To Texas-based Auctions Expert International LLC, it was an easy way to make money on the Internet. Sign up with Google, which functions as a kind of online ad agency, and agree to let the online giant place ads on your Web site. Then, every time someone clicks on one of the ads, the advertiser pays a fee, and Google shares that fee with Auctions Expert.
The problem, according to a lawsuit filed last year by Google, is that Auctions Expert began clicking on the ads itself, artificially inflating the number of clicks and driving up the bills sent to advertisers.
Hook, click and sinker
Auctions Expert allegedly recruited as many as 50 people to click on online advertising, generating about $50,000 in ad revenue. The self-clicking was "worthless to advertisers, but generated significant and unjust revenue for defendants," the Google lawsuit said.
Auctions Expert, Google claims, appeared to be created solely to profit from manipulating the Internet ad process. A person answering the phone at the home of Sergio Marfin, an Auctions Expert executive named in the Google lawsuit, said Marfin was unavailable for comment.
Google, Yahoo and other providers of online ads said they are increasingly being targeted by online fraudsters, who exploit weaknesses in the Internet ad system to generate revenue or hurt their competitors. The Internet giants said they are working to combat the problem, but some advertisers accuse the companies of not moving aggressively enough because they also profit from the scams.
The tension comes as the click, click, click of the computer mouse steadily becomes the cyberspace equivalent of a cash register ringing up sales. These days, millions of computer users are clicking away on the small text ads set off from search engine results or other Web content, generating billions of dollars in fees paid annually by advertisers to Google and Yahoo and their Web partners.
Users seem to appreciate the fact that the tiny ads are less intrusive than other types of online marketing, such as those Internet pitches that pop up unbidden on the computer screen. And since advertisers typically pay only when someone interested in their products clicks on one of the ads, the system has proved to be a more cost-effective way to generate sales than banner ads and many types of traditional marketing.
Tracking phony clicks
But with the increasing amount of money involved, serious problems have arisen. The single biggest difficulty, known in the industry as "click fraud," involves the repetitive ad clicking alleged by Google's lawsuit — manually or automated — by unscrupulous businesses trying to artificially inflate their own revenue or trying to hurt their competitors by driving up worthless ad spending.
"If there is anybody who says this is not a real problem, they are kidding you," said John Slade, a product manager with Yahoo.
Jessie Stricchiola, a click fraud expert who frequently represents advertisers seeking refunds from Google and Yahoo, estimates that click fraud accounts for as much as 20 percent of the clicks in some industry sectors. The president of AlchemistMedia.com, Stricchiola said tens of thousands of advertisers, who pay Google and Yahoo by credit card, are being overcharged daily, adding that neither search engine has a large enough staff devoted to monitoring the problem or fielding complaints.
Providers' response under scrutiny
Inflated amounts charged to advertisers by the search engines have prompted litigation. At least one disgruntled advertiser recently sued Google and Yahoo and is seeking class-action status for a group of advertisers who claim they have been overcharged by the search engines.
Stricchiola harshly criticizes Google, saying the firm typically will not divulge much information to advertisers about the nature or scope of click fraud on their Web sites. Google defends the practice, saying it does not want to provide a road map for those with bad intentions.
Stricchiola says Yahoo takes a more open approach by sharing data with advertisers who complain about click fraud, enabling greater collaboration to minimize the problem.
"Google is notorious for just flat out ignoring advertisers," Stricchiola said. "Google says, 'Thank you for your inquiry. We see no problem.' Sometimes Google does not even look at the data, and they give the most ridiculous explanations. Yahoo tends to be more proactive. That is because they have the people, more so than Google," which Stricchiola says views click fraud "as a purely technological issue."
Ad placements prove lucrative
Google vigorously defends its approach, saying it has the people, systems and technology in place to prevent advertisers from being charged for suspicious clicks. "I would characterize the problems due to click fraud as small. We have a software system that filters out fraudulent clicks even before advertisers get billed for them," said Salar Kamangar, a Google product manager.
"We also have a team of specialists investigating reports from customers that contact us and let us know when they think there is a problem. And we have prosecuted a case of this."
Both Google and Yahoo say they are beefing up efforts to fight click fraud, adding that it does not threaten the viability of pay-per-click advertising, the rapid growth of which has made both search engine firms the darlings of Wall Street.
In addition to the ads it presents on its own Google.com search-result pages, Google sells and places ads on tens of thousands of other Web sites. About half of Google's revenue comes from clicks on the ads it places elsewhere. And whenever someone clicks on one of those small text ads, Google shares the revenue from that click — anywhere from a nickel to more than $50 — with the owner of that Web site, which may rely on Google for all or most of its income.
The rapidly growing Google ad network has added to the click fraud problem, as some Web site owners artificially pump up their own revenue by clicking on the ads Google serves them. Google says it filed the lawsuit against Auctions Expert and barred the firm from participating in its ad network in the future, in part to make an example out of a company and discourage the practice.
Despite the lawsuit and other efforts, the problems persist.
Death by a thousand clicks
Martin Fleischmann, chief executive officer of MostChoice.com, an Atlanta-based firm in the insurance business, says that competitors have been clicking on his ads, sometimes through third-party Web sites, in an effort to disguise their activity and use up his marketing budget. Since MostChoice relies heavily on Internet traffic for customers, Fleischmann says he must continue advertising online, but he also expresses anger about the growing number of worthless clicks.
Fleischmann would like to see Google and Yahoo join forces to address the issue, just as America Online, MSN and other major Internet services teamed up a few years ago to fight the junk e-mail known as spam.
Some industry experts strike a measured tone. Andy Beal, vice president of KeywordRanking.com, an Internet marketing firm, says that click fraud may be growing as online advertising increases but that it is not a fatal flaw. Instead, he advises advertisers that click fraud is just a part of doing business on Google and Yahoo. He likens it to retailers who face the intractable problem of merchandise theft but remain profitable.
"People will take it for granted there will be some clicks of a suspicious nature, but the advertising model will be robust enough to withstand that," Beal said. "I don't think it is going to be an epidemic."
Change the model?
One way to eliminate click fraud would be to change the business model used by Google and Yahoo from "pay-per-click" to "cost-per-action," though this would reduce profit dramatically. Under this scenario, advertisers would pay only when someone clicked on one of their ads and purchased a product or service. That is the approach taken by Snap.com, a small search firm attempting to distinguish itself by using the cost-per-action billing method.
One way for advertisers to identify potential click fraud is to closely monitor what proportion of those who click on their ads typically purchase products and set up an automatic alert system whenever that figure drops precipitously, experts say. Another way is to hire a firm that tracks the origin of clicks, identifying, for example, whether a significant number of clicks may be coming from a single e-mail address or Web site.
Dan Shapero, chief operating officer of Net Applications, says click fraud had once been the dirty little secret of pay-per-click advertising. Now, he says, the secret is out. Net Applications sends e-mail alerts to advertisers that hire the firm to monitor click fraud. "It is important that advertisers put up some type of first line of defense to spot suspicious click activity," Shapero said.
Google does provide advertisers some flexibility, which can minimize click fraud. It gives them the choice of advertising on only Google.com, where the click fraud rate is lowest, on Google.com and its major search partners — America Online and AskJeeves — or on Google.com and the entire, vast Google network of Web sites, where the click fraud rate is highest.
"This is not a significant problem," Google's Kamangar said. "Google's technology detects invalid clicks, including instances when publishers click on their own ads."