Google Settles, but Fails to Satisfy Advertisers

With Click Fraud Costing Business $1 Billion, Buyers Want More Transparency

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NEW YORK ( -- Click fraud cost Google $90 million in make-goods. It costs advertisers $1 billion a year.

And those advertisers' agencies, furious at the wrongdoing, which cheats them much as magazine-circulation scandals have cheated their print brethren, feel that Google has got away lightly with a settlement it reached in a recent lawsuit. What's more, they are demanding more transparency and better analytics.

The settlement, resolving a class-action lawsuit on behalf of all advertisers that have taken part in Google's AdWords program, allows them to apply for reimbursement for invalid or fraudulent clicks that occurred since 2002. But Google would be able to reimburse the advertisers in the form of make-good advertisements. The only cash payouts would go to the lawyers.

"If the extent of the liability to Google is just $90 million, that's a tremendous win for Google," said Jeffrey Rohrs, an attorney and president at Internet marketing agency Optiem.

"[The drag on Google] gets eliminated-and it gets eliminated for $90 million, only a small amount of which will be in cash," said Eric Goldman, assistant professor of law, Marquette University. "What a cheap way to solve a thorny problem."

It's not just thorny, it's expensive. Many search agencies and click-tracking companies say the problem affects between 4% and 10% of all clicks in the $6 billion paid-search industry. "Click fraud impacts everyone who participates in the paid-search ecosystem," Joshua Stylman, co-founder of search-marketing agency Reprise Media.

To commit click fraud, a company sets up an automated system or hires workers to click on its competitor's sponsored links, or a search engine network partner (a Web site that features sponsored links on its site) clicks on those links to boost their revenue share from the engine. Experts say that advertisers lose about $1 billion a year in clicks that have no chance of converting.

The click-fraud controversy echoes the circulation scandals of the magazine industry, with advertisers in both cases clamoring for more information and complaining bitterly about the assurances their media partners have issued. It is different, however, in that it affects so many small players.

Given the relatively low cost per eyeball of search ads vs. other media such as TV or print, the top 250 advertisers can see 4% to 10% as a fairly minor dent in their total budgets. But those major players make up only a tiny -- and undisclosed -- fraction of Google's ad base, which is still primarily composed of smaller business, according to experts. For some of those smaller advertisers the money spent on search makes up their entire ad budget.

Business sectors victimized the most include purveyors of high-ticket items like jewelry and computer hardware, because the keywords for these products are expensive, said John Marshall, CEO, ClickTracks, a software that tracks behavior and fraud on Web sites. Highly competitive online verticals like travel, insurance, adult products and the law, particularly personal-injury lawyers, are also targeted frequently. "A term like 'auto insurance' has several hundred thousand searches against it, so it will be harder to identify fraud," said Matt Naeger, VP-general counsel of search-marketing agency Impaqt.

Mr. Marshall, who estimates 6,000 of his 7,000 clients are small and medium-size businesses, said, "Large companies are less upset about click fraud -- you might say they are less aware. They probably hire an agency that takes care of this for them."

Still, the large marketers are not blase about this: "There's a lot of frustration among marketers about what's being done," said Karl Siebrecht, senior VP-general manager of the digital technology unit of aQuantive.

What they want is more careful monitoring of clicks by search engines and either third-party measurement or disclosure by search engines of click data and their means of gathering for comparison's sake to their own data. "More transparency would help," Steven F. Malouf, the principal at the law firm representing the suit's lead plaintiff, Lane's Gift & Collectibles. Mr. Malouf declined to detail any additional terms of the settlement, but said, "one of the things you'll see in the next 12 months is third-party analytics -- the analysis of that click-through done by a third party."

The settlement aside, if engines cannot engender more trust among marketers, the long-term viability of the pay-per-click model is in danger, some said. Google disagreed. In an e-mail to AdWords clients, the company wrote: "Advertisers continually increase the amount of money they spend, which suggests that they are pleased with the return delivered by their ads."

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