Eric Schmidt says click fraud is a self correcting problem

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.

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Comments

[ZF]

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.

[CPCcurmudgeon]

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.