A challenge verifying online advertising

Though there’s concern surrounding Internet “click fraud,” there is no agreement on how to define it, how prevalent it is or who to blame for it.

Online click fraud occurs in pay-per-click advertising, when a person or automated program clicks on an advertisement. Internet advertisers pay for each click, or inquiry, and the more clicks, the higher the cost of that advertisement. Most advertisers agree pay-per-click advertising is one of the most effective and verifiable forms of Internet advertising, so the worry is that fraudulent clicks will discourage its use.

“Click fraud is an instance in which the advertiser isn’t getting what they paid for and it strikes to the very heart of pay-per-click performance,” said Marc Barach of San Francisco advertising firm Ingenio. “It’s important to note that the industry is healthy and advertisers are getting very good value for the clicks that they pay for. This is a healthy system, but everyone involved acknowledges that there is a certain amount of click fraud and companies like Google are working extremely hard to minimize that. There’s no room for hysterics.”

Last month, Google proposed a settlement in a case in which it was sued by advertisers who had paid for fraudulent clicks. The settlement, which is awaiting final approval from the judge, offers advertisers $90 million in advertising credits. The paradox is that search engines such as Google (GOOG) and Yahoo Inc. (YHOO) are held more responsible than the actual fraud perpetrators.

“The question is if the one who was doing [click fraud] had ill intent but everyone is focused on Google because they have the deep pockets,” said Craig Cardon, a partner specializing in intellectual property and advertising with Sheppard, Mullin, Richter & Hampton LLP in San Francisco.

“This is an issue we take very seriously,” said Shuman Ghosemajumder, business product manager for Google. “The main problem is that there are a lot of self-interested third parties, click fraud consulting firms, that have been hyping this issue and providing exaggerated estimates about how much click fraud there is.” There is disagreement within the industry about the percentage of clicks that are fraudulent — anywhere from 10 percent to 30 percent. The Click Fraud Index, a data collection network, estimates the industrywide average click fraud rate is 13.7 percent.

The term click fraud covers a multitude of sins. At the most simplistic level, it can involve a company clicking their competitors’ ads to waste their money. There are even rumors of click fraud farms in Europe and Asia, where rooms full of people fraudulently click on advertisers with this intent. Clickbots are the automated form of click fraud, software programs that simulate clicks, and botnets are networks full of clickbots that do the same thing on a much larger scale.

There is also a kind of click fraud known as impression fraud, which involves not clicking on an advertisement that has been searched for.

“Google only displays ads that get a certain clickthrough rate,” Barach said. “People have to click on your ad, otherwise you lose that good placement, so a competitor can call up an advertisers’ name and never once click on it and so that hurts their performance so they wouldn’t show up on Day Two.”

Not only do competitors benefit from click fraud, so do third-party search engines that syndicate advertising from Yahoo and Google. Ben Edelman, a researcher from Harvard University, released a report recently contending Yahoo indirectly supports click fraud through what he calls syndication fraud.

“Yahoo pays numerous companies to show ads via syndication,” Edelman said. “So when a spyware vendor can’t find advertisers to buy its inventory directly, the spyware vendor can show Yahoo ads instead. Every time a user clicks on such an ad, the advertiser must pay Yahoo. Then Yahoo pays a revenue share to the spyware vendor that showed the ad.”

Yahoo and Google maintain they do everything they can do thwart fraudulent click billing, but Edelman says they can do better. Still, no one seems to be addressing the actual perpetrators of click fraud because they are too hard to identify.

Cardon maintains this is not an issue for the legal system, but rather something that will eventually be factored into the pricing structure for pay-per-click advertising.

“If, on average, a percentage of clicks are click fraud, then you’ve got some leverage to negotiate and say I don’t want to pay full rates,” he said. “If you look at the print publication industry, there’s a difference between paid circulation and free circulation and people factor those in differently. There’s a different multiple for each one. Is that how we’re going to handle this or are we going to have very targeted legislation? To me a lot of this is not necessarily a legal issue.”

ndelconte@examiner.combusinessBusiness & Real Estate

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