Click Farms. Impression Fraud. Zombie Networks. P-P-C. Cost-per-Action. Sploggers.

Originally published March 13, 2006

Never heard of Click Farms, Zombie Networks or Splogs? You're not alone, but you will hear more about them as the Click Fraud debate that has been looming for the past few years emerges as the hottest topic in the online community.

Last week, Google agreed to settle a class-action lawsuit brought against it by one Lane's Gift & Collectibles. If approved, the settlement will provide a kitty of not more than $90M towards advertisers who believe they paid for fraudulently created clicks as far back as 2002. Each of the leading search engines, ubiquitous Google, Yahoo!, and Microsoft, have been reaping billions from advertisers for search engine leads. Now it seems some of it may have been based on fraudulent actions by Click Farms, Zombie Networks and Sploggers.

To a great extent, the media is inaccurately reporting the story, the consequence of business reporters not understanding the search advertising model that is the online standard today. In no way has Google admitted to "knowingly overcharging" advertisers. Rather, it appears that, until now, it has not owned up to the potential severity of the issue.

At bit of context: Currently the online search model operates under a Pay Per Click (PPC) model first developed by IdeaLab chairman Bill Gross. The acronym is self-explanatory: when a user clicks on an ad that appears beside your search results, Google charges affiliates who have paid for placement via its AdWords program. Based on popularity, there is an auction for the cost of the word. Therein lies the potential for manipulation.

In the January issue of Wired magazine, Charles C. Mann explains how simply by clicking on a rival's ad you can exhaust their ad budget and force them off the page. Recent investigations into this practice were conducted by the Times of India, which found there were "Click Farms" stocked with low-wage earners who manually clicked on advertisements around the clock. According to the article, fraud occurs when a person clicks on ads multiple times; a competitor clicks on ads to waste competitors' ad dollars; website owners click on their own ads to increase revenues; robot programs repeatedly visit the ad disguised as legitimate visitors; businesses are set up exclusively to click on ads.

Wired News reported that Auction Experts International, a Google AdSense partner, allegedly made $50,000 by clicking on the ads it displayed on its own website. Their counterparts are firms that participate in "impression fraud," where you repeatedly click on web pages to generate false impressions or reload a search engine page and don't click on a competitor's ad. Ultimately, they are dropped for non-performance.

As with all things technological, humans have been replaced by software. Last October Danish police discovered that three youths had forged a Zombie Network that was toggling 1.5 million personal computers together, not to spam or unleash viruses but to target Google and perpetrate click fraud.

Another way fraud has been committed is through spam blogs or splogs Splogs are blogs where the articles are fake, and are only created for spamming. The purpose, according to Wikipedia, "is to increase the page rank of the affiliated sites, get ad impressions from visitors, and/or use the blog as a link outlet to get new sites indexed. Content is often nonsense or text stolen from other websites with an unusually high number of links to sites associated with the splog creator, which are often disreputable or otherwise useless websites."

How frequently does click fraud occur? Google maintains it's 1%, while The Wall Street Journal cited reports that more than 20% of all clicks are fraudulent. Some industry observers argue click fraud in some cases runs from 30% to 40% on leading search engines and up to 80% on second and third tier search engines. Last August, MEC Labs published a research brief stating that the instance of click fraud in Google's pay-per-click search engine might be as high as 29.5 percent. "From our research, we found that it is unlikely an individual committing click fraud by clicking an ad over and over will go undetected by Google," said Flint McGlaughlin, director of MEC Labs. "But our research also shows that when more sophisticated systems and software are used, only a small percentage of the fraud is detected, with fraud increasing proportionate to the bid price." MEC Labs/MarketingExperiments.com is conducting additional click fraud research. Clickfacts also tracks click fraud across various types of sites, content and advertising. For more information, contact Clickfacts CEO Michael Caruso at Michael@clickfacts.com.

David Vise's The Google Story suggested troubles ahead for Google in the best-seller's discussion of click fraud. While Yahoo! copped to the problem and seemed to be responsive to customer complaints, Google had a curiously cavalier attitude, indicating that "Yes, it was aware of the problem…" but that it was an internal matter, something not to be discussed in the media.

Google has had an exciting but tumultuous first quarter in 2006. It began with a bang by announcing its $1B investment in AOL, and then Google purchased dMarc, also in a $1B+ deal that announced its foray into radio advertising.

While these moves were universally applauded, Google's move into China has stood the firm's "Do No Evil" credo on its head, even as the Department of Justice demands that it share search query results for its case on behalf of the Children's Online Protection Act (COPA).

Last week's settlement comes as Google is trading at $337.50, down from its yearly high of $475. Piper Jaffrey's ceiling of $600 looks quite bullish these days. Clearly this was one week that Sergey Brin and Larry Page wish had never happened.

What this case does point out is that Google and its peers have to come up with a different model. Google relies on advertising for 99% of its revenues. That said, Google's a bigger recipient of ad dollars than any television network or newspaper chain. But search ads might be getting too expensive for their own good. Both FTD and Blue Nile are reportedly backing way for this reason.

Bill Gross, the aforementioned daddy of Pay-per-Click has himself switched to a new advertising model:cost-per-action (CPA). Advertisers only pay when you ultimately book that hotel room, or buy the book. Gross's search engine launched in late 2004 and is called Snap.com, once the name of the NBC-owned search tool. Until now, search engines have spurned his alternative because it demands transparency.

Whatever the result of this class-action lawsuit (Yahoo! is fighting it and a judge has yet to accept the settlement), it does appear that Google is no longer in a state of denial about click fraud. Danny Sullivan of SearchEngineWatch.com, long a Google booster, sees a silver lining in this episode: "The settlement gives Google a fresh start. They need to regain the advertiser's trust and be more responsive."

But not so fast.

A second class-action lawsuit was filed against Google last June by Click Defense, a Web service devoted to tracking and preventing fraud. While there are several legal issues represented in the suit, the key seems to be the interpretation of whether "actual clicks," the contractual measure of value in Google's agreements, exclude fraudulent clicks, and if it is Google's responsibility to identify fraudulent clicks. Whatever the legal issues and judgments, expect large advertisers and agencies to demand improved audit procedures and click validation. Also, the two Texas law firms that filed the Lane's Gifts & Collectibles suit have created a site at www.LostClicks.com to aggregate other companies that believe they might have been "victims" of click fraud, and the attorneys appear committed to pursuing additional class action suits.