Fraudulent Traffic Is Rampant, and It's Costing Marketers Billions

About 36% of Web traffic is fake, The Wall Street Journal recently reported. This problem is costing marketers in the U.S. billions of dollars. For online advertising companies like Facebook (NASDAQ: FB  ) , Google (NASDAQ: GOOGL  ) , and Twitter (NYSE: TWTR  ) , could this be a threat?

Fraudulent traffic
So-called bot traffic cheated U.S. marketers of $6 billion last year, according to ad-fraud detection firm White Ops.

The Journal's Suzanne Vranica explains how it happens.

The fraudsters erect sites with phony traffic and collect payments from advertisers through the middlemen who aggregate space across many sites and resell the space for most Web publishers. The identities of the fraudsters are murky, and they often operate from far-flung places such as Eastern Europe, security experts say.

Citing one example, Vranica says that Verizon Communications lost more than $1 million to fraudulent ad traffic. Fortunately, Verizon used ad-fraud detector Telemetry to identify that figure and has asked for free ad space in order to recoup those losses -- a common form of defense marketers are increasingly relying on to combat bot traffic.

Fraudulent traffic can surface not just when advertisers use an ad exchange platform, but also when they buy advertising spots directly from a publisher.

Will advertisers lose confidence?
Given the importance of digital advertising today, there's little chance fraudulent traffic awareness would dampen marketer spending in the space. As consumers spend increasingly more time browsing the Internet and on social networks, digital advertising is becoming more important than ever.

Digital ad spend in the U.S. will reach more than $42 billion this year, according to eMarketer. That's about one in every four ad dollars that will be spent in the U.S. in 2014. By 2017, that figure will reach one in every three ad dollars spent in the U.S., eMarkter predicts.

Google, Facebook, and Twitter's fast-growing advertising revenues paint a vivid picture of the gold-rush mentality toward digital advertising among marketers today. The companies' 2013 fourth-quarter ad revenues were up 22%, 76%, and 116% from the year-ago quarter, respectively.

Roxanne Barretto, assistant vice president for U.S. digital marketing at L'Oreal, told The Wall Street Journal that digital ad spending is "too important." Despite L'Oreal's recent first-hand encounter with fraudulent advertising, the company won't be adjusting its digital ad spending lower. "Slowing down spend represents a missed opportunity to connect with our core audience."

While investors shouldn't adjust their theses for digital ad companies such as Google, Facebook, and Twitter in their portfolio based on this news, it would be wise to at least keep an eye on the development. If fraudulent ad traffic gets worse and online advertising exchanges and publisher platforms like Facebook and Twitter don't find better ways to sift through the traffic, then there may be a problem.

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