The Economics of Spam
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Written July 2002
Updated June 2002
Tennessee resident K. C. "Khan" Smith owes the internet service
provider EarthLink $24 million. According to the CNN, in August 2001 he was
slapped with a lawsuit accusing him of violating federal and state Racketeering
Influenced and Corrupt Organizations (RICO) statutes, the federal Computer Fraud
and Abuse Act of 1984, the federal Electronic Communications Privacy Act of 1986
and numerous other state laws. On July 19, 2002 - having failed to appear in
court - the judge ruled against him. Mr. Smith is a spammer.
Brightmail, a vendor of e-mail filters and anti-spam
applications warned that close to 5 million spam "attacks" or "bursts" occurred
in June 2002 and that spam has mushroomed 450 percent since June 2001. This pace
continued unabated well into the beginning of 2004 when the introduction of spam
filters began to take effect. PC World concurs.
Between one half and three quarters of all e-mail messages are
spam or UCE (Unsolicited Commercial Email) - unsolicited and intrusive
commercial ads, mostly concerned with sex, scams, get rich quick schemes,
financial services and products, and health articles of dubious provenance. The
messages are sent from spoofed or fake e-mail addresses. Some spammers hack into
unsecured servers - mainly in China and Korea - to relay their missives
Starting in 2003, malicious hackers began using spam to install
malware - such as viruses, adware, spyware, and Trojans - on the unprotected
personal computers of less savvy users. They thus transform these computers into
"zombies", organize them into spam-spewing "bots" (networks), and sell access to
them to criminals on penumbral boards and forums all over the Net.
Spam is an industry. Mass e-mailers maintain lists of e-mail
addresses, often "harvested" by spamware bots - specialized computer
applications - from Web sites. These lists are rented out or sold to marketers
who use bulk mail services. They come cheap - c. $100 for 10 million addresses.
Bulk mailers provide servers and bandwidth, charging c. $300 per million
As spam recipients become more inured, ISPs less tolerant, and
both more litigious - spammers multiply their efforts in order to maintain the
same response rate. Spam works. It is not universally unwanted - which makes it
tricky to outlaw. It elicits between 0.1 and 1 percent in positive follow ups,
ActiveX coding and thus resemble (or actually contain) viruses and Trojans.
Jupiter Media Matrix predicted in 2001 that the number of spam
messages annually received by a typical Internet user will double to 1400 and
spending on legitimate e-mail marketing will reach $9.4 billion by
- compared to $1 billion in 2001. Forrester Research pegs the number at $4.8
billion in 2003.
More than 2.3-5 billion spam messages are sent daily. eMarketer
puts the figures a lot lower at 76 billion messages in 2002. By
, daily spam output will soar to c. 15 billion missives, says Radicati Group.
Jupiter projects a more modest 268 billion annual messages this year (2005). An
average communication costs the spammer 0.00032 cents.
PC World quotes the European Union as pegging the bandwidth
costs of spam worldwide in 2002 at $8-10 billion annually. Other damages include
server crashes, time spent purging unwanted messages, lower productivity,
aggravation, and increased cost of Internet access.
Inevitably, the spam industry gave rise to an anti-spam
industry. According to a Radicati Group report titled "Anti-virus, anti-spam,
and content filtering market trends 2002-
", anti-spam revenues were projected to exceed $88 million in 2002 - and more
than double by
. List blockers, report and complaint generators, advocacy groups, registers
of known spammers, and spam filters all proliferate. The Wall Street Journal
reported in its June 25, 2002 issue about a resurgence of anti-spam startups
financed by eager venture capital.
ISPs are bent on preventing abuse - reported by victims - by
expunging the accounts of spammers. But the latter simply switch ISPs or sign on
with free services like Hotmail and Yahoo! Barriers to entry are getting lower
by the day as the costs of hardware, software, and communications plummet.
The use of e-mail and broadband connections by the general
population is spreading. Hundreds of thousands of technologically-savvy
operators have joined the market in the last five years, as the dotcom bubble
burst. Still, Steve Linford of the UK-based Spamhaus.org insists that most spam
emanates from c. 80 large operators.
