Monday, September 26, 2005

Controlling spam via e-mail charges

A number of economists have noted that the problem of spam (or more correctly "Unsolicited Bulk E-mail" or UBE for short) arises because of the imbalance between the costs of sending out bulk e-mails and the benefits that might be derived by the recipients.

Although there are some costs in maintaining an e-mail account and in compiling (or buying) a list of addresses to target for these bulk e-mails, the (marginal) cost of adding an extra address to send to is effectively zero. This means that a spammer can reach literally millions of potential customers for almost nothing. E-mail is the cheapest form of direct marketing (much cheaper than telemarketing or bulk junk mail through the post). Andrew Leung (2003) observed that the response rate to spam is as low as 0.005% - only 50 in every million people respond to UBE. But despite this very low response rate spam can make economic sense because the costs of dealing with it are felt only by those recipients who don't want it. This is an example of negative externalities. Private costs and social costs diverge. Spammers are either unaware or don't care about the costs they impose.

Although technological measures (blockers and filters) and legal action (the 2003 Can-Spam Act in the US and the 2003 UK Privacy and Electronic Communications Regulations Act, as well as litigation by big players such as Microsoft) can help in controlling this unwanted e-mail, perhaps the best approach to the problem is an economic one.

In a recently published paper Sunder et al. (2005) have assessed the potential of e-mail postage charges for dealing with spam. “"Charging postage for e-mail causes senders to be more selective and to send fewer messages. However, recipients did not interpret the postage paid by senders as a signal of the importance of the message. These results suggest that markets for attention have the potential for addressing the problem of spam but their design needs further development and testing.”"

Although the ratio of spam to legitimate e-mail is still very high (reported to be 67% in June 2005) this figure is slightly down on earlier estimates (it was reckoned to stand at 83% in January 2005). However it is believed that although there may be fewer unsolicited bulk e-mails they are now more carefully targeted (“spear phishing”) and may also carry viruses or spyware. It has been estimated that the number of e-mails carrying viruses rose by 50% in the first half of 2005 and that one in twenty-eight computers is now infected with spyware or keylogging programs. Organised crime has become involved so spam is not only attempting to persuade people to buy products (especially pharmaceutical products, sex aids, counterfeited software and entertainment goods, even jewellery) but it is also implicated in money laundering schemes and identity fraud cases.

Spammers usually purchase lists of e-mail addresses that have been “harvested”. They use viruses to turn unprotected computers into “zombies” which then send out millions of spam messages across the world. Sophos estimates that half of all spam comes from zombie machines (computers that have had a program implanted on them surreptitiously making it possible for them to be used by a remote user). A botnet is a network of compromised machines that can be controlled remotely by a spammer or a phisher.

Spamhaus says that 72% of US e-mail is still spam and that a relatively small number of people are behind it – they say 7 of the worst 10 offenders are based in the US. The problem is that there are huge potential rewards (some spammers’ clients pay up to %50 thousand a month for distributing spam). The risk of detection and the penalties are still too small to deter spammers. A Sophos spokesman said “it hardly registers).

Research by Javelin suggests that the losses due to phishing in the US in 2004 could be as much as $367 million. Phishing scams contribute to the loss of confidence in using the Internet for e-commerce and e- banking because they are worried about possible identity theft and fraud. Perhaps as many as 13% of consumers in the US and Europe have stopped paying bills online because of these concerns.

A surprising number of people read spam: 23% in the UK and as many as 37% in Brazil (figures from BBC News December 2004). Either they are unaware of the dangers of spyware or are tempted by what they perceive as the bargains on offer.

There have been a number of new developments in the technology approach to filtering spam. A new technology for message verification called Domain Keys Identified Mail (DKIM) has been submitted to the Internet Engineering Task Force by a group of companies that includes Cisco and Yahoo!. Microsoft has proposed its own standard called Sender ID. Useful as these initiatives might be they will not get rid of spam on their own.

There have been a number of high profile legal cases against spammers recently. Scott Richter, who operated the Colorado based, agreed to pay Microsoft $7million in a settlement agreed in August 2005. It is believed that over 38 billion unsolicited messages a year originated from his company pushing mortgages and other loans as well as pornography. Microsoft announced that it will donate $1 million to a New York project that is providing PCs to community centres and a further $5 million to anti-spam projects. (Guardian 11th August 2005). Microsoft has now filed over 100 anti- spam lawsuits in the US winning more than $800 million in judgments against spammers. Why is Microsoft so concerned? Most spam is sent from Windows PCs that have been infected by a trojan that has got in via a spam message or website. Despite regular patches and updates being announced to the operating system people don'’t always update their machines. The international law firm Pinsent Masons has a web page at which provides up to date information on spam. Go to web site and enter the word spam in the search box to view the latest stories. An interesting story dating from May 2005 was of a survey by Mirapoint which found that many spam filters block too many legitimate mail messages (too many false positives). This suggests that technical solutions are not a panacea for dealing with spam.

A couple of other recent surveys on spam may be of interest. The Pew Internet and American Life Project last April published the results of a survey which found that, although many users are getting more spam than they did a year earlier, they are less frustrated by it -– they have learned to manage it. A survey of UK consumers and SMEs by Checkbridge, also published in April 2005, found that 57% of respondents have no anti-spam filters - –they thought it was the responsibility of their ISP to filter out these e-mails. 24% reported that they received over 50 spam e-mails per day. Interestingly 47% of respondents said that they would be willing to pay between £10-30 per year for effective filtering.

Which brings us back to our main point. It's all down to economics in the end!


