• by joe.h , Bob Heyman , March 16, 2006

Surely, when Google settled a "click fraud" class action suit last week for up to $90 million, it hoped the issue would go away. However, initial reaction seems to indicate that the settlement may just be the tip of the click fraud iceberg.

Click fraud is widely regarded as a potential Achilles' heel for the giant search engines. Some speculate that about 20 percent of all search clicks may be fraudulent. If true, then with the paid search marketplace a $5 billion per year business, $1 billion of advertisers' spend might be based on fraudulent clicks. No less than Google's own CFO, George Reyes, told an investor's conference, "I think something needs to be done about this (click fraud) really, really quickly, because I think it potentially threatens our business model." While the exact size of the problem is still unclear, a recent study by SEMPO, a trade association of search professionals, suggested that 45 percent of search advertisers were concerned about the issue. As John Squire, CEO of Coremetics, said " Click fraud is a fin sticking out of the water; you're not sure if it's a great white shark or a dolphin."

The settlement gets Google out of a class-action suit brought in Arkansas in February 2005 by two small business advertisers, Lane's Gifts and Collectibles and Caulfield Investigations. Under the terms of the settlement, Google will offer credits for invalid clicks to its advertisers back to 2002, no matter when the clicks occurred. General Google policy is to require advertisers to notify Google of questionable clicks within 60 days. The suit also named Yahoo as well as other engines including Ask.com, AOL, and Lycos.

While the proposed Arkansas class action settlement is intended to settle all click fraud claims against Google, it still needs to be approved by the court and the class. Before that can occur, another similar case against Google may get certified by a California court.

"The U.S. District Court may end up certifying a nationwide class in our case before the settlement can be finally approved in Arkansas," said Darren Kaplan, one of the lawyers representing the plaintiffs in the California case. "If we are successful in certifying a class in our case in the U.S. District Court, the proposed settlement in Arkansas will not resolve anything." The California case, AIT v. Google, is scheduled for a hearing to be held May 14 in the U.S. District Court for the Northern District of California.

Google had routinely assured advertisers that the click fraud problem was under control. It has multiple detection schemes in place and typically awards refunds to advertisers when it detects fraud. However, the size and speed of the settlement has led many to wonder whether the problem is bigger than Google has admitted. $90 million, of course, is just a drop in the bucket for Google (a mere 1 percent of sales). Michael Caruso, CEO of Clickfacts.com, said, "Google is getting a deal. This is pocket change for them." But the company historically had been seen as a willing litigator. For them to throw in the towel on click fraud may well indicate that where there is smoke there may well be fire. Both Google and Yahoo have repeatedly stated that there is a relatively small amount of click fraud and that their filters catch most of it before the billing stage. However, industry observers fault both engines for a failure of transparency.

Click fraud can be perpetrated by individuals or it can be automated. There are online "bots" that can be programmed to repeatedly click ads. A California man, Michael Bradley, was caught trying to blackmail Google into paying him $150,000 for his click fraud software, which he threatened to unleash against the search engine giant. The human alternative is to employ low-cost workers from India and China. A recent article in the Times of India hints at the scope of the problem. It noted that when you type "earn rupees clicking ads" into Google, you get 25,000 listings. The newspaper highlighted one worker whose job it is to click on online ads. She makes $100 to $200 per day at about 20 cents per click. The paper quotes another as saying ""I have no interest in what appears when clicking an ad. I care only whether to pause 60 seconds or 90 seconds, as money is credited if you stay online for a fixed time."

Clearly, Google and the other search engines take the problem seriously and are throwing major resources at it. Google has described three layers of click fraud defense. First, it utilizes monitoring techniques to examine every click based on IP address and click patterns to identify invalid activity. Second, it has a group of PhDs who have developed proprietary security mechanisms; third, it has a team of technical specialists whose job it is to manually investigate individual cases of suspected click fraud.

But the question remains whether the search industry can rely on the current regime in which the engines, in effect, police themselves. Some have analogized this as allowing the fox to guard the henhouse. In other areas of media the need has arisen for trusted third parties to provide authentication. For example, in the magazine world circulation is authenticated by the Audit Bureau of Circulation (ABC). Many search advertisers think the time may have come for the establishment of a similar solution in search.