'Click Fraud' a Legitimate Concern (3/14/2008)

The report by USC Marshall researchers Kenneth Wilbur and Yi Zhu has been accepted for publication in the journal Marketing Science.

Study suggests that advertisers create third-party groups to look at online actions that increase a Web site's search-advertising revenues.

Advertiser concerns about online search engines' commitment to battle "click fraud" may be justified, and the industry should consider creating third-party verification groups to quell those concerns, according to a new study by two USC researchers.

"There's evidence this is a problem of more than $1 billion in scope and nobody has taken an impartial look at it before," said Kenneth Wilbur, an assistant professor of marketing at the USC Marshall School of Business. Wilbur collaborated with economics doctoral student Yi Zhu on the study.

"The industry may want to consider creating third-party organizations, as other ad-supported media have, to certify the quality of their efforts to combat click fraud."

Search advertising has exploded in the past decade to more than $8 billion in revenues in 2007. Advertisers increasingly are looking to keyword search advertising because it reaches consumers who are looking to buy and because all their actions online can be tracked and measured.

The downside of keyword search is that it can be manipulated and exploited by competitors or Web site owners who would display the ads and receive much of their revenues.

Click fraud is a catch-all term applying to online actions that increase a Web site's search-advertising revenues or exhaust a search advertiser's budget.

The Click Fraud Network (clickfraudnetwork.com), an industry watchdog organization supported by the software company ClickForensics, estimates that about one in six clicks on search engines sites was a "high threat" to be fraudulent in the third quarter of 2007.

More than a quarter of clicks, some 28.1 percent, on search engines' content network Web sites were considered a "high threat" to be fraudulent.

"Click Fraud," the paper by Wilbur and Zhu, applies economic theory to build a model of the search advertising market. It mathematically proves that click fraud can increase search-engine revenues under a variety of scenarios. The paper has been accepted for publication in Marketing Science, the top journal in the field of quantitative marketing.

Widespread click fraud has huge implications for the booming online advertising industry. And efforts to quell concerns about click fraud face a difficult Catch-22: If search engines reveal too much about how they prevent click fraud, they may reveal how those measures can be beaten.

So they reveal little, forcing advertisers to trust what the search engines are doing, even as they have to pay for every fraudulent click that goes undetected.

In 2006, Google chief executive officer Eric Schmidt sparked controversy when he said that eventually, advertiser distrust would depress keyword prices, self-correcting the problem.

"In fact, there is a perfect economic solution, which is to let it happen," Schmidt said at the time.

The new study confirms the impact of click fraud on keyword prices. Advertisers, however, are more concerned about total spending, not just prices for a specific keyword.

Click fraud automatically increases expenditures by increasing the number of paid clicks. The question is, when do depressed prices offset the rising expenditures from more clicks?

When a keyword auction is very competitive, click fraud depresses search-engine revenues, the study found. But in less-competitive auctions, click fraud can increase search-engine revenues, reducing their incentive to prevent click fraud.

According to the study, the search-advertising industry would benefit by creating a neutral third party to authenticate click-fraud detection efforts.

Such an entity could maintain confidentiality, while providing impartial verification of detection methods, an approach common in other advertising-fueled media.

Nielsen Media Research measures TV audiences, Arbitron measures radio listeners, and the Audit Bureau of Circulation authenticates the sales of newspapers. Even online banner advertising contracts usually are sold on the basis of third-party audience figures from comScore or Nielsen/NetRatings.

"We hope to call attention to the issue of click fraud," Wilbur said. "We do not doubt search engines' good intentions, but their networks are so wide open that it is difficult to police all the network's users. We have suggested several mechanisms the industry can adopt to build advertiser confidence in the click figures they are getting."

Note: This story has been adapted from a news release issued by the University of Southern California

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