New federal legislation in the U.S. to put a lid on Internet spam – the torrent of unwanted commercial e-mails promoting Nigerian business investments, mortgages and body-parts enlargement – may help against the electronic onslaught. But better solutions are probably to be found in economic and technological change, according to Wharton faculty.


The term spam comes from a Monty Python skit in which a customer in a restaurant is deluged with demands to order canned Spam before screaming out, “I don’t want any Spam.” Under a tsunami of junk solicitations, now estimated to make up more than half of all e-mails, Internet users have made the same cry to Congress.


Known as the Can Spam Act, the new federal legislation authorizes, but does not require, the Federal Trade Commission to set up a Do Not E-mail registry similar to the proposed federal Do Not Call list, which is now caught up in litigation. It also carries criminal penalties of up to five years in prison for violators. “With this bill Congress is saying that if you’re a spammer you could wind up in the slammer,” said Sen. Charles Schumer, (D.-N.Y.) a supporter of the legislation, which has passed through both houses of Congress and is expected to be signed by President Bush.


The federal provisions would supersede tougher legislation in several states, including a California law set to take effect Jan. 1. The California legislation would require marketers to gain permission from consumers before sending e-mail messages. By contrast, the federal legislation puts the burden on consumers to opt out of junk e-mail.


Crushed by Volume

According to Eric Clemons, Wharton professor of operations and information management, the volume of junk e-mail has grown beyond an annoyance. “The net could get crushed by volume.” he says, adding that while the federal legislation is well intentioned, a more effective way to stop spam is rooted in economics. “One entire approach to making this work has nothing to do with forbidding it, just making it no longer free to the sender.”


He points out that bulk advertisers who use traditional mailings bear the burden of printing their materials and paying for postage. The sender has to decide whether that investment will pay off with new customers. But e-mail is essentially free for bulk mailers because it does not cost much more to spam millions than it does to send a single e-mail. “If it costs nothing to the sender he thinks, ‘Why don’t I send it to everybody on the off chance somebody might be interested?’” says Clemons. “There is no cost to the sender in wasting my time.”


The best way to reduce Spam is to attach a cost to sending it, he suggests. “If the sender has to think before he puts me on his mailing list, then it’s going to limit the volume he sends and the volume I receive. Everybody is happier.”


According to Clemons, there are several ways to shift the burden of spam to the sender. One approach would be to use technology that allows Internet service providers, or ISPs, to require that PCs perform a short calculation before sending any e-mail. The delay would have little impact on normal e-mail users, but would have a much larger effect on spammers. This approach, which is being studied by Microsoft and other technology companies, addresses the issue of shifting the cost of bulk mail, but falls short of benefiting the public, says Clemons. “Anything that just creates computational friction or some form of economic waste is silly.”


A second and better solution, he says, would be to charge a small tax to send e-mail, then use the proceeds to upgrade the infrastructure of the Internet. The cost would not be enough to affect regular e-mailers, but in multiplying even a small tax by their tremendous volumes, it would make the tax prohibitive for spammers.


A third solution – studied by professors at the University of Michigan – would be for bulk mailers to post a bond that would be used to give e-mail recipients a micro-payment to read messages. This could be waived if the recipient felt the message was worth reading.


Of the three approaches, Clemons prefers the second because it is the easiest to administer even though economists dislike the idea of any tax because they argue it can distort usage. “But you already have a distortion,” says Clemons. “People are assuming that wasting my time is free.” A system taxing bulk e-mail or requiring a bond could be administered by ISPs or other net-based organizations, not necessarily government, says Clemons, adding that “the net has done a marvelous job of organizing itself so far.”


Target the Advertisers

Dan Hunter, professor of legal studies at Wharton, agrees that the cost of spam must shift from the receiver; in effect, the legislation attempts to do that with fines and jail time. But he says the federal law will be difficult to enforce because spammers can easily move offshore and beyond Congress’ jurisdiction. “At the moment, most of the big spammers are American citizens using foreign servers to mask their identity. The difficulty is going to be actually finding them and catching them.”


Instead of focusing only on the spammers, says Hunter, government should go after the advertisers, who are likely to be located in the United States. “The people marketing these Viagra pills are often local. If you attack them as well as the spammers and the ISPs that host them, this multi-pronged approach is much more likely to work.”


According to Hunter, the big obstacle to this plan is political opposition by powerful interests, including the Direct Marketing Association. “Any attempt to actually stop people advertising is politically sensitive because they have lots of money and they don’t want their market taken away.”


