Continued: W3i Holdings: Inside pitch

Getting free downloads online -- games, screen savers, wallpaper photos -- is easy. But just because they're free doesn't mean someone isn't making money from them.

Consider the unusual approach of W3i Holdings, a 60-employee Sartell, Minn., company that was started by three college-age brothers in 2000. It makes money on its free Windows PC software downloads by offering consumers a little more than they asked for.

If you request a free download from W3i's websites (including freeze.com, screensaver.com, and wallpapers.com), you might also be offered a free-to-download Yahoo toolbar or weather software from WeatherBug. If you say yes, W3i makes money every time you click the Yahoo toolbar to connect to an advertising-supported page (W3i gets a share of the Yahoo advertising revenue). And W3i gets a one-time payment for every WeatherBug download, which redirects consumers to the ad-supported WeatherBug page.

"We're in the business of aggregating consumers and passing them on to partner websites," said W3i CEO Andy Johnson.

Some analysts say that tapping into this indirect online advertising revenue will be the next great Internet advertising model. But W3i's approach already has triggered consumer warnings from some Web security firms and prompted an investigation by the Florida attorney general.

One analyst who likes this approach is Gerry Kaufhold, with research firm In-Stat in Scottsdale, Ariz. "The problem Web advertisers have is that the branded portal sites like Yahoo or Google never reach 100 percent of the Web audience," he said. "If W3i can bring Yahoo another 3 percent of the Web audience by downloading Yahoo tool bars, Yahoo likes that. It's actually the next online business model. The W3i guys are ahead of their time."

W3i says it had $26.8 million in revenue in 2006, the most recent year for which it will give financial information. (W3i reportedly is projecting $34 million in revenue this year, but it won't confirm that number.)

Yahoo confirmed that it has a five-year-old agreement for W3i to download Yahoo tool bars in exchange for a share of Yahoo search advertising revenue. Such arrangements with smaller websites help Yahoo reach more consumers with its Internet search service, said spokeswoman Emily Fox. A spokeswoman for WeatherBug, which is owned by Maryland-based AWS Convergence Technologies, didn't return a phone call.

But not everyone believes consumers should welcome W3i's free downloads, which can be used to feed consumers a steady diet of advertising.

Some Internet security services have flagged W3i websites as potentially risky because of their download policies. McAfee continues to warn consumers about the sites; Websense quit flagging them after it was contacted by W3i.

McAfee said it "red-flagged" W3i websites www.freeze.com, www.w3i.com and www.my. freeze.com, for one of three reasons: "They pose especially hazardous risks to a user's computer security, there are an exceptional number of annoying behaviors, or there is exceptional information that McAfee believes SiteAdvisor users would want to be aware of before or during a visit to that site."

W3i is trying to overcome such bad impressions about its business.

"We try to get the security firms to know that we are aboveboard and transparent," said Robert Weber, vice president of business development. The firm seeks user permission before downloading anything, and it was recently certified by security firm Truste as meeting best practices for a downloading website, he said.

Consumer beware

But it's possible that not all consumers see the firm's downloading disclosures. Some disclosures are obvious: The WeatherBug offer to consumers says it is "free software, supported by sponsors and advertisers." But a consumer would have to read the company's detailed online privacy policy to learn that "personally identifiable information" the consumer volunteers (it's not required) is shared with W3i's marketing partners. In addition, W3i "may provide your postal information, e-mail address and other relevant data to direct marketers and list managers," the privacy statement says.

Besides being flagged by Web security firms, W3i was investigated last year by the Florida attorney general's office in connection with a firm named AzoogleAds, a large online advertising firm with which W3i says it likely has done business. AzoogleAds got into trouble when some of its "free" ring tone downloads actually signed up consumers for monthly subscription services without their knowledge. The Florida investigation of W3i remains open, but W3i says nothing has come of it.

"This investigation is over 16 months old, and not since April 2007 have we been contacted by the Florida attorney general's office," said Hayden Creque, W3i's vice president and general counsel. W3i has since sold off its cell phone ring tone website, Creque said, because ring tones weren't central to its business and the ring tone market became less attractive after the Florida investigation.

One investor who is convinced of W3i's good intentions toward consumers is Young Sohn, a former co-president of California data storage firm Quantum Corp., who is W3i's chairman. He says W3i once had to terminate a partner company that was "promoting downloads without getting the proper [consumer] consent," but is more careful now.

"If you want to partner with Yahoo, you must be trustworthy," Sohn said.

While W3i isn't the only Web-based company making money with free downloads, it claims to have perfected the technique based on early work by its founders, brothers Robert, Ryan and Aaron Weber (the "three" in W3i), who all attended St. Cloud State University. Today, two of the three, 28-year-old twins Robert (working on a bachelor's degree in business) and Ryan (who has a bachelor's degree in computer science), remain with the firm. Robert says the three brothers learned the business the hard way, starting out as website consultants in 1996, then creating a website called freestuffcenter.com in 1998.

"We had $500,000 in revenue in 1999, while we were living in our dorm rooms," Robert Weber said.

The trio founded an earlier version of W3i, called Freeze.com, in 2000.

Despite the disagreements over W3i's unusual business model, one of the company's outside board members says its approach to advertising isn't really new at all.

"This is direct marketing, which has been around for 80 years or longer," said Tim Dibble, managing general partner of Boston-based investment firm Alta Communications, a minority stakeholder in W3i. "But these guys are using a new delivery mechanism called the Internet."

Steve Alexander • 612-673-4553