Click fraud has become an all-too-common risk of doing business on the Net. Even companies that say the practice isn't widespread nevertheless concede it happens. They agree that advertisers should be compensated when their ads are clicked on by scam artists hoping to make a quick buck, rather than by genuine Web surfers looking for information on a product or service.
But exactly how to compensate—and protect—those companies is a matter of heated debate. The question takes center stage in an Arkansas court, where a judge will decide as soon as July 25 whether $90 million sufficiently compensates tech titan Google's (GOOG) advertisers and their lawyers for "click fraud."
It's clear there are flaws in the current system, whereby companies pay fees based on the number of times an ad gets a click. Malicious computer users can exploit the so-called pay-per-click arrangement favored by Google and Yahoo! (YHOO) by repeatedly clicking on ads solely for the purpose of driving up advertising costs (see BusinessWeek.com, 2/27/06, "Click Fraud Gets Smarter").
COST OF BUSINESS? And, despite search-engine outfits' assurances that they are aggressively evaluating the validity of advertising hits, millions worth of fraudulent clicks are still making it onto advertisers' bills. Click Forensics, a San Antonio (Tex.)-based consulting service, estimates that 14.1% of advertising clicks were fraudulent in the second quarter. Other consultants, such as Burlingame (Calif.)-based Outsell, put the number closer to 15%, or roughly $800 million a year (see BusinessWeek.com, 7/07/06, "Counting Up Click Fraud's Toll"). "It is hard to find any other legitimate business where there is an accepted rate of 15% fraud," says Chuck Richard, Outsell's vice-president and lead analyst. "People won't accept that as the cost of doing business."
Least of all, the advertisers that have brought click fraud suits against all the major search engines, including Google, Miva (MIVA), Looksmart, and Time Warner's (TWX) AOL. In late June, Yahoo reached a settlement allowing advertisers who incurred click fraud costs since January, 2004, to file claims for cash rebates and credits. The company also set aside $4.95 million for attorney's fees.
Yahoo's decision to dole out rebates and credits on a case-by-case basis is one of four main models of coping with click fraud to emerge in recent months. Other methods: automatically issuing credits worth a portion of alleged fraudulent costs, establishing an independent board to evaluate Internet traffic and set advertising rates, and abolishing pay-per-click altogether, in favor of what's known as pay-per-action ads.
"FRACTION OF A CENT." The credit model is the one favored by Google, which set aside $60 million in advertising credits for aggrieved clients and $30 million to pay associated legal fees. But many advertisers object to that method, some of them preferring the settlement approach taken by Yahoo. In all, 51 objections were filed.
Darren Kaplan, an attorney with Atlanta-based Chitwood Harley Harnes, represents two objectors. He says Google's settlement is unfair, particularly in light of Yahoo's offer. "For every dollar of claimed click fraud the [plaintiffs] will receive a fraction of a cent," he says. "I've never seen a class action where the class received less than a cent in benefit. This is not a low watermark, this is where you go down to the shore and begin digging into the sand."
Google contends its solution is fairer to advertisers than Yahoo's. Google says it will not evaluate claims individually but will issue credits based on the amount of fraud claimed by companies that fill out the appropriate paperwork. In court filings, Google says "while that objection is meritless in its own right, it rings particularly hollow after the announcement of the California plaintiffs' settlement with Yahoo. As a result of that settlement, Yahoo itself will decide how many credits (or in a small number of cases, refunds) it will award to the subgroup of class members who are permitted to request reimbursement, and in which the remaining class members will receive no compensation at all." Google's lawyers, in court documents, also dispute the math used by attorneys like Kaplan.
SEEKING MONITORS. Other observers say neither approach is the right one. Consultants Click Forensics and Outsell argue that the Internet advertising industry needs a third-party service, similar to television ratings service Nielsen Media Research, that can independently evaluate how many clicks are legitimate and what advertisers should be charged. "We are advocating a third-party monitoring system similar to what Nielsen does for television," says Click Forensics spokeswoman Heidi Johnson. "We can actually use technology to monitor the clicks."
Outsell's Richard says the lawsuits are unlikely to go away without some uninterested third-party monitoring system. However, he thinks it is unlikely any such system will arise out of the debate over Google's settlement. "I opt for transparency, but I see no signs that [Google] is buying into that at all."
What Google is buying into: pay-per-action ads, which charge according to whether a computer user performs some verifiable action—such as providing an e-mail address on a registration form—after clicking on an ad. Other Web companies such as AOL and Snap.com are focusing on this kind of advertising.
But, many advertisers can't afford to set up extensive Web sites with action items, says Johnson. As a result, she thinks pay-per-click is here to stay. And chances are, until the industry picks a reimbursement model companies can live with, so are the lawsuits.