Click Fraud

Martin Fleischmann put his faith in online advertising.

He used it to build his Atlanta company, MostChoice.com, which offers consumers

rate quotes and other information on insurance and mortgages. Last year he paid

Yahoo! Inc. and Google Inc. a total of $2 million in advertising fees. The 40-year-old entrepreneur

believed the celebrated promise of Internet marketing: You pay only when

prospective customers click on your ads.

Now, Fleischmann's faith has been shaken. Over the past three years, he

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

Fleischmann is a victim of click fraud: a dizzying collection of scams and

deceptions that inflate advertising bills for thousands of companies of all

sizes. The spreading scourge poses the single biggest threat to the Internet's

advertising gold mine and is the most nettlesome question facing Google and

Yahoo, whose digital empires depend on all that gold.

The growing ranks of businesspeople worried about click fraud typically

have no complaint about versions of their ads that appear on actual Google or

Yahoo Web pages, often next to search results. 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. When

somebody clicks on these recycled ads, marketers such as MostChoice get billed,

sometimes even if the clicks appear to come from Mongolia. Google or Yahoo then

share the revenue with a daisy chain of Web site hosts and operators. A penny or

so even trickles down to the lowly clickers. That means Google and Yahoo at

times passively profit from click fraud and, in theory, have an incentive to

tolerate it. So do smaller search engines and marketing networks that similarly

recycle ads.

SLIPPING CONFIDENCE

Google and Yahoo say they filter out most questionable clicks and either

don't charge for them or reimburse advertisers that have been wrongly billed.

That confidence may be slipping. A BusinessWeek investigation has revealed a

thriving click-fraud underground populated by swarms of small-time players,

making detection difficult. "Paid to read" rings with hundreds or thousands of

members each, all of them pressing PC mice over and over in living rooms and

dens around the world. In some cases, "clickbot" software generates page hits

automatically and anonymously. Participants from Kentucky to China speak of

making from $25 to several thousand dollars a month apiece, cash they wouldn't

receive if Google and Yahoo were as successful at blocking fraud as they

claim. "It's not that much different from someone coming up and taking money out

of your wallet," says David Struck. He and his wife, Renee, both 35, say they

dabbled in click fraud last year, making more than $5,000 in four months.

Employing a common scheme, the McGregor (Minn.) couple set up dummy Web sites

filled with nothing but recycled Google and Yahoo advertisements. Then they paid

others small amounts to visit the sites, where it was understood they would

click away on the ads, says David Struck. It was "way too easy," he adds.

Gradually, he says, he and his wife began to realize they were cheating

unwitting advertisers, so they stopped. "Whatever Google and Yahoo are doing [to

stop fraud], it's not having much of an effect," he says.

Spending on Internet ads is growing faster than any other sector of the

advertising industry and is expected to surge from $12.5 billion last year to

$29 billion in 2010 in the U.S. alone, according to researcher eMarketer Inc.

About half of these dollars are going into deals requiring advertisers to pay by

the click. Most other Internet ads are priced according to "impressions," or how

many people view them.

Google and Yahoo are grabbing billions of dollars once collected by

traditional print and broadcast outlets, based partly on the assumption that

clicks are a reliable, quantifiable measure of consumer interest that the older

media simply can't match. But the huge influx of cash for online ads has

attracted armies of con artists whose activities are eroding that crucial

assumption and could eat into the optimistic expectations for online

advertising. (Advertisers generally don't grumble about fraudulent clicks coming

from the Web sites of traditional media outlets. But there are growing concerns

about these media sites exaggerating how many visitors they have -- the online

version of inflating circulation.)

Most academics and consultants who study online advertising estimate that

10% to 15% of ad clicks are fake, representing roughly $1 billion in annual

billings. Usually 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. In all, $300 million

to $500 million a year could be flowing to the click-fraud