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July 09, 2006



Schmidt appears to be saying that click fraud is like a percentage-of-revenues tax on PPC (with a higher rate for ads on affiliate sites), and that Google believes it can hold it down to a level which does not damage its business.

This may be true. It also suggests that the company has determined what is in effect a budgeted level of click fraud, although they are unlikely to tell us what that is.

I'd have thought there is some legal exposure here unless they alert advertising customers in some way to the known characteristics of what they are buying. This may be where Schmidt is ultimately going with an otherwise surprising statement like this one.

Julian Gall

You say: "Click fraud will cause the price per click to drop, which will lower Google's revenue". Can you prove this? Click fraud is surely likely to increase the number of clicks, which will offset any effect on Google's revenue of the reduction in CPC.

You say: "CPC ad networks ... detect most of it [click fraud] before it ever gets billed to their advertisers". How do you know? By definition, any click fraud that impacts an advertiser is undetectable, or it would have been detected. If it is undetectable, how do you know how much there is?

You say: "Google, Yahoo, MSN, AOL, and others ... can easily detect click fraud and stop most of it." If Google CEO Eric Schmidt thinks the "perfect economic solution" to click fraud is to "let it happen", he has just admitted he has no interest in stopping it. On what evidence do you suggest that Google is taking action that is the opposite of what their CEO promotes as a solution?

Don Dodge

ZF, yes, that is part of what Mr. Schmidt is saying, and he believes the "perfect" economic market factors in this level of click fraud into their ROI calculation in determining what they are willing to pay per click.

Julian, remember advertisers set the price per click through an auction, not Google. This economic theory has been proven thousands of times over hundreds of years. In a competitive marketplace prices adjust according to supply and demand, risk vs reward, and ROI.

Put yourself in an advertisers shoes. If they pay $5.00 per click for an ad, and later do the ROI analysis and determine that due to click fraud they didn't get the return they were looking for, they have several choices. Never use Google again, bid much lower than $5 to compensate for the click fraud and thereby increase ROI, or go to a competitor like Microsoft or Yahoo.

Google will definitely react to this loss of customer revenue by cracking down on click fraud. The lower click fraud goes, the higher prices advertisers will be willing to pay.

It is impossible to stop all click fraud so advertisers will always factor some amount into the price they are willing to pay for clicks.

I think what Eric Schmidt is saying, perhaps not eloquently in that particular quote, is that the market establishes an equilibrium of acceptable prices and ROI, based on the actual results from Google, Yahoo, and Microsoft. Each company will compete and react in order to optimize its revenue.

Short term it takes the "perfect" market some time to equalize. Long term the market always corrects. Mr. Schmidt is basically saying let the market work.

Ben Langhinrichs

I think that in the absence of real competition, Google's revenues would not go down enough to encourage truly aggressive click fraud detection. But with solid competition from MS AdCenter and Yahoo, the market will be self correcting. The reason is, just lowering the price per click is not discouraging click fraud... it is perhaps even encouraging more aggressive and efficient click fraud, which serves to offset the loss to Google (or any other vendor). On the other hand, potential loss of business will be a tremendous incentive for providers to detect and handle the problem. Yes, let the market work, but markets work by competition between providers, not be competition with yourself with a single provider.


ZF: "I'd have thought there is some legal exposure here unless they alert advertising customers in some way to the known characteristics of what they are buying. This may be where Schmidt is ultimately going with an otherwise surprising statement like this one."

IMO, it would have behooved Google to do this in the first place. In other words, before rolling out PPC AdWords/AdSense, they should have explained the risks of click fraud, the degree to which it could not be detected, and how someone might reduce their exposure. They should have provided tools to monitor campaigns, spend, traffic, etc. They should have provided other payment options such as CPM, CPA, and fixed fees. It just strikes me as very odd that as smart as their engineers are, they did not anticipate that click fraud would become as serious as it is -- enough that advertisers would file lawsuits against them.

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