Waging War Against Click Fraud

As fraud undermines faith in pay-per-click Web ads, search engines, advertisers, and Web hosts are wrangling over what to do

When it comes to click fraud, search engines are on the defensive. In lawsuits, advertisers accuse Internet companies of failing to adequately guard against a practice that's lining the pockets of scam artists and artificially inflating ad rates.

Part of the problem, advertisers say, is that search engines like Google (GOOG) and Yahoo! (YHOO) aren't doing enough to stop click fraud before it happens. The companies dutifully screen for false clicks and reimburse advertisers accordingly (see BusinessWeek.com, 7/27/06, "Click Fraud: Google Comes Clean, Sort Of"). The methods ease the burden of fraud, but they're far from fail-safe.

Put another way, Internet companies are good on defense—but need to bolster their click fraud offense. To do that, companies will need to change the so-called pay-per-click business model, whereby ad rates are determined by the number of times an ad is clicked on. That was the message from a host of Web startups, advertisers, and Internet service providers that gathered for a conference on click fraud in New York on Aug. 16.


 The model provides a strong incentive for fraud, says Mikhail Ledvich, chief strategy officer of ClickFacts, a San Francisco company that develops auditing software for Internet advertisers. Businesses can cut into rivals' margins and exhaust their advertising budgets by repeatedly clicking on pay-per-click ads.

Web-page owners that host ads have an even stronger incentive because they share pay-per-click revenue with the search engines responsible for placing ads. "Competitors clicking on ads does happen, but the bigger issue is when the ads are syndicated and there is a parallel incentive for someone to be clicking on your ad," Ledvich said at the conference, run by TECHmarketing.

"Obviously pay-per-click suffers from a click fraud problem," says Alexander Tuzhilin, a professor of information systems at New York University's Stern Business School. "I think all search engines are trying to solve this problem, but how much goes through is hard to say." Some outfits have tried to quantify the scope of the fraud, and some estimates say more than 15% of clicks are fake.

Advertisers, of course, want the number to be zero. So some companies and advertisers say pay-per-click should be thrown out altogether. Instead, they favor a "pay-per-action" or "pay-per-performance" model that lets advertisers be charged only when a computer user either makes a purchase, registers, or performs some other action of value on the advertisers' Web page.


 Fabian Siegel, chief technology officer of Click&Buy, an electronic payment network similar to eBay's (EBAY) PayPal, says that such a system would be highly beneficial to advertisers—though perhaps not welcomed by ad publishers. He compares the dismay with pay-per-click to the displeasure many advertisers have with another model known as pay-per-view, whereby rates are set according to the number of times a page containing the ad is viewed—giving the advertiser little indication how much attention an ad receives.

"Pay-per-view had the highest risk for advertisers, and the publishers of this world had no interest in changing that," Siegel says. "Then Google came along and said, 'Let's change the risk and orientate on performance. Let's make performance-based advertising,' and that shifted some of the risk from the advertiser to the publisher. Pay-per-action would shift the risk entirely to the publisher."

Some shift may be inevitable in media-saturated markets where advertisers increasingly call the shots, Siegel says. The idea is catching on. Bill Gross, credited with starting pay-per-click advertising in 1998 with his site GoTo/Overture.com, launched a search engine, Snap, earlier this year that only charges advertisers when users purchase goods. He hopes Snap repeats the success of Overture, which was acquired by Yahoo in 2003 for $1.6 billion.


  Even Google is testing a pay-per-action model with a limited number of advertisers. Shuman Ghosemajumder, Google's business product manager for trust and safety, says the company is looking at the model to deliver additional choices to advertisers.

He stresses, however, that the company's core advertising model is, and will be, pay-per-click. "Certain models of advertising are suited for different purposes," he says. "Just as the channels of television or radio or print are better suited to impression-based advertising, search-based advertising is very suited to the pay-per-click advertising model."

Search engines have two major reasons for not wanting a pay-per-action model to prevail. The first is that sales happen far less often than clicks. To make similar profits, search engines would have to charge higher rates for such advertising, likely eliminating smaller advertisers from the revenue pool altogether.

The second is that sales are dependent upon factors largely outside of search engines' control, such as the quality of advertisers' Web sites and products. A pay-per-action model would thus put additional responsibility on search engines to ensure Web sites can easily handle and track purchases.

That may sound great for advertisers, but there are problems with the pay-per-action model for them, as well. Small advertisers, for example, may not have Web pages that easily convert ads into sales. Instead, they may want an ad to just get their name and information out there. A more expensive pay-per-action model could keep them from advertising on the Web altogether.


 Large advertisers could also lose out. Sometimes advertisers' concerns lie not with sales but with changing or bettering a brand image, says Jeffrey Rohrs, president of Optiem, an interactive marketing firm based in Cleveland.

"On paper, CPA (click-per-action) sounds completely great, and in certain circumstances it is absolutely the way to go, especially if you are an online retailer," Rohrs says. "However, marketers have more diverse goals than just what CPA can serve."

Rohrs sees a future when pay-per-click, pay-per-action, video ads, and pay-per-view—one of the advertising models used by sites such as Time Warner's AOL (TWX)—are all available to advertisers. "I don't think there needs to be one model because there are so many different advertisers," says Theresa Olszewski, an account executive at AOL Media who attended the conference.

She adds that, as advertisers spend more online, they will want more choices for their money. EMarketer projects that online advertising will jump 30%, to $16 billion, this year (see BusinessWeek.com, 8/3/06, "AOL Casts Its Fate with Ads").

Multiple pricing models are already available to advertisers, at least to a limited extent. Anand Subramanian, the CEO of ContextWeb, says his company offers PPA, PPC, and pay-per-impression advertising on affiliated content producer sites such as CNN. At the conference, Subramanian said the best way to combat click fraud is not to eliminate pay-per-click from the advertising pie but to change the way it rewards ad hosts.


  Instead of offering Web hosts a revenue-sharing agreement, ContextWeb pays hosts according to thousands of impressions, regardless of whether the advertiser is paying per click, per action, or per view. He said the payment model eliminates some of the fraud incentive because advertisers can't increase their paycheck by interfering with the ad.

In theory, ad hosts could increase their revenue by repeatedly visiting the page from different computers, which would eventually drive up advertising costs. However, they would have to open the same page thousands of times before significantly affecting their profit share.

By then, companies could recognize the problem and remove them from the host pool. "You don't have that much fraud when you pay publishers on a CPM model," Subramanian says. Whether that remains true could depend on whether greedy content providers develop some new undetectable bot or virus program to repeatedly open pages.


  In the end, the best proactive way to combat click fraud may be through harsher penalties for fraud perpetrators and better screening of the ad hosts that stand to benefit from advertising fraud. Yahoo, for example, has yet to widely syndicate its pay-per-click ads to small Web page owners in part because it wants to monitor the quality of their clicks and guard against fraud, says David Karnstedt, Yahoo's senior vice-president for Direct Business.

The program, which offers ad hosts a share of the revenue similar to the way Google's runs its AdWords network, has been in a testing phase since last year. "One of the reasons why we kept that in [testing] was to learn a lot more about that network,"he says. "For us, click fraud is something that we have taken very seriously."

Such measures, along with an independent click auditing service that uses industry standards to measure bad clicks, could reduce fraud to negligible amounts. Yahoo, Google, Microsoft (MSFT), and Ask.com are working with the Interactive Advertising Bureau to set such standards. And several consulting firms are already lobbying for the position of outside auditor (see BusinessWeek.com, 7/25/06, "Compensating Click Fraud's Victims"). When it comes to click fraud, the best defense well may be a good offense.

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