Search Industry Focuses on Ferreting Out Click Fraud

Depending upon who you ask, click fraud -- the practice of triggering pay-per-click fees by clicking on an advertising link with dishonest motives -- is either a minor nuisance for the search industry or a huge risk to one of the fastest-growing segments of the Web business.

Nearly everyone agrees that the problem of click fraud is nothing new, however, and that even if it remains contained, it calls into question the value of one of the hottest forms of advertising available to marketers, online or off.

Affecting Some More Than Others

Skip Pratt, the general manager of PPC Trax, which offers a pay-per-click campaign tracking program, told TechNewsWorld click fraud is more prevalent in some markets than others.

"I don't think it's particularly a problem for companies that are selling 10-foot Ethernet cables, but it's a real big issue for companies selling mortgages, for example," Pratt said. "The most expensive keywords, the ones that cost US$3 and up per click, are the ones where you see the higher percentage of fraudulent clicks."

PPC Trax got its start more than three years ago when a Web hosting business owned by the same company ran a pay-per-click campaign.

"In an hour, our hundred dollar budget got spent and we didn't have a single sale to show for it," Pratt recalled. Engineers set out to write code to evaluate where clicks were coming from and that technology forms the basis for the company's online offering today.

Pratt doesn't believe search providers will make major changes to the way they monitor and to what they tell their advertising customers. "Not until that is mandated by a judge or a law, anyway," he said.

Looking Smart -- a Case Study

One search firm that recognized it had a problem with click fraud and set out to address it is LookSmart.com. CEO David Hills, a former executive at About.com, took the helm at LookSmart in the fall of 2004.

"We realized a couple months after I got here that we had an issue with click fraud," Hills told TechNewsWorld. "Every company takes its own path on this issue, but we set up a conference call and said to the commercial community in different ways, we know we have a problem here. The company had been a bit naive about the type of traffic that was coming in. We set about rooting it out of the distribution network that we operate."

Hills believes the size of the click fraud problem -- analysts have estimated it ranges anywhere from 10 percent to 50 percent of all advertising clicks -- is not as important as the fact that the practice is wrong and should be dealt with aggressively. He said advertisers can help wipe it out by working with search engines that make stopping it a priority.

Taking out bad traffic hit LookSmart revenues and other metrics, Hills noted, but "it was the right thing to do. Now we can go forward and build back up on that solid foundation."

LookSmart, meanwhile, is also looking to lessen its reliance on PPC ads, moving aggressively into vertical search -- an area Hills believes will become increasingly important over time -- and by licensing its own paid search advertising platform to Ask Jeeves and other third parties.

Growth Stopper?

The search industry has plenty to lose. PPC ads were the fastest-growing part of the online advertising market for the past two years, according to the Interactive Advertising Bureau (IAB) and made up the bulk of revenue at fast-growing search companies such as Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO)

Google has been warning about click fraud since before its 2004 IPO, saying in its filings with the Securities and Exchange Commission (SEC) that it had paid back some advertisers for fraudulent clicks in the past and may be forced to do so again in the future. More recently, several analysts have cited click fraud as reasons for downgrading the stock of Google and Yahoo.

Those companies say they carefully monitor where clicks come from and often provide rebates or credits to customers without being asked when clearly fraudulent click traffic is spotted.

William Blair equity research analyst Troy Mastin said some concerns about click fraud may be "overblown."

He said a recent survey conducted for the Chicago Interactive Marketing Association found that 43 percent of the advertisers responding saw the practice as a threat to the "long-term viability of search engine marketing" while the majority, 57 percent, saw no such risk.

Hills believes that whatever the size of the problem, there is risk for the search industry in the form of lost confidence from advertisers and consumers alike if the click fraud issue is not addressed head-on.

"From an industry perspective, I think we're in a really high growth market and in a market like that you're always going to find folks who are trying to game the system," Hills said. "Sometimes I wonder if this was what it was like in San Francisco in 1849 when the gold rush started and how people always try to take advantage of those environments.

"Do I think credible companies knowingly let this stuff in? No. I also think that what's going on now is a good healthy discussion across the industry. We know we've got to fix this and we've got every company aggressively dealing with it. We've got a chance to grow great businesses here and we've got take steps to keep out things that aren't healthy."