So Many Clicks, So Few Sales

Pay-per-click advertising seems like a dream. But up to 35% of

all the clicks you pay for may be fraudulent.

It didn't make any sense. Kevin Steele, co-owner of Karaoke Star, a Phoenix

retailer of karaoke equipment, noticed that the number of people clicking on his

paid search-engine ads had shot from 200 to 800 a day. But despite the apparent

jump in traffic, sales hadn't budged. Steele and his partner, Diana Frerick, had

built their business on Internet advertising, and more clicks almost always

meant more revenueâ€"which the pair had invested in a new office, more inventory, and a call center to field technical questions.

Steele thought he had pay-per-click advertising down to a science. Karaoke

Star spent about $2,000 a day on search-engine ads at Google and Overture, a

subsidiary of Yahoo focusing on keywords like "karaoke","karaoke player,"

"karaoke song"to generate about $6,000 a day in sales. Suddenly, it had to

budget the same amount just to get $3,000. With each keyword costing

anywhere between 40 cents and $3 a click, Karaoke Star found itself being

nickel-and-dimed to death. "One day we were doing great, says Steele, "and

the next it was as if someone had turned off the lights."

The problem was click fraud, which occurs when people click on paid search

ads with no intention of buying anything. In some cases, the clicker is a

competitor that wants to force a rival to burn through cash. Other times it's

someone from an affiliate site that hosts search-engine ads and receives a small

commission for every click. It could be a team of users clicking repeatedly on

an ad. Or, most commonly, the fraudulent clicks are automated by "hitbot"

software.

Experts estimate that 20% to 35% of all ad clicks may be bogus. Whatever the

number, it's as if thousands of people are charging you for window-shopping.

Steele says the fraudulent clicking has cost Karaoke Star nearly $400,000 over

the past two and a half years.

The paid search ad market is essentially a grand auction. Advertisers bid on

specific keywords; the terms with the highest demand fetch the highest prices,

and the advertisers that pay the most get the highest placement on the search

engine's webpage. Because affiliate sites earn commissions based on how many

clicks the ads receive, there's a lot of incentive to claim as many clicks as

possible. Paid online search is a nearly $3 billion business and it's easy to

see why. Popular keywords can get very expensive very fast.

The major search engines all acknowledge that click fraud is a problem. In a

recent SEC filing, for example, Google warned investors that "if fraudulent

clicks are not detected, the affected advertisers may experience a reduced

return on their investment which could lead to loss of advertisers and

revenue.

What's an advertiser to do? If you think you've been charged for bogus

clicks, you might be able to convince a search engine to credit your account.

The problem is, getting a search engine to hand over a record of your

advertising activity is no easy feat. Search engines treat such data as

proprietary and are loath to share it. Karaoke Star's Steele and Frerick, for

example, expressed their suspicions to Overture and were given some "token

refunds, Steele says. But Overture steadfastly refused to tell them who was

behind the bogus clicks. Nor would it give Karaoke Star the data it needed to

figure it out itself.

Fortunately, Karaoke Star as well as a number of other online karaoke

stores received an anonymous e-mail tip from someone claiming to be a former

employee of Ace Karaoke, a competitor in City of Industry, Calif. Attached to

the e-mail, according to Steele, was a video that showed an automated click

fraud program employed by Ace Karaoke to target the stores. Frerick and Steele

retained a lawyer who has contacted Ace Karaoke, as well as Google and Overture,

and informed them of his intention to sue. Why target the search engines?

"Because Google and Overture make the most money from click fraud and have

the least amount of incentive for taking simple precautions to prevent the fraud,

says C. Tab Turner, a plaintiffs' attorney in North Little Rock, Ark., who

represents Karaoke Star. Overture and Google declined to comment on the matter.

Ace Karaoke's owner, David Su, denies the charges. "At this stage, there is

no way for advertisers to prevent fraudulent clicks from being billed to their

accounts.

Unlike Karaoke Star, many advertisers are reluctant to complain out of fear

that the search engines, which provide most of their traffic, could blacklist

them. "At this stage, there is no way for advertisers to prevent fraudulent

clicks from being billed to their accounts,says Jessie Stricchiola, president

of Alchemist Media, a click fraud auditing firm in Hollywood.

Fortunately, there are alternatives to taking legal action. There are a

number of click fraud auditing tools available including Click Lab, Click

Defense, and Click Detective that are designed to alert you to suspicious

clicks. The cost can range from $29.95 to several thousand dollars a month,

depending on the amount of traffic your site receives. Or you could hire a

consultant like Stricchiola to analyze your traffic and broker a deal with the

search engines. But Stricchiola, who charges between $250 and $450 an hour,

warns that it often costs more in time and money to identify the problem than is

actually lost to click fraud. There are also alternative search engines, such as

Brooklyn-based BlowSearch, which guarantees that its advertisers will not

receive any automated clicks on their ads or they'll get their money back. Of

course, BlowSearch gets only a tiny fraction of the traffic of the big search

engines and offers less bang for the advertising buck.

In the end, you may have little option but to accept fraudulent clicks as a

cost of doing business and recalculate your expected advertising ROI

accordingly. That's what Karaoke Star is doing. Of course, it's also reserving

the right to sue.