Now, according to Jupiter Media, ISPs and portals are poised to
begin to charge advertisers in a tier-based system, replete with premium
services. Writing back in 1998, Bill Gates described a solution also espoused by
Esther Dyson, chair of the Electronic Frontier Foundation:
"As I first described in my book 'The Road Ahead' in 1995,
I expect that eventually you'll be paid to read unsolicited e-mail. You'll tell
your e-mail program to discard all unsolicited messages that don't offer an
amount of money that you'll choose. If you open a paid message and discover it's
from a long-lost friend or somebody else who has a legitimate reason to contact
you, you'll be able to cancel the payment. Otherwise, you'll be paid for your
Subscribers may not be appreciative of the joint ventures
between gatekeepers and inbox clutterers. Moreover, dominant ISPs, such as AT&T
and PSINet have recurrently been accused of knowingly collaborating with
spammers. ISPs rely on the data traffic that spam generates for their revenues
in an ever-harsher business environment.
The Financial Times and others described how WorldCom refuses to
ban the sale of spamware over its network, claiming that it does not regulate
content. When "pink" (the color of canned spam) contracts came to light, the
implicated ISPs blame the whole affair on rogue employees.
PC World begs to differ:
"Ronnie Scelson, a self-described spammer who signed such
a contract with PSInet, (says) that backbone providers are more than happy to do
business with bulk e-mailers. 'I've signed up with the biggest 50 carriers two
or three times', says Scelson ... The Louisiana-based spammer claims to send 84
million commercial e-mail messages a day over his three 45-megabit-per-second
DS3 circuits. 'If you were getting $40,000 a month for each circuit', Scelson
asks, 'would you want to shut me down?'"
The line between permission-based or "opt-in" e-mail marketing
and spam is getting thinner by the day. Some list resellers guarantee the
consensual nature of their wares. According to the Direct Marketing
Association's guidelines, quoted by PC World, not responding to an unsolicited
e-mail amounts to "opting-in" - a marketing strategy known as "opting out". Most
experts, though, strongly urge spam victims not to respond to spammers, lest
their e-mail address is confirmed.
But spam is crossing technological boundaries. Japan has just
legislated against wireless SMS spam targeted at hapless mobile phone users.
Many states in the USA as well as the European parliament have followed suit.
Ideas regarding a "do not spam" list akin to the "do not call" list in
telemarketing have been floated. Mobile phone users will place their phone
numbers on the list to avoid receiving UCE (spam). Email subscribers enjoy the
benefits of a similar list under the CAN-Spam Act of 2003.
Expensive and slow connections make mobile phone spam and spim
(instant messaging spam) particularly resented. Still, according to Britain's
Mobile Channel, a mobile advertising company quoted by "The Economist", SMS
advertising - a novelty - attracts a 10-20 percent response rate - compared to
direct mail's 1-3 percent.
Net identification systems - like Microsoft's Passport and the
one proposed by Liberty Alliance - will make it even easier for marketers to
The reaction to spam can be described only as mass hysteria.
Reporting someone as a spammer - even when he is not - has become a favorite
pastime of vengeful, self-appointed, vigilante "cyber-cops". Perfectly
legitimate, opt-in, email marketing businesses and discussion forums often find
themselves in one or more black lists - their reputation and business ruined.
In January 2002, CMGI-owned Yesmail was awarded a temporary
restraining order against MAPS - Mail Abuse Prevention System - forbidding it to
place the reputable e-mail marketer on its Real-time Blackhole list. The case
was settled out of court.
Harris Interactive, a large online opinion polling company, sued
not only MAPS, but ISPs who blocked its email messages when it found itself
included in MAPS' Blackhole. Their CEO accused one of their competitors for the
allegations that led to Harris' inclusion in the list.
Coupled with other pernicious phenomena - such as viruses,
Trojans, and spyware - the very foundation of the Internet as a fun, relatively
safe, mode of communication and data acquisition is at stake.
Spammers, it emerges, have their own organizations. NOIC - the
National Organization of Internet Commerce threatened to post to its Web site
the e-mail addresses of millions of AOL members. AOL has aggressive
anti-spamming policies. "AOL is blocking bulk email because it wants the
advertising revenues for itself (by selling pop-up ads)" the president of NOIC,
Damien Melle, complained to CNET.
