On Wednesday night, Google (NASDAQ:GOOG) agreed to a $90 million settlement stemming from click-fraud allegations. The leading online advertising platform will distribute what's left of that sum after it pays out legal fees to its past sponsors in the form of AdWords credits.
Click fraud is a serious problem in the contextual-marketing space. Malicious folks can click on a rival's text ad in an attempt to drain that competitor of its online ad budget. And in Google's AdSense program, which serves the search engine's ads on third-party sites, shady publishers can click on ads on their own sites to falsely enrich their coffers.
Google is pretty good about catching click-fraud criminals. It has to. When 99% of your revenue comes from advertising -- and you're valued as a $105 billion company -- you have little choice but to make sure you protect the purity of your bread and butter.
Some argue that Google may be lax on policing for click frauds because it stands to lose money if it cracks down even harder, but that's just ridiculous. Think about it: Advertisers are able to track conversion rates online. If click fraud deflates the effectiveness of a campaign, sponsors will just bid lower on future clicks, taking money from Google's pocket in the long run.
Click fraud hurts everyone. Advertisers are cheated out of their money. Google and legitimate third-party publishers then earn less for qualified leads. With so much at stake, it's really just a matter of time before Google legally pursues click bandits to set an example. The company does credit its advertisers when it discovers fraudulent clicks, but it may never be possible to catch and correct all of the cases.
Yahoo! (NASDAQ:YHOO) was also named in the lawsuit, but it isn't looking to settle. Because the company has just launched its own AdSense clone -- Yahoo! Publisher Network -- click fraud is probably less of a problem there. However, Yahoo! sponsors have to bid at least a dime for every click. Google allows its advertisers to bid as little as a penny for an interested click. Even though most keyword bids are for far greater sums than that, the high minimum at Yahoo! means that the company can't afford to scoff at this litigation. Potential click fraud on its network would add up quickly.
Search marketing is still in its infancy, and click fraud is just one of the nascent industry's speed bumps. Smaller players like LookSmart (NASDAQ:LOOK) and MIVA (NASDAQ:MIVA) have dealt with click-fraud accusations by sponsors claiming low conversion rates, but some have also had to cope with suspect sponsors, too.
It isn't a perfect medium, but at least it's more accountable than more conventional advertising formats. It's why Inside Value recommendation Microsoft (NASDAQ:MSFT) is diving in with AdCenter, and why IAC/InterActive (NASDAQ:IACI) is looking to follow suit on Ask.com.
Online advertising is the way of the future. Let's hope that future brings a little more honesty and transparency, too.
Longtime Fool contributor Rick Munarriz is a huge fan of Google, and it would be his homepage if it weren't for Fool.com. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
