Donna Bogatin at ZDnet has another great post, this time about click fraud. BTW, I read everything Donna writes. She has a keen sense for what is important, and does a great job investigating stories. I highly recommend her blog at ZDnet Digital Micro Markets.
Eric Schmidt, CEO of Google, says click fraud is a self correcting problem. "Eventually, the price that the advertiser is willing to pay for the conversion will decline, because the advertiser will realize that these are bad clicks, in other words, the value of the ad declines, so over some amount of time, the system is in-fact, self-correcting. In fact, there is a perfect economic solution which is to let it happen."
Mr. Schmidt is theoretically correct. In fact, I wrote a blog espousing similar arguments a few months ago. Mark Cuban and I have debated this issue, via blogs, twice in the past 6 months.
My views have changed over time, thanks to Mark and others who commented on my blog. In the short term click fraud is a big problem, and the market is not self correcting due to a lack of competitive alternatives. Longer term I still believe that the market will self correct for click fraud and that Google and other ad networks will do a better job of fighting it. Yahoo Publishing Network and Microsoft AdCenter will provide real competition soon. They will work hard to solve the click fraud issue, and use it as a competitive advantage.
Here are my theories on click fraud, taken from my previous blog debate with Mark Cuban.
The marketplace automatically adjusts for click fraud by lowering the price they are willing to pay for clicks. Remember, CPC ad prices are set by competitive auctions for each keyword. Advertisers run ROI's on all their ad spending. They will adjust what they are willing to pay, up or down, based on the real returns from each campaign.
Google has incentive to stop click fraud. A common "logical" argument of the click fraud alarmists is that Google has no incentive to stop click fraud. Well, in fact they do. I just explained the incentive in my previous point. Click fraud will cause the price per click to drop, which will lower Google's revenue. Google wants higher prices for quality clicks, so they have every incentive to stop click fraud and keep prices higher.
Greed always exposes click fraudsters. Mark Cuban makes logical arguments about how click fraud can be done. I agree it can be done without detection on a small scale. But, greed causes the bad guys to crank up the frequency, which causes them to be caught by the detection algorithms. Google's algorithms monitor everything, and can detect abnormal traffic or patterns that are likely click fraud. There are lots of stories about ad network sites being banned from Google due to suspected click fraud. Google, and other CPC ad networks, take click fraud very seriously and detect most of it before it ever gets billed to their advertisers.
Click fraud is far lower on quality sites. Major sites like Google, Yahoo, MSN, AOL, and others have very sophisticated monitoring tools that analyze everything. They can easily detect click fraud and stop most of it. Tier 2 sites are also pretty good at it. There are of course a class of web sites that are set up solely for advertising fraud. Anyone who allows their ads to be run on these sites gets what they deserve.
Advertisers should hold Google accountable for click fraud by lowering their bids on key words. They should also try Microsoft AdCenter or Yahoo to see how click traffic quality compares.
It is all about ROI, which factors in click fraud. Competition always corrects problems and inefficiencies.