  1. Fallows, D (2005) CAN-SPAM a year later. Pew Internet and American Life Project, April. Available online at
  2. Sunder, S et al. (2005) Pricing Electronic Mail to Solve the Problem of Spam. Human-Computer Interaction 20 195-223. Available online at

Other sources

  1. BBC News. Computer Users Ignore Warnings. 10th December 2004
  2. BBC News. Net Criminals Customise Attacks. 3rd August 2005
  3. BBC News. Software pirates tap into technology. 2nd August 2005
  4. BBC News. Bad e-mail habits sustains spam. 23rd March 2005
  5. BBC News. Net users learn to live with spam. 11th April 2005.
  6. Greene T C Netizens learning to tolerate spam. The Register 12th April 2005.
  7. Koprowski, G J Phishing Rattles Online Consumers. ECommerce Times 17th July 2005
  8. Leung, A Spam: the current state. Telus Corporation 8th August 2003.
  9. Leyden, J Save us from spam. The Register 18th April 2005
  10. Leyden, J Spear phishers launch targeted attacks. The Register 27th August 2005
  11. Pinsent Masons. Spam filters block too much work e-mail. 27th April 2005-09-26 http//
  12. TechNewsWorld 18th July 2005-09-23

Monday, September 19, 2005

More on bandwagons and network effects

In lecture 2 I spoke about the ideas of network externalities and complementary bandwagon effects introduced by Jeff Rolhfs, first in his pathbreaking article in the 1974 Bell Journal, and then more recently in his book and his Strategic Policy Research Institute paper Bandwagon effects and the Internet. Both these ideas help to explain the rapid take off of the Internet once the commercial conditions were right.

Of course bandwagons don't always get rolling. Greenstein (2003) "Jumping on bandwagons" recalls the failure of the Picturephone to take off in the 1970s. Greenstein also explains the impact of network externalities in terms of asymmetries above and below the "critical mass". The value to an individual user of a marginal addition to the network is small when the network is small, but can be much larger when the network is big. The positive feedback only kicks in when enough users have joined the network. This is why complementary bandwagon effects from applications can be so important.

In the lecture I also noted that Clements (2004) has a slightly different form of terminology for these effects. He stresses the difference between what he calls direct network effects and indirect ones. The direct effect is where the utility of an individual user is raised by the addition to the network of another user. The indirect effects occur via complementary (compatible) products. For example a DVD player becomes more valuable as the number of DVDs available to play on them increases (usually these systems have hardware and software elements). Clements explores the extent to which a market will "tip" to a single standard.

Sadly network effects might not always be good for consumers. Recent debates over the spread of viruses and other forms of malware have raised the possibility that the use of RSS feeds to enable blogs to reach a wider audience could be attractive also to virus spreaders. You have been warned!

Don't forget to look at my bibliography file for the full details of papers and books that I mention, and also for quick links to them.

Thursday, September 15, 2005

Communication, communication, communication

Last week eBay, the Internet auction company, paid $2.6 billion (about £1.4 billion) to acquire Skype Technologies, the Luxembourg based Internet telephone company. Indeed if certain performance targets can be met over the next three years eBay will have to pay an additional $1.5 billion to Skype. Several market analysts have questioned the wisdom of the deal, trying hard to figure out the logic of the acquisition and suggesting that eBay may be paying out more than it should have done.

Exactly why did eBay buy Skype? Are they trying to expand their range of services to come into more direct competition with other Internet giants like Google and Microsoft, or can we accept at face value eBay's own explanation that the move was all about improving communication between eBay buyers and sellers?

First, some background. Skype Technologies was launched in 2003 by Niklas Zennström, and Janus Friis, who had already been successful in creating the peer-to-peer (P2P) file-sharing program KaZaA. With their new company they set about providing another P2P system that would permit simple web-based telephone calls built on the Voice over the Internet Protocol (VoIP) technology. With Skype calls made from PC to PC have been completely free. Calls from PCs to ordinary telephones (landlines or mobiles) have to be paid for, but are much cheaper than through the usual telephone companies. Skype has been the market leader in the Internet telephone sector and, according to a BBC News report, it currently has 53 million registered users worldwide. The Seattle Post reports that Skype earned $7 million in revenue in 2004, predicted to rise to $60 million this year and over $200 million in 2006. However Skype as yet has not become profitable.

Two other big digital technology companies have been focusing on Internet telephone services: Microsoft has recently bought Teleo Inc, while Google has developed Google Talk. Perhaps eBay feels that all the big players will have to have an in-house Internet telephone service and it needs to diversify a bit? The official reason being given by eBay executives is that the voice communications technology will make it easier for eBay users (buyers and sellers) to communicate with each other, especially for very highly priced products or services such as cars, houses and valuable paintings and furniture. I think there is probably some truth in both explanations. It will be interesting in future months and years to see exactly how eBay, Amazon, Google, Yahoo!, Microsoft and AOL develop their range of services and compete with each other. I am particularly interested in the Microsoft-Google competition right now. That will be one to watch!


BBC News
eBay to buy Skype in $2.6bn deal
12th September 2005

Mark Ward, BBC News
Portal bid drives eBay Skype deal
12th September 2005

Yahoo! Finance
Skype Technologies SA Company Profile
Page accessed 13th September 2005

Seattle Post-Intelligencer
EBay to pay $2.6 billion for Skype Technologies
13th September 2005

Ken Belson, New York Times
EBay to buy Skype, Internet Phone Service for $2.6 billion

Andrew Ross Sorkin, New York Times
Are the latest big deals really a big deal?

Skype web page
Page accessed 13th September 2005

Alexandru Macovschi
Google Wanted Dead Or Alive. Better Dead
Softpedia news
4th September 2005

BBC News
Microsoft-Google battle heats up
4th September 2005