forge a closer relationship with Yahoo, according to one current and one former Direct Revenue manager. But after a flurry of phone calls from Direct Revenue representatives, Yahoo refused.

Yahoo officials say they can't comment specifically because of pending litigation between the company and some of its advertisers. "Yahoo takes the quality of its search-ad distribution network very seriously," spokeswoman Gaude Paez says. "Yahoo has strict distribution partner guidelines and has terminated many publishers for failing to comply with those guidelines."

Dell says it doesn't allow its ads to appear in spyware pop-ups but wouldn't comment on its relationship with Yahoo. InfoSpace says it focuses intently on ad quality and discontinued its relationship with Direct Revenue last year.

By Ben Elgin

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