Internet ads can show up in the darnedest places -- and not always where the advertiser intended. Ads purchased for placement on Yahoo! (YHOO) and its partner sites ended up being used as annoying pop-ups, and in some cases were clicked on by automated programs -- not consumers, according to a recent study by Harvard researcher and spyware watchdog Ben Edelman.
The study documents an elaborate chain of middlemen that can pass along ads far beyond Yahoo's intended network and expose advertisers to so-called click fraud, where machines -- not people -- create false and misleading traffic on Internet ads.
BUYER, BEWARE. It highlights what has become a growing worry for online advertisers: They may be overpaying for ads that show up on questionable sites and don't reach their intended audience.
Concerns over click fraud have contributed to recent weakness in Google's (GOOG) share price (see BW Online, 2/27/06, "Click Fraud Gets Smarter") and resulted in a downgrade from at least one analyst.
"The advertisers need to be aware that they are not getting their money's worth -- they have a contract that said they are paying for one thing and they are getting another," says Edelman, whose study was released Apr. 4 and doesn't cover Google.
OUT OF CONTROL. Edelman's work builds on a report he released in August that found Yahoo-managed sponsored links were being passed through several subaffiliate networks and appearing in adware-created pop-ups (see BW, 9/26/05, "For Yahoo, Mistrust is Popping Up"). This time around, Edelman says Yahoo not only has failed to remedy the problem, but he documents several cases where the adware and spyware programs actually create fake clicks on the sponsored links, running up bills for the oblivious advertisers.
Here's how: Yahoo runs an ad-management service called Yahoo Overture that, in effect, resells advertisements to partner sites. The arrangement generates extra sales for Yahoo, while extending an advertiser's reach.
A buyer supplies Overture with an ad, agreeing to pay Yahoo every time a user clicks on it. Yahoo displays that ad next to its search results and on its own Web pages. It also makes the ad available for partner Web sites to display if they choose, in return for a cut of advertising fee if someone clicks.
SNEAKING AROUND. Somewhere along the way, an ad can wander off this trail. This happens when one of Yahoo's partners decides to give its own partners a cut in return for traffic, Edelman says. According to the study, a Yahoo partner called Ditto.com served an Overture advertisement through another site, NBCSearch (no affiliation with General Electric's (GE) NBC), unaffiliated with Yahoo. That company, in turn, passed it along to one of its own partners. (NBCSearch didn't immediately respond to requests for comment.)
When that happens, Yahoo can't track its ads. Sometimes, the ads show up in undesirable places, like a pop-up from a spyware program. The average user simply sees the pop-up, unaware of how many networks it traversed beforehand.
Yahoo said in a statement: "Yahoo takes the quality of its search ad distribution network very seriously.We are carefully investigating the claims that have been raised. Once we determine the sources of these implementations, we will take appropriate action, which could include terminating a feed, ending a relationship with a partner or taking legal action against an offending entity."
BOGUS TRAFFIC. According to Edelman, advertisers including Cablevision (CVC), Microsoft's (MSFT) MSN, Allstate (ALL), Travelocity, and Drugstore.com's (DSCM) Vision Direct had their ads passed along until they showed up as a pop-ups in adware and spyware applications.
And in the case of Travelocity and Vision Direct, the spyware ran a program that had already "clicked" the ad -- meaning the advertiser had to pay for it.
Cablevision released a statement saying, "Cablevision does not fund or support spyware or adware applications. Online advertising is a valuable component of our marketing mix and we are looking into this report." Spokespeople for MSN, Allstate, Travelocity, and Vision Direct didn't comment for this story.
"NEFARIOUS ACTIVITY." It's impossible to know just how widespread this type of click fraud is on Yahoo's network. But 180solutions, an adware network that Edelman identifies as generating false clicks, serves more than 20 million unique users, according to its Web site. Edelman estimates from his own testing that an Overture ad would be served up by 180solutions an average of once a day, though it could vary depending on how much time the user spends surfing the Web. 180solutions said in a statement, "At no time are clicks 'faked' -- the user is simply sent advertising based on keywords from his/her browser session. 180solutions is committed to working diligently with all advertising partners to ensure they are in compliance with codes of conduct and best practices."
Edelman's findings aren't the only controversy roiling the adware industry. On Apr. 4, New York Attorney General Eliot Spitzer filed suit accusing adware firm Direct Revenue of installing ad-spawning software on people's computers without their consent. Spitzer's investigation uncovered company e-mails that suggest Direct Revenue made its software difficult for users to detect and remove -- and in some cases reinstalled itself after removal. Yahoo says it does not work with Direct Revenue, but research conducted by Edelman has shown Yahoo search ads appear in Direct Revenue pop-ups -- typically after first traveling through one or more distribution partners.
Yahoo investors may shrug off Edelman's findings, says Standard & Poor's analyst Scott Kessler. "This isn't something that's going to cause people not to buy Yahoo -- Yahoo is a lot more diversified, and that should mitigate concerns relative to this particular issue," he says. "But this is definitely worth watching...I definitely think that there is a lot more nefarious activity taking place in [online advertising] than most people understand."
LESS THAN DESIRABLE." And this isn't the first time affiliate networks have created headaches for partners. In early 2005, MIVA, a smaller advertising network with a model similar to Yahoo's, cut out partners that it deemed as having "poor quality" subaffiliates, costing the company roughly $6.7 million in revenue, according to estimates by then CEO Craig Pisaris-Henderson, and costing it approximately 11.5% of annual revenue in 2004. "You just don't have clarity into your [traffic] feed," when subaffiliates come into play, Pisaris-Henderson told BusinessWeek Online in a Mar. 10 interview. "We were having brands of our biggest advertisers showing up on a site that were less than desirable."
Many advertisers will continue to do business with Yahoo as long as they continue to see a good return on their investment, regardless of problems like these. But until those companies are able to better convince the public they have a handle on where they place their ads and who's clicking, advertisers and investors alike will continue to wonder just what percentage of the business is nothing but shadows.