Click Fraud: Just The Cost of Doing Business?

by Alan Graham

In the recent issue of Wired Magazine (Jan 2006), you'll find a great article called How Click Fraud Could Swallow The Internet.

This is not news to many of us in the business. As someone who works at a small search/advertising company, the problems of the larger players, like Google's Ad Sense, could hurt the entire Web 2.0 industry.

Or then again will it?

I asked a friend who spends millions of dollars in online ads each year if they knew of this problem.

The answer was:

"Yes. We realize it is a problem, but we factor it into our costs. So even if we end up spending several hundred thousand dollars a year on click fraud, if it still falls in our acceptable margins, we just pay it. It all comes down to the cost of doing business."

Ouch...that's an amazing amount of money to be pissing away. As a billion dollar company, they can obviously afford to pay the added cost, but that extra money spent on fraud translates into other budgetary issues internally.

Google alone is looking at $6.1 billion in revenue for 2005...99% of which is from Keyword ads (56% of that is from AdWords, 43% from AdSense). So we're probably looking at companies paying millions of dollars in fraudulent ad payments. This problem is compounded enormously by the proliferation of splogs on the web and currently I see no sign of it slowing.

Another friend recently told me that while working at a search company a couple of years ago, they discovered Russian "click farms" where people were paid to simply sit around and click on ads all day.


Winners & Losers

Obviously large destination sites with ad programs like Yahoo! have no doubt earned a considerable amount of money from click fraud. Last April Yahoo! was named as one of the defendants in a lawsuit led by a company called Lane's Gifts and Collectables who claimed that not only were they improperly charged, but that Yahoo! colluded with other search engines. While I question the issue of collusion (we still haven't decided on the official handshake at the Search/Ad cabal meetings), this is not the only lawsuit out there and I suspect we'll see more in 2006.

I'm curious what Yahoo! Search is doing to combat this issue? Google? And how will it eventually affect their bottom line? An admission through court documents of the suspected percentage of fraud, might translate to a correction of stock valuation and some departmental cuts. In the meantime I do wonder how many millions have been spent on ads that served only to get these click fraud crooks rich? And...what can we do about them other than simply play an IP cat and mouse game?

We all know the online ad space is extremely viable, and it works. If it didn't, we'd know it by now. However, not all companies can afford to bite the fraud bullet and it simply can't continue to be an enormous cost of doing business.

Another good post: How many AdWords clicks does it take to increase GOOG $10?

So...what are we going to do about this and can anyone talk about their plans to combat this problem?


2006-01-13 18:06:18
more measures
Thanks for the link! Here is a follow up that your readers might like:

Microsoft to pay search users? Google too? Crazy.

Where I offer:

As they mature, I believe that online ad services must work to improve their credibility with advertisers, not erode it. If I were an advertiser, I would want:

* to see a strong, active policy against click fraud,
* some transparency into the click cost mechanism, and
* click audit features.

That is, some assurance I'm getting high quality clicks. Maybe even a transparent 'click quality index' that quantifies these factors (and adjusts click cost to suit). Paying users to read/click ads would draw the lowest quality ad clicks.

I believe this is technically possible, especially after seeing examples of Google Analytics! The problem is that pay-per-click advertisers are darlings right now who enjoy a privileged position. I read that some advertisers fear them and don't want to rock the boat by asking hard questions.

OTOH, a PPC newcomer such as Microsoft just might make itself more appealing by coddling advertisers a little. Its higher demand by advertisers would translate into higher revenue.