Click Fraud Costs Advertisers

[jokach]

The results of a research study were recently published indicating that companies like Google, Yahoo and others were selling advertising that had no chance of making any money .... its interesting that in further readings on the issue, 2 "click-fraud" lawsuits have recently been settled with Google and Yahoo.

Originally posted at:
http://www.internetfinancialnews.com/insiderreports/featured/ifn-2-20060706ClickFraudCostsAdvertisers800M.html


Kurt Cobain wasn't talking about Bill Gross, the man who invented cost per click advertising at GoTo.com, which became Overture before Yahoo (YHOO) purchased the company. But the numbers reported by the San Francisco Chronicle about click fraud may make online advertisers feel like they have been sold something like a bill of goods.

That report cited Outsell research on click fraud. Respondents to their study claimed three out of four of them had been victimized by illicit clicks. They also complained that 14.6 percent of all clicks made on their ads were fraudulent.

"In our opinion, it is not acceptable that advertisers fund the illicit profits of the scammers," Chuck Richard, vice president of Outsell, said in the report.

Those profits comprised some $800 million of the collective budgets of online advertisers. These are businesspeople who very likely look for anything that drains their profits and act to stop the bleeding. Outsell noted that 27 percent of its study group reduced or eliminated their spending on cost per click ads, with an extra 10 percent planning to reduce such spending.

Yahoo denied contentions it is weak when it comes to policing such clicks. A spokesperson for the company said in the article it filters numerous suspicious clicks, and has a refund procedure in place for advertisers to request one should they think they were billed for fake clicks.

Although Google (GOOG) had no comment on the Outsell report, it has in the past espoused a similar opinion to Yahoo's.

Danny Sullivan at Search Engine Watch updated his site's post on the Outsell report, and questions the numbers in contained:

The $800 million cited in the San Francisco Chronicle article comes from the report taking that 14.6 percent average and applying it to the entire estimated $5.5 billion search ad spend from 2005. Some problems with this being an accurate stat are:

Advertisers might be off in their estimates

The average rate might not be applicable across the entire spend. In some industries, it might be much higher -- while spend in those industries might be a small percentage of overall search ads spend. Or it could be the reverse.

Scott Karp, writer of the Publishing 2.0 blog, opined that it isn't the dollar amount that matters, but the perception of click fraud that will hammer cost per click advertising dollars:

...it doesnt matter (Danny) how big click fraud actually is " the system cant escape the inexorable death spiral of negative advertiser perceptions. Google knows this, and thats why theyve been chasing offline media and experimenting with cost-per-action.

[jokach]

Here is Googles response (via their blog) to the media coverage over the reported click-fraud:

reposted from:
http://googleblog.blogspot.com/2006/07/let-click-fraud-happen-uh-no.html


"Let click fraud happen"? Uh, no.

7/14/2006 07:58:00 AM
Posted by Shuman Ghosemajumder, Business Product Manager for Trust & Safety

You may have seen some of the media coverage generated by a blogger's quoting Eric Schmidt about click fraud. By using select excerpts and ignoring the context of the remarks, that blog post made for an interesting read, but was unfortunately misleading.

Eric spoke at a SIEPR economics event at Stanford in March. At the end of his remarks he took questions. (You can view the whole presentation and Q&A that followed here.)

Here's the relevant question Eric was asked about click fraud: "Recently there’s been some talk about click fraud being a potential threat to the entire advertising business model. I was just wondering what your thoughts on that were and if there’s an economic solution to it more than just technical solutions."

Eric made clear from the very beginning that he wasn't describing our approach to click fraud and was answering hypothetically. He introduced his answer by saying: "Let’s imagine for purposes of argument that click fraud were not policed by Google and it were rampant ..."

The "let it happen" excerpt followed, in which he discusses the economic forces that can retard click fraud: "Eventually the price that the advertiser is willing to pay for the conversion will decline because the advertiser will realize that these are bad clicks. In other words, the value of the ad declines. So, over some amount of time, the system is, in fact, self-correcting. In fact, there is a perfect economic solution, which is to let it happen."

But he made clear that we don't take that approach, by adding that click fraud is "a bad thing and because we don’t like it, and because it does, at least for the short-term, creates some problems before the advertiser sees it, we go ahead and try to detect it and eliminate it." He also said, "In Google's case, we worry about this a lot and we have a number of technical engineers who think that this is great fun to try to go ahead of this and get ahead of it."

The fact is that Google strives to detect every invalid click that passes through its system, and to prevent those clicks from ever reaching an advertiser's account. And Eric and many others at Google have discussed the problem of invalid clicks publicly many times -- on our quarterly earnings calls, at our Press Day, and in other places, such as blogs. Anyone who has followed Google knows that Eric, and others at Google, have stated several times that Google fights invalid clicks, that we've devoted significant resources to manage it, and that we take it very seriously