Data-Driven Rip-Off: Google and pay-per-click

Last month I wrote on data-driven decision-making as a way to address fast-changing conditions when computers identify discrepancies between their forecasts and the real data. The idea is that you don't have to underlying the dynamics of, say, stock prices - what is driving a specific output - to take action and adjust your strategy in light of the observed behavior. (It sounds quite obvious, but analysts have long preferred probabilistic descriptions of uncertainty and until a few years ago, computers could not process large amounts of inputs fast enough for data-driven models to make practical sense.)

In his comment on my post, CPC mentioned the role of data-driven techniques to assess consumer behavior, the most famous of which being of course Google's pay-per-click business model. He gave the link to a report commissioned by Google on click fraud; you can read what he has to say about it here. The report arose from the controversy surrounding Lane's Gifts and Collectibles, an Arkansas-based gift shop, which reached a settlement with Google in March 2006 regarding bogus clicks. The company is briefly mentioned in articles about online advertising in a November 2006 issue of The Economist (this one is the Leader and that one the real article), which mention that internet advertising (half of which is due to "pay-per-click" ads) brought $27 billion in revenue in 2006, and is expected to represent 20% of total advertising expenses in just a few years, as opposed to 5% now.

The Economist describes pay-per-click as follows: Google, Yahoo! and similar providers put the ads on their search pages when users type in queries related to their line of business (the advertiser who bid the most money gets to be on top of the list), and on affiliates' websites, but the advertiser is only charged for clicks on the ad. This way, he is supposed to only pay for real traffic generated by the ad to his site. The articles also explain that "The price per click varies from $0.10 to as much as $30, depending on the keyword, though the average is around $0.50." At that rate, it is not difficult to imagine the damage malicious competitors can inflict on an unsuspecting advertiser; affiliates also get a small profit when someone clicks on an ad on their site, and therefore have an incentive to game the system as well.

I was wondering what led Lane's Gifts to determine it was the victim of click fraud (as opposed to, for instance, a large number of customers being turned away by a poorly designed website or too expensive prices); unfortunately there is no information whatsoever on the web about that. The class-action lawsuit led to a settlement of $90 million, and I couldn't decide whether that was a lot or not (the plaintiffs got no cash - only credits toward more Google ads), but Google's cavalier attitude about it was enough to infuriate many a small business. After all, "Bill Gross, the entrepreneur who pioneered the pay-per-click model back in 1998, was aware of the problem even then," so it is no surprise that Google's CEO "caused an uproar [in 2006] when he seemed to suggest that the 'perfect economic solution' to click fraud was to 'let it happen'."

A Washington Post columnist writing in March 2006 made a similar comment: "Google has repeatedly pooh-poohed click fraud, contending that it is a minor annoyance that it has under control with automated detection technology. At a meeting with analysts two weeks ago, chief executive Eric Schmidt said click fraud "is not a material issue." Co-founder Sergey Brin said such cases amount to "a small fraction" of Google's ad clicks." (This declaration came six days before the settlement with the gift shop in Arkansas.) The Post column also provided a real-life small company struggling with click fraud, which helped to put the situation in perspective: that company pays Google and Yahoo! $40,000 every month, at the rate of $0.80 to $1.20 per click, and it turns out  "35 percent of the referrals that Radiator [think car radiator] paid Google for stemmed from bogus traffic. Likewise, 17 percent of the leads that came from Yahoo search results were illegitimate." It also has worryingly statistics, that suggest click fraud represents a larger chunk of clicks than the 10% usually accepted. Even just 10% of $13 billion (The Economist's estimate of pay-per-click revenue) values the money flowing to the click fraud business to a billion dollar every year.

But the best article I've found on click fraud comes from an October 2006 issue of Businessweek. I liked that article because it described real people on all sides of the scheme and put numbers on the issue. Here are a couple of highlights. (It really is a fascinating article, and I encourage anyone interested in the issue to read it in its entirety. No registration/subscription necessary.) In 2005, an Atlanta entrepreneur paid Google and Yahoo! $2 million in advertising fees (his company has 30 employees and generates revenues of $6.4 million).

• "Over the past three years, [the entrepreneur] has noticed a growing number of puzzling clicks coming from such places as Botswana, Mongolia, and Syria. This seemed strange, since MostChoice steers customers to insurance and mortgage brokers only in the U.S. [He discovered] that the MostChoice ads being clicked from distant shores had appeared not on pages of Google or Yahoo but on curious Web sites with names like insurance1472.com and insurance060.com."
• "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.
  
• "The search engines divide these proceeds with several players: First, there are intermediaries known as "domain parking" companies, to which the search engines redistribute their ads. Domain parkers host "parked" Web sites, many of which are those dummy sites containing only ads. Cheats who own parked sites obtain search-engine ads from the domain parkers and arrange for the ads to be clicked on, triggering bills to advertisers."
• "The search engines describe [their] affiliates in glowing terms. A Google "help" page entitled "Where will my ads appear?" mentions such brand names as AOL.com and the Web site of The New York Times. Left unmentioned are the parked Web sites filled exclusively with ads and sometimes associated with click-fraud rings." (The description of the click-fraud rings is particularly interesting.)

Who in their right mind would build a business model around pay-per-click and then condone domain-parking? The owners of parked websites often count on people misspelling the name of popular sites to stumble on theirs. Does that sound like a fine business practice? At the very least, Google and Yahoo! should limit the resale of ads to websites that actually have a track record of selling a product (as opposed to only listing recycled ads), or have been vetted as legitimate (especially blogs).

Most stories about click fraud are about small businesses straddled with gigantic advertising costs, or seeing their budget depleted without any benefit. For those the downside of other people's get-rich-quick scheme can mean bankruptcy, and it makes sense then to prefer the "pay-per-action" model described in The Economist, where companies are only charged for clicks that lead to a sale. Google might complain it shouldn't be held responsible for small businesses' poorly designed websites. But given the current state of online advertising, this might be the only option to prevent small-size companies from going back to their old paper ways.

Comments

[gregbo]

The court filing of Lane's Gifts can be found at http://blog.ericgoldman.org/archives/lanegiftsac.pdf . There isn't anything in the filing that says (explicitly) what Lane's Gifts believed they were victims of click fraud. However, there are common complaints of suspicious clicks, such as those outlined at the Wikipedia click fraud page (http://en.wikipedia.org/wiki/Click_fraud). If the pattern of clicks was not "obviously fraudulent" (such as the examples you gave), one could argue that Lane's Gifts might have reached an alternate conclusion, namely that the clicks were due to poorly designed sites or high prices. OTOH, fraudsters are aware that people do not convert (buy goods, or at least, sign up for more information) for such reasons, so they are able to mimic the actions of legitimate (but nonconverting) clickers through the usage of automated and manual means.

[John Hunter]

I wrote on this awhile back in: Click Fraud = Friction for Google http://investing.curiouscatblog.net/2006/10/22/click-fraud-friction-for-google/. My main point was click fraud acts as friction to Google's service (providing customers to those paying for clicks). Google's engineers have made a great deal of money by creating a system that is efficient and leaves room for Google to profit nicely from the difference between the value of the visitors provided to Google's customers and the cost of providing those customers to Google. Click fraud essentially transfers (in the long term) some of the value to those practicing click fraud that otherwise Google would be able to claim a portion of. For that reason I can't see Google doing anything other than trying to reduce click fraud.

Domain parking is a bit different as there the customer delivered to Google's customer may well be profitable to them. There are issues in the domain parking area to address, I am just saying it doesn't quite match the friction argument.