Click fraud. Few words can cause as much trepidation in the hearts of the advertisers who spend big bucks to get their message across on the Net. That's because the practice can exaggerate the effectiveness of ads, rob advertisers, and line the pockets of fraudsters.
So researchers at information-industry researcher Outsell set out to find out just how costly click fraud may be. Their finding: The practice cost as much as $800 million last year. Outsell bases the finding on a survey of 407 advertisers who control just under $1 billion in ad spending. Respondents estimated that of all the clicks on so-called pay-per-click ads—where advertisers pay fees based on the number of times a Web surfer clicks on an ad—an average of 14.6% are fraudulent. Outsell applied that figure to total search-engine ad spending of $5.5 billion.
The findings revive debate over a practice that threatens to undermine faith in the reach of Internet ads and the business models of companies like Google (GOOG) and Yahoo! (YHOO), which rake in sales from ads placed on the Web. The fraud happens when false clicks are generated on a Web site, forcing advertisers who pay per click to cough up inflated fees. That money is then split between the search engines that place the ads and the site owners responsible for the phony clicks.
AD-SPENDING CUTBACKS. Google and Yahoo have already drawn fire from advertisers and analysts who say the companies aren't doing enough to combat click fraud. Yahoo settled a class action click-fraud lawsuit with Checkmate Strategic Group in late June, months after Google settled a $90 million class-action suit over the same matter (see BusinessWeek.com, 3/10/06, "Gauging Google's Gaffes").
Outsell's study may only add to the concern. According to the Burlingame (Calif.)-based firm, 27% of advertisers reported they had already decreased their online ad spending, by an average of 33%. An additional 10% said they plan to reduce online spending until search-ad publishers come up with a plan to protect their investment. "I think it's a piece of the drip, drip, drip—the Chinese water torture effect," Outsell Vice-President and lead analyst Chuck Richard says of the study and the increased scrutiny of search engine companies.
The cutback in pay-per-click ad spending could provide inroads for Web companies that use other ad-payment methods, Richard says. Several companies, from eBay (EBAY) to Time Warner's (TWX) AOL to newcomer Snap.com, are using some form of so-called cost-per-action ads, which require Net surfers to perform a certain action—say registering or making a purchase—before the advertiser owes any money to the publisher. "To me, the big share shift will be between cost-per-click and cost-per-action sort of duking it out," he says.
CALLS FOR TRANSPARENCY. Google, Yahoo, and Microsoft's (MSFT) MSN all say they are working hard to combat click fraud. To analysts' dismay, they're unwilling to reveal statistics on their methods, saying it would give the fraudulent clickers a leg up. Richard says this is self-defeating. "I think they are making absolutely the wrong decision by not being as transparent as possible," he says. "We're not saying publish your algorithms, and we're not saying show us your tricks."
Outsell urges the companies to share data on how much fraud they detect and on click-fraud claims by advertisers. It also suggests that search engines partner with independent, third-party auditors to collect data and refine the identification of click fraud.
JUST A START? When contacted for comment on the study, Google, Yahoo, and Microsoft representatives all provided prepared e-mail statements saying they acknowledge click fraud as a legitimate problem and have systems in place to combat it. The statement from Google described the click-fraud problem as "small."
Meantime, the quest to calculate click fraud's costs continues. Fair Isaac, a tracker of credit card fraud, is teaming with Alchemist Media for an in-depth analysis of click fraud, looking to provide advertisers and publishers with solutions (see BusinessWeek.com, 3/13/06, "How Do You Clock the Clicks?"). And analysts and advertisers will no doubt continue to pressure Internet companies to come clean on click fraud.