• by Dave Morgan , Featured Contributor, July 13, 2006

Last week, market researcher Outsell released the results of a study on click fraud in the pay-per-click advertising market. Based on interviews with 407 advertisers representing approximately $1 billion in ad spending, the study found that confidence is dropping in pay-per-click advertising as advertisers estimated that more than 14 percent of the clicks that they're billed for are fraudulent. This would represent more than $800 million in wasted spending last year. The results of the study were reported broadly in the online ad trades, since $800 million is a big number, but to many the story didn't seem much different than the dozens of other click fraud stories that we have become accustomed to reading over the past year or two. But that changed.

Earlier this week, Donna Bogatin in her ZDNet blog uncovered comments from Google's CEO Eric Schmidt made in March of last year discussing Google's point of view on click fraud. He described how the pay-per-click advertising model was inherently "self-correcting" and that click fraud should be viewed by Google advertisers as a "cost of doing business." Google's logic, it seems, is that to the extent that click fraud becomes rampant, advertisers will understand its extent and will factor the cost of those "bad clicks" into what they are willing to bid and pay for ads. Thus, even if it becomes a serious problem, it will "self-correct." Advertisers will not overpay for the value that they actually receive. If the click fraud becomes too great, they will stop buying Google ads or paying the bid prices.

Essentially, Schmidt is saying that Google knows that some of its distributors of ads (Web sites) are falsifying clicks so that they can get paid more than they deserve and that this problem isn't that much of a problem since advertisers seem to be happy paying the inflated numbers. Thus, the logic goes, the clicks must have been undervalued to start with.

This certainly raises some questions in my mind, such as:

• What about the advertisers? How do they feel about this? I suspect that they do not feel the same way. I suspect that most of the hundreds of thousands of Google advertisers, particularly the small "mom and pops," have no idea about the level of click fraud that exists and that if they all knew, they would not be happy paying for the fraudulent clicks. Many are turning to third parties like ClickFacts to help them recover dollars wasted by fraud.

• Is Google right? Is click fraud self-correcting? Of course not. That's not how the business works. The only way that Google's argument holds water is if their advertisers have perfect information. This would only work if the advertisers could perfectly track each and every click to each and every site visit to each and every paid sale--and only if they could see all of Google's data across all of the sites and advertisers, and if they had extraordinary analytics tools, to be able to learn for themselves the validity of each and every click. They don't and can't, by the hundreds of thousands.

• Is there any harm done? I think so, and not only to the advertisers that were the direct recipients of click fraud. What about all of the advertisers that bid against them? What about all of the advertisers that lost their top ranking to "click-frauded" competitors? It seems to me that this click fraud problem has a network effect just as powerful as the network effect in the auction component of Google's business model. If fraudulent clicks inflate the prices, it artificially inflates the auction and it impacts everyone. It makes more money for Google. It makes more money for the Web sites. But, unfortunately, it hurts the advertisers.

• Is this much different than the newspaper circulation fraud that was so much in the news over the last year or two? In those cases, it was discovered that several newspaper distributors (bulk wholesalers) had fraudulently inflated their circulation numbers so that they would be paid more. And, of course, since these numbers were used in computing the respective newspapers' rate cards, advertisers ended up paying for the fraudulent circulations--fraudulent clicks, as it were. Following Google's logic, shouldn't this have also been a "self-correcting" situation? If advertisers paid the higher rates and it included the fraudulent circulation, they must have thought that the media value they received was worth the price that they paid. If not, they would have stopped buying it. Of course, newspaper ads are not nearly as measurable on an ROI basis as pay-per-click ads, but in the grand scheme of things, it's just a matter of degree.

Is this self-correcting? Whether or not Google is right, it doesn't matter. We cannot afford to wait. Michael Caruso at ClickFacts asserts that 14 percent is a very low estimate for click fraud, and he has clients where 30 or 40 percent is more the norm. The world, particularly the advertisers and financial markets, watch Google and Yahoo and other pay-per-click advertising providers with bated breath. They are our barometers. They are the basis upon which almost all of us are judged. We benefit from their successes. We are hurt with their failures. In this case, the trust of our industry is at stake. We can not wait to see if it self-corrects. We (Google and Yahoo) need to get out in front of this issue and solve it now. We (they) owe it to the advertisers in whose trust and pocketbooks our futures lie.