Year: 2006

On October 19, Google announced that their 3rd Quarter profit rose 92% from $381 million a year ago to $733 million. These impressive numbers might lead one to suppose that the most important question facing Google is “what’s next?”. However, that’s not the whole story. Google must deal with the one term that was not discussed during the conference call: click fraud.

“The sum of these five things: users, ads, the diversity of our business, the blizzard of new product launches, and the partnership strategy which is in full force, has delivered great, great results and we’re very, very pleased with them.” Google CEO Eric Schmidt, Oct 19 2006

Google’s Q3 earnings call is filled with gems. There are many quotable excerpts that one could take to make declarations about Google’s future plans or their shifting focus from search to comprehensive advertising. In fact, David Jackson takes the transcript and makes the following point concerning the most important questions facing Google post announcement:

Think about it. Google wants there to be more web sites because more websites means more advertisers and also more sites to search. More advertisers, more websites, more searches — and Google dominates online advertising and search.

This is proof that Google is the ultimate Internet business, the ultimate long tail business. The more web sites there are, the better for Google. And Google scales with the growth of the Internet, because its customer interactions are automated.

Simple, but more important than anything else when you’re thinking about Internet stocks.”

That is simple. It’s too simple and not the most important thing about the call or Google’s surging profits or its growing hegemony in the online advertising space. Search through the transcript and try to find the term click fraud. You won’t find that term or any approximation of the potential troubles behind search marketing. There was a panel of highly respected financial institutions on the call:

Mark Mahaney – Citigroup
Robert Peck – Bear Stearns
Mary Meeker – Morgan Stanley
Anthony Noto – Goldman Sachs
Imran Khan – JP Morgan
Christa Quarles – Thomas Weisel
Jordan Rohan – RBC Capital Markets
Ben Schachter – UBS
Bill Morrison – JMP Securities
Justin Post – Merrill Lynch
Safa Rashtchy – Piper Jaffray
Doug Anmuth – Lehman Brothers
Mark Rowen – Prudential
Marianne Wolk – Susquehanna

Yet, no one asked about click fraud. Should there be concern? Yes!

Charles C. Mann made the following point about the amount of click fraud back in January and his insight is still relevant ten months later:

“The amount of click fraud is difficult to quantify; estimates of the proportion of fake clicks run from as low as 1 in 10 to as high as 1 in 2. In a widely cited recent study, MarketingExperiments.com, an online marketing research outfit, reported that “as much as 29.5 percent” of the clicks in three experimental PPC campaigns on Google were fraudulent. Whatever the exact figure, click fraud has become pervasive, and Google, Yahoo!, and the other major PPC firms have found themselves caught in a game of cat and mouse with its perpetrators. Even as the search engines shore up their defenses, click scammers are becoming more sophisticated, increasingly deploying complex software to disguise the origins of clicks. For now, the search companies and many of their clients maintain that the problem on their networks is under control. But some observers, like Holcomb, believe that click fraud is “a billion-dollar mess” that “has the potential of destroying the entire industry.”

The amount of click fraud alone should cause Google to address the issue, especially on conference calls announcing record high profits. However, they didn’t address the issue at all. A panel full of Wall Street analysts with the ability to ask questions didn’t approach the issue. And internet analysts such as Jackson aren’t coming close to the importance of the issue in their commentary on Google’s Q3. Have we forgotten about click fraud already or does no one care?

BusinessWeek’s cover story on October 2 dealt with click fraud and the dark side of internet advertising. Most signficant from that article are the following:

“The growing ranks of businesspeople worried about click fraud typically have no complaint about versions of their ads that appear on actual Google or Yahoo Web pages, often next to search results. The trouble arises when the Internet giants boost their profits by recycling ads to millions of other sites, ranging from the familiar, such as cnn.com, to dummy Web addresses like insurance1472.com, which display lists of ads and little if anything else. When somebody clicks on these recycled ads, marketers such as MostChoice get billed, sometimes even if the clicks appear to come from Mongolia. Google or Yahoo then share the revenue with a daisy chain of Web site hosts and operators. A penny or so even trickles down to the lowly clickers. That means Google and Yahoo at times passively profit from click fraud and, in theory, have an incentive to tolerate it. So do smaller search engines and marketing networks that similarly recycle ads.

Google and Yahoo say they filter out most questionable clicks and either don’t charge for them or reimburse advertisers that have been wrongly billed. Determined to prevent a backlash, the Internet ad titans say the extent of click chicanery has been exaggerated, and they stress that they combat the problem vigorously. “Google strives to detect every invalid click that passes through its system,” says Shuman Ghosemajumder, the search engine’s manager for trust and safety. “It’s absolutely in our best interest for advertisers to have confidence in this industry.

That confidence may be slipping. A BusinessWeek investigation has revealed a thriving click-fraud underground populated by swarms of small-time players, making detection difficult. “Paid to read” rings with hundreds or thousands of members each, all of them pressing PC mice over and over in living rooms and dens around the world. In some cases, “clickbot” software generates page hits automatically and anonymously. Participants from Kentucky to China speak of making from $25 to several thousand dollars a month apiece, cash they wouldn’t receive if Google and Yahoo were as successful at blocking fraud as they claim.”

Click fraud is alive and very well for those of you wondering why this may be a big deal. I’ll be blogging more this week about a recent trip down the rabbit hole with the famous (or infamous depending on your persuasion) Wayne Porter. This trip started with an AdSense scraping site making money off of high paying “mesothelioma” keywords and led to some places that caused me severe “shock and awe.” The implications are beyond what I would consider just superficial, and extend well into the very ideas and assumptions that we hold about the internet and the money trail it provides which an lead to some very unsavory places.

We’re all having the wool pulled over our eyes if we focus just on positive aspects of Google’s profit numbers. Of course they deserve laud and magnification for their hard work to increase profits 92% over the past year. However, if 10 to 25% of that money is coming from fraudulant clicks, what does that say about Google’s complete refusal to raise the issue on the conference call? What does that say about the panelist of Wall Street analysts who didn’t ask the question of click fraud?

Even more, what does that say about all of us in the online marketing industry who are commentators and who aren’t saying a thing about click fraud?