'Loyalty' Sites Push E-Commerce Affiliate Limits

Adware makers are diverting millions of dollars from Web merchants to themselves, our Executive Tech columnist reveals.
Adware makers are diverting millions of dollars from Web merchants to themselves, using various tricks that are years old -- and now some big players are finding even bolder methods to make profits, according to an adware expert.

Ben Edelman, a recent graduate of Harvard Law School and a recognized authority on adware and spyware programs, posted on his Web site last month an accusation that Shop At Home Select, an online "loyalty" program, collects commissions that it doesn't deserve from numerous e-commerce sites, including Dell, Expedia, and Buy.com.

Edelman's analysis of this problem -- and Shop At Home's response in defense of its practices -- shines a light on a side of Internet e-commerce that we mere consumers rarely see.

The Problem With Affiliate Commissions

I've written previously about rogue affiliates who use technical means to steal unearned commissions from Web merchants. I reported on Aug. 17, 2004, that 10 percent or more of the charges from advertising affiliates of Google and Overture (now Yahoo Search Marketing) are fraudulent, according to experts. And back on Oct. 1, 2002, I wrote about software "plug-ins" that install silently on users' PCs and divert commissions from legitimate affiliates to unscrupulous hackers.

The situation has evolved somewhat with the growth of "loyalty" sites. Such programs offer consumers small rebates on many of the purchases they make on the Web. The rebates represent a percentage of the commissions the promoters earn from merchants. Some of these programs are above-board and actually return significant amounts to end users or their preferred charities. Others are, um, not deserving of your loyalty.

In his recent posting, Edelman makes the following claims about Shop At Home software:

Silent installs. Shop At Home pays third parties to install its shopping software on end users' PCs, and many of these parties quietly install the application as part of some other software or by exploiting Windows security flaws, Edelman says;

Unearned commissions. Shop At Home makes online merchants pay it a commission on each sale, even when an end user types the name of a merchant into a browser rather than clicking a Shop At Home affiliate link, he asserts; and

Unpaid rebates. Shop At Home claims commissions from merchants and keeps the full amount, instead of sharing the commission with end users as a "rebate," for those end users who never register their name and address with the company, he says.

Edelman says it isn't surprising that many consumers, who may not know how Shop At Home's software got on their PCs, don't sign up for the promised refunds. "Users have no easy way to distinguish SAHS's offer from a phishing attempt or other scam," he writes. "Without payment details, SAHS will simply retain users' funds."

Shop At Home's Response

Shop At Home Select, a subsidiary of Belcaro Group Inc. of Greenwood Village, Colo., had publicly remained silent since Edelman's accusations. When I contacted the company on Sept. 9 for comment, however, Michelle Pujol, director of Internet marketing, sent me a 6-page document in rebuttal to the adware researcher's claims.

"We reviewed Edelman's allegations and believe that his allegations are mistaken," the document says about the researcher's reports of software being installed without notice. "Unfortunately, our SelectRebates software often gets confused with other rebate sites and other companies' software with which we have no association."

Regarding the accusation that Shop At Home takes commissions from merchants, even if users visit merchants' sites on their own, the statement says: "To respond to consumer demand, we developed downloadable free software that consumer can use to ensure they get their rebates if they do not go to our website prior to shopping. The free SelectRebates software allows our customers to go directly to our participating merchant sites [such as Dell, etc.], while maintaining eligibility for cash rebates via an automatic redirect through our site."

Finally, regarding the point that many end users don't receive any rebates, the statement points to the license terms on the company's site. "We are very clear that in order to obtain cash back, we need to track a consumer's purchases through Affiliate Network Systems."

After hearing of Shop At Home's defense, Edelman posted two additional screen shots that he says clearly show the company's software being installed. In this instance, the installation is by PacerD Ltd., which installs more than half a dozen adware programs through a Windows ActiveX routine, Edelman says.

Does he think a company should be held responsible for the actions of third parties it contracts with? "Where a software developer has a few bad distributors but is largely in compliance with laws and norms, there may be no story," Edelman tells me. But, he continues, "where so many of the distributors are in breach of basic standards -- get consent before installing software -- I do think this is worth discussing."

Are Affiliate Networks Too Lax?

One of Edelman's most incendiary claims is that commission networks, such as Commission Junction and LinkShare, are not doing all they can to terminate suspicious affiliates. Shop At Home and thousands of other affiliates have joined such networks and collect commissions when they send traffic to the merchants that participate. The commission networks, according to Edelman, collect a 30% fee whether or not a payment was earned legitimately, putting them in a conflict-of-interest situation.

"Dell and Buy.com get no bona fide benefit from paying 1%-2% to SAHS," Edelman's site says. "LinkShare and Commission Junction need not continue to pass money to SAHS from unwitting merchants, nor need they continue taking 30% cuts for themselves."

To learn whether Shop At Home's methods are considered kosher, I spoke with Elizabeth Cholawsky, vice president of marketing for Commission Junction.

Commission Junction has a strict policy about downloaded software, Cholawsky says: "No forced clicks." Asked whether a company could advertise rebates to consumers, and then collect commissions even if no consumer ever received a rebate, she said, "That we don't allow on the network."

"You've got to have a relationship with the person who's supposed to get the refund," Cholawsky explains. Generating commissions automatically via users who didn't opt in, she says, "is considered a major violation. If, during our audits, we identify SAHS performing redirects on unregistered users, we will take immediate action up to and including account deactivation. To date, none of our audits have identified or confirmed this practice." She adds, "SAHS claims that the software will not function until an end-user registers."

Edelman swears that Shop At Home software generates commissions from both Commission Junction and LinkShare merchants, whether or not an end user ever registers his or her e-mail address to enter the refund program. It's impossible for me to confirm this one way or the other, since even the top experts disagree on what's going on.

The Future of Loyalty Programs

Having stated Commission Junction's policy, Cholawsky emphasized that all kinds of loyalty programs are growing. "There are some merchants and loyalty sites who permit that," she says, referring to software that automatically generates commissions for promoters and refunds for users, even those who visit merchant sites directly.

"Take the Schoolpop example," Cholawsky explained. "Some merchants know that some customers will go through Schoolpop." These companies knowingly allow commissions to be auto-generated for each sale by software that makes it look as though each end user had clicked an affiliate link.

Schoolpop.com has all the appearances of a legitimate business. Edelman himself tells me, "I have previously investigated nonconsensual or dubious installations of rebate programs like Schoolpop, and I haven't been able to uncover much of interest." Schoolpop's site says it has paid out rebates totaling more than $200 million to schools and other nonprofits selected by end users who voluntarily installed a downloaded program that generates affiliate commissions from online sales.

Unfortunately, Schoolpop told its employees last week that it was filing for bankruptcy. (This fact was apparently unknown to Cholawsky; I discovered it separately.) Companies such as Schoolpop seemingly can't make a go of it, while shady affiliates whose software is installed without any notice continue to collect millions in dubious commissions. Edelman says he's documented many such schemes, some of which are browser-based and don't even require that any software be downloaded.

It's very lucrative for adware makers to get a cut of every online sale made by PCs they can get their software installed on. But if affiliates can claim commission dollars without generating bona fide traffic to merchants, those merchants will eventually have to stop accepting any affiliates -- and the e-commerce networks will shrivel.

Edelman's analysis of Shop At Home Select is in his site's news section. The rebuttal statement that Shop At Home made public has been posted as a PDF document.

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