There are two words -- short of "server down" -- that send shivers down the spine of search engine investors: click fraud. With companies like Google (NASDAQ:GOOG) relying on Internet advertising to account for as much as 99% of their revenue mix, the very notion that sponsored results are being defrauded by third-party bandits can be troublesome.
Thankfully, it turns out that while click fraud is quite real, it's also mostly overblown. Study results released yesterday by Click Forensics on its ClickFraudIndex.com site show that only about an eighth of all ad clicks on the leading sites like Yahoo! (NASDAQ:YHOO) and Google are bogus.
Would it be better if every click was genuine? You bet. But if you tell an advertiser that a perfectly targeted audience can be reached when 88% of the clicks received are coming from interested viewers, it stacks up well compared with the money wasted on more mainstream advertising like print, radio, and television, where a much larger segment of the billable audience couldn't care less.
Deep into the phantom clickthroughs
The Click Forensics study found that the overall click fraud rate accounts for 13.7% of all clicks. The further you dig into obscure online advertisers, the more questionable the quality of contextual traffic becomes.
|
Click Fraud Rate | |
|---|---|
| Tier 1 | 12.1% |
| Tier 2 | 21.3% |
| Tier 3 | 29.8% |
| Overall | 13.7% |
Yes, it can get awfully murky for advertisers wooed by dirt-cheap keyword bids on small pay-per-click networks. Even some of the more recognizable mid-level producers like MIVA (NASDAQ:MIVA) have had their moments of cleaning house when it comes to unscrupulous publishers and advertisers.
With Google settling a $90 million case for fraudulent clicks last month, it's good to know this isn't a pervasive problem for the big boys.
What makes a good click go bad
Click fraud can take on various forms, but the end result is that it bleeds the advertiser of a promised lead. Portals pledge to reimburse sponsors for malicious clicks, although cynics often equate that with foxes guarding the henhouse.
In the simplest of cases, it's true. If a website isn't able to police its bandits, it will still profit from the misdeed in the near term by overcharging an advertiser. However, it's undeniable that it doesn't make sense to be lax in the long run. Because online advertising is fully accountable, cheated sponsors will lower their bids according to the return they're receiving on their marketing campaigns. They may not be able to cull the legitimate from the illegitimate, but they know how it all adds up at the end of the campaign. It's the reason the portals have been proactive in crediting ad accounts for improper actions.
Why do fraudulent clicks occur in the first place? It's rarely boredom or clumsy cybersurfers. In some cases, it can be a competitor attempting to bleed a rival's ad budget away. In rare and more extreme cases, it can be someone trying to blackmail the search engine.
Things get a little more complicated when you turn your attention to third-party networks. Google launched its AdSense program in 2003. Even though companies like Yahoo! and Google always sought out premium publishers to rebroadcast their ads in exchange for a lion's share of the related revenue, AdSense opened up the process to content sites of all sizes. In sum, it has been a major component of Google's superior growth strategy. This past quarter, $928 million -- or 41% -- of the $2.25 billion in revenue generated by Google came from third-party AdSense publishers.
Once you back out the $723 million that Google paid those publishers out of its AdSense revenue and total revenue, it adds up to only 13.4% of Google's net revenues, but it's still a major component of Google's branding strategy by having "Ads by Google" stamped all over the Internet.
It's a business so sweet that now paid-search pioneer Yahoo! has jumped on board with its similar Yahoo! Publisher Network offering.
In terms of click fraud, third-party sites pose the same challenges as before, since they're broadcasting the same ads displayed on Google's own sites. However, there's another layer of potential miscreants here as disingenuous publishers may click on their own ads, encourage site visitors to click on their ads, or in rarer cases, be subject to click attacks from begrudged enemies who understand that too many clicks may get the publisher booted instead of enriched.
There is no "I" in team, but there are a couple in integrity
Paid search isn't just the playing field for Yahoo!, Google, and a cast of smaller specialists like MIVA or LookSmart (NASDAQ:LOOK). It's the green turf that Microsoft's (NASDAQ:MSFT) MSN.com and IAC/InterActive's (NASDAQ:IACI) Ask.com are gunning for, too. Just about every other major content site relies on these players to help drive their lucrative targeted advertising engines.
Why? Because it makes too much sense not to. Even the mighty eBay (NASDAQ:EBAY), a site that risks alienating sellers if the leading online marketplace begins filling up its pages with ads, is supposedly in talks with Microsoft and Yahoo! about a marketing alliance that could compromise its own flagship business if it populates its pages with outsider ads.
For that reason, integrity has to be at the heart of the platform, even if jaded advertisers can still score Internet advertising high if they're grading on a curve. There's too much at stake here. But if we go by the Click Forensics surveyed results, you and I are more honest than we look.
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Longtime Fool contributor Rick Munarriz keeps his mouse steady and true as he surfs around the Web. He does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