The Direct Marketing Association, which represents 4,700 companies in the United States and 53 others abroad, supported the Congressional legislation although it objected to the do-not-email provisions. But Hunter says the marketers supported a weak version of the legislation that now will supplant the California law. “They supported the watered-down version, the one that’s not going to work and does not affect their interests.”   Marketers had objected to the California legislation because they said it would be difficult to identify California e-mail and would have left businesses open to frivolous consumer lawsuits.


According to John Mozena, co-founder of the Coalition Against Unsolicited Commercial Email (CAUCE), not only direct mailers but also other large corporations and business associations joined with the DMA to back the federal legislation over the California law or tougher versions debated earlier in Congress. “It’s not just the DMA. Every company of any size uses direct marketing,” says Mozena, adding that the legislation does not go far enough to protect e-mail users from spam. “It fails the most basic test of anti-spam legislation. It doesn’t tell anybody not to spam. It regulates spam and requires truthfulness in spam, but it doesn’t stop any marketer anywhere from sending us messages.”


Still, Mozena says CAUCE believes spam can be legislated out of inboxes. “We agree with the basic concept that there needs to be financial disincentives for spammers. But we continue to believe the only way to do that is through laws and the courts. We have yet to see any suggestion for a technologically-backed way of assessing the cost of the marketing – and getting it back to the original sender – that can be deployed in the real world.”


Higher Usage, Higher Fees

According to Thomas Lee, Wharton professor of operations and information management, ISPs are already exploring a new pricing structure known as quality of service based pricing, which could be more effective in controlling spam than legislation. Broadband providers, he says, charge a person who sends a few e-mails a week the same amount as a teenager who downloads music in huge chunks of data. “If you are an ISP you would like to grade your level of service so people using more bandwidth pay more.”


He, too, says one of the main difficulties with the new U.S. legislation is that it does not address the problem of foreign spammers. But if ISPs charge additional fees for heavy users, that would be a disincentive to spammers around the world because their local ISP would be charged a higher interconnect fee by U.S. ISPs to get the messages in front of American e-mail users. In turn, the foreign ISPs would then charge their spamming customers more.


Lee acknowledges the fees would have to be carefully structured to avoid hurting individuals who legitimately want to send packets of information. He also notes that whatever pricing thresholds are set, spammers may be able to get around them, just as money launderers get around U.S. banking requirements to report cash deposits of $10,000 by making deposits of $9,999.


Spammers could get around filters in the same way, says Lee. If they figure out that anti-spam filters are bouncing out mail going to more than 5,000 recipients, the spammers will send their messages to 4,999. “That’s a constant game.”


Balaji Padmanabhan, professor of operations and information at Wharton, suggests that the idea of paid e-mail might be a long-term solution. “At some point it would be nice to see someone experimenting with this concept so we know the problems and benefits.”


In the short-run, however, Padmanabhan suggests technology can be used to stop much of the spam overload. The software for spam filters is easier to write than virus detection software and can easily be updated as spammers find new ways around the system. Anti-spam filters would be most effective if they are applied by ISPs who can keep a closer watch on Internet traffic trends than individual PC users. The danger with any filter, he acknowledges, is the possibility of creating false positives that delete legitimate e-mails. “You’re worried about missing an e-mail from a high school friend who has not been in touch for 20 years.”


One solution would be for filters to add a message to the sender saying the message was deleted as possible spam. “If the sender is a friend from high school, they can at least know to work a little harder at finding another way to get in touch with you … The bottom line,” says Padmanabhan, “is that good spam filters will go a long way towards dealing with the spam problem.”


Wendy Moe, who earned a PhD at Wharton and is now a marketing professor at the McCombs School of Business at the University of Texas, says that of the three ways she receives unsolicited advertising – mail, telephone and e-mail – she finds e-mail the last intrusive. Aggressive legislation, taxation or technological filtering of spam may choke off development of a potentially valuable consumer service, she suggests. “Intelligent marketing makes spam a service as opposed to an annoyance.”


When Moe uses e-mail systems through an employer or a private server she receives far less spam than when she uses a big commercial network such as hotmail or MSN. She suggests that consumers complain to ISPs who allow their lists of e-mail addresses to get into the hands of spammers. “That’s not something the legislature needs to deal with.”


She is not ready to fully endorse the federal legislation, nor is she ready to say that there will never be a time when spammers do not need legal sanctions. “There are extreme cases. There are situations where the market can only do so much. But I don’t think we’ve had enough time to let the market try and sort it out,” she says.