Spam is a classic "free rider" problem. For any given
individual, the cost of blocking a spammer far outweighs the benefits. It is
cheaper and easier to hit the "delete" key. Individuals, therefore, prefer to
let others do the job and enjoy the outcome - the public good of a spam-free
Internet. They cannot be left out of the benefits of such an aftermath - public
goods are, by definition, "non-excludable". Nor is a
public good diminished by a growing number of "non-rival" users.
Such a situation resembles a market failure and requires
government intervention through legislation and enforcement. The FTC - the US
Federal Trade Commission - has taken legal action against more than 100 spammers
for promoting scams and fraudulent goods and services.
"Project Mailbox" is an anti-spam collaboration between American
law enforcement agencies and the private sector. Non government organizations
have entered the fray, as have lobbying groups, such as CAUCE - the Coalition
Against Unsolicited Commercial E-mail.
But, a few recent anti-spam and anti-spyware Acts
notwithstanding, Congress is curiously reluctant to enact stringent laws against
spam. Reasons cited are free speech, limits on state powers to regulate
commerce, avoiding unfair restrictions on trade, and the interests of small
business. The courts equivocate as well. In some cases - e.g., Missouri vs.
American Blast Fax - US courts found "that the provision prohibiting the sending
of unsolicited advertisements is unconstitutional".
According to Spamlaws.com, the 107th Congress, for instance,
discussed these laws but never enacted them:
Unsolicited Commercial Electronic Mail Act of 2001 (H.R. 95),
Wireless Telephone Spam Protection Act (H.R. 113), Anti-Spamming Act of 2001 (H.R.
718), Anti-Spamming Act of 2001 (H.R. 1017), Who Is E-Mailing Our Kids Act (H.R.
1846), Protect Children From E-Mail Smut Act of 2001 (H.R. 2472), Netizens
Protection Act of 2001 (H.R. 3146), "CAN SPAM" Act of 2001 (S. 630).
Anti-spam laws fared no better in the 106th Congress. Some of
the states have picked up the slack. Arkansas, California, Colorado,
Connecticut, Delaware, Idaho, Illinois, Iowa, Kansas, Louisiana, Maryland,
Minnesota, Missouri, Nevada, North Carolina, Oklahoma, Pennsylvania, Rhode
Island, South Dakota, Tennessee, Utah, Virginia, Washington, West Virginia, and
The situation is no better across the pond. The European
parliament decided in 2001 to allow each member country to enact its own spam
laws, thus avoiding a continent-wide directive and directly confronting the
communications ministers of the union. Paradoxically, it also decided, in March
2002, to restrict SMS spam. Confusion clearly reigns. Finally, in May 2002, it
adopted strong anti-spam provisions as part of a Directive on Data Protection.
Responding to this unfavorable legal environment, spam is
relocating to developing countries, such as Malaysia, Nepal, and Nigeria. In a
May 2005 report, the OECD (Organization for Economic Cooperation and
Development) warned that these countries lack the technical know-how and
financial resources (let alone the will) to combat spam. Their users, anyhow
deprived of bandwidth, endure, as a result, a less reliable service and an
intermittent access to the Internet;
"Spam is a much more serious issue in developing countries...as
it is a heavy drain on resources that are scarcer and costlier in developing
countries than elsewhere" - writes the report's author, Suresh Ramasubramanian,
an OECD advisor and postmaster for Outblaze.com.
ISPs, spam monitoring services, and governments in the rich
industrialized world react by placing entire countries - such as Macedonia and
Costa Rica - on black lists and, thus denying access to their users en bloc.
International collaboration against the looming destruction of
the Internet by crime organizations is budding. The FTC had just announced that
it will work with its counterparts abroad to cut zombie computers off the
network. A welcome step - but about three years late. Spammers the world over
are still six steps ahead and are having the upper hand.
About the Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and
"After the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org and the editor
of mental health and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor
to the Government of Macedonia.
His web site:
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Article Published/Sorted/Amended on Scopulus 2007-11-03 22:44:07 in Economic Articles