The unpalatable business of spam

A new article provides a fascinating overview on the dynamics of unsolicited email and the fight to keep it at bay

A couple try to get cooked breakfasts at a greasy spoon, but their attempts to order are frustrated. The menu largely consists of Spam, and in any case the conversation – and indeed, the following sketch – is swamped by a crowd of Vikings singing “Spam, Spam, Spam, Spam”. A typical Monty Python skit, really.

Unsolicited email, often selling fake pills or watches, has a similar ability to drown out sensible communication, which may be why the name “spam” stuck, despite the initial protestations of the trademark owners, Hormel Foods.

Spam email rarely reaches my inbox these days, but this isn’t because spam itself is a thing of the past. Most emails “out there” are spam, but the vast majority are intercepted at some point.

So where do these emails come from? How? Who pays for them? And who pays for our defences against them? A new article by Justin Rao and David Reiley in the Journal of Economic Perspectives provides a fascinating overview.

It would be easy to block spam sent from a single fixed source, so spam emails are sent by “botnets”, swarms of home computers that have fallen prey to viruses and been co-opted by the spammers. These botnets are rented by merchants, who use a bewildering variety of aliases. One group of researchers identified 30 pharmaceutical merchants who, between them, were using almost 1,000 different “store front” web-page styles, more than 50,000 domain names and almost 350 million distinct URLs.

But who buys these products, typically shipping from China or India, from such obviously shady sources? Almost nobody. Rao and Reiley estimate that the hit rate is about one sale per 10 million emails sent – but then sending 10 million emails might only cost $50 or $60, so the spam continues.

If it’s clear who benefits from sending spam, it’s less clear who pays to block it. One case is instructive: when the vast Rustock botnet was shut down last spring, Microsoft and Pfizer (manufacturer of the genuine Viagra) took leading roles and Microsoft offered a $250,000 reward. This single episode reduced the proportion of spam email from almost 90 per cent to 75 per cent, creating large spillover benefits.

This seems typical: the big beasts of the internet have the incentive to fight spam, and it’s striking that the big three webmail providers with the resources to keep spam at bay – Google, Microsoft and Yahoo – have seen their market share rise from under 60 per cent to over 80 per cent since 2006. (Rao and Reiley wrote their working paper at Yahoo before moving to Microsoft and Google respectively.)

Economists often talk about “negative externalities” – private activities that produce public costs. Driving a car might produce a social cost of about 10 pence for every pound of private benefit, which is why economists advocate fuel duty and congestion charges. But the externality ratio for spam is about a thousand times higher – perhaps £100 per pound of private benefit. Vast resources are devoted to blocking spam, or deleting it when it gets through, but the actual benefit to the spammers is relatively tiny. Rao and Reiley reckon that even car theft has a lower externality ratio – at least the thief gets a car.

All this put me in mind of two immigration lawyers, Laurence Canter and Martha Siegel, often credited with being the first spammers back in 1994. Canter and Siegel defended their unsolicited bulletin board advertising: it was a matter of free speech, they said, and then published a book called How to Make a Fortune on the Information Superhighway. In the end, the real fortunes are being made by the likes of Amazon and Google. Spam is a small industry; annual revenues are about what Apple makes in a single day. Alas, it is a small industry with a long shadow.

Also published at ft.com.