Click Fraud: Online Advertising Trends.
The New Market: Big Business and Increased Traffic
By Konstantine Kyros
This article is intended to give my perspective on the rapidly
changing dynamics of the internet and market conditions (entering
2006/2007) and to further understanding of the issues advertisers
confront with their online spending. The argument is conjectural
to some extent but the data that I have gathered so far supports
the ideas developed here. I welcome feedback.
Basic position of this article is that the costs of advertising
online are based on traffic delivered to raise revenue for the
search engines and not on natural consumer behavior. The search
engines have changed the costs in a number of ways: mainly by
delivering a large volume of click traffic from sources that
do not create inquiry.
Introduction:
Google and Yahoo are multi-billion dollar businesses that have been built almost solely through advertising revenue. As a result advertising online now reflects a cost imposed by the search engines that is no longer dependent on actual user behavior. The formal distinction between paying for a performance based CPC (cost per click) and a flat advertising fee has been blurred and the price to have ads displayed is now de facto set by the search engines themselves.
Brief History: The original guiding concept of the search engines that was formulated out of the communitarian computer culture of the 1990s was non-commercialization. The search engines were intended to deliver search results with altruistic dedication to the dissemination of knowledge that would uplift mankind. The search engines were guardians and gatekeepers of the promise of education through universal knowledge- free of charge. Of course, the results of a particular search could yield the favored site owners large revenue if they were lucky. Luck, gave way to search engine optimization, which was staunchly opposed and numerous attempts were made to make sure the search results were "natural." There was fanatical resistance to any form of advertising especially in search results. This altruism worked well as long as billions of investor dollars freely flowed and promises that the internet would change everything pushed stocks higher. Unfortunately many of the dramatic changes did not materialize, many companies collapsed and revenues dried up.
The non-commercial guiding principle of a search engine persisted, but the revenue from all of the traffic did not benefit the companies themselves who styled themselves the portals through which the internet was available. In 2001 in an article called: "The End for The Search Engines?," the well known search engine writer Danny Sullivan warned against a"free for all" and complained that certain engines cease calling paid links "Featured Listings" or "Partner Search Results" and "use more honest terminology" to identify them as advertising. A small company with a search engine called Goto.com (Goto became overture.com and was then bought by Yahoo- the father of all ppc advertsing) attracted attention when it cash revenues were derived 100% from search ads. Sullivan derided it: "GoTo really is no longer a search engine and rather a search engine ad network..." Resistance broke down only slowly, with the search engines doing limited advertising that was to be "clearly labeled," as such etc, etc All the while still promising that they would not compromise the "integrity" of the engine and the "quality of search." The major portals did not want to risk offending the self appointed internet culture netizen watchdogs who viewed advertising of any kind with deep suspicion and assured the engines that public outrage would follow any attempt to commercialize search.
Entering 2006/2007
Today the debate over the commercialization of the internet has ended and no one cares. The traditional guardians are gone and more likely to be incorporated into the industry especially with multi billion dollar revenues available to turn critics into analysts. Large scale advertising practices are institutional and have dramatically altered the internet landscape. Most of the ads are text based and appear in response to a search for a key word or phrase. Most consumers cannot distinguish between ads and the natural search results (exactly what was feared by the opponents of advertising). Yahoo has also monetized the natural listings with its paid inclusion programs and a web site listing in the Yahoo directory costs $299 per year. Far being a marginal area, looked askance by traditionalists seeking "real content,"advertising search content has been catapulted to forefront of multi-billion dollar companies. Both Google and Yahoo report monster revenue generated almost entirely from search advertising. This year so far Yahoo reported net income of $1.2 billion on revenue of $3.75 billion, compared to earnings of $467 million in 2004. Google reported net income of $1.1 billion on revenue of $4.2 billion, compared to net income of $195 million in 2004. (Cnet News) Yahoo's CFO states "Two years ago we had no sponsored search listings. Today they account for 60 percent of our revenues." Google's even greater income is almost entirely driven from its advertising (Nearly all of Google's revenue comes from advertisements that appear on search result pages and on partner sites) (Cnet News)
Advertising Online:
With this amount of income the search engines have hit upon an advertising model that works (so far). There are several types of pricing models employed for advertising online: 1) Cost Per Thousand Impressions (usually called CPM) these are employed on banner networks and are not based on the ads performance. The chief asset of a CPM campaign is the ability to brand. 2) Cost Per Click (CPC) the model used by most Yahoo and Google advertising including our firm. 3) Other models could be based on performance exist Cost Per Lead acquisition or registration etc
The preferred advertising pricing are the performance based CPCs, with which we are familiar. The theory behind these ads is that consumers search will honestly and randomly find the advertising text, click on it and hopefully convert to an inquiry. This model historically worked well delivering a good return to both advertiser and search engine. The problem is that once established these ads would in theory be fluctuating (based on auction style prices), and finite sources of revenue. Analysts originally argued that the financial problem facing these models was in inducing the advertisers to raise the bids, and believed that in order for the CPC ad model to work the bid price of keywords would need to be much higher. For example in 2001 according press reports on Goto.com's earnings (then a mere 62 M- break even):"GoTo said much of its success was due to higher prices it's been able to charge advertisers, which pay on a cost-per-click basisThe company said it has seen the average cost increase steadily since February, to $0.21 per click, up from $0.16 last quarter." The analysts were wrong. The way to the big dollars was not to increase the relative CPC, but to expand the number of places the ads are displayed and further to expand the number of clicks to those ads. (Ironically resulting in lower bids!).
Since a finite universe of searchable keywords means a finite source of revenue. Yahoo and Google have both aggressively expanded their content network to display the revenue producing ads. That is, both companies have pushed out the number of searches by placing the ads on websites other than the search engines themselves. This is done both openly and clandestinely. Both companies openly sell content network ads which have a demonstrably higher click through rate and a much enough lower conversion rate. In other words they have managed to generate more clicks and revenue without substantially adding value. In some cases the advertiser can opt out of these new programs, but this disrupts revenue and the engines now bundle the good advertising with the bad and sell an advertising product that is not all that it appears to be.
The clicks keep coming.
Google Adsense.
According to press reports at the end of October 2005: "Google
saw its third-quarter revenue nearly double from a year ago and
profit rise in what usually is a slow Web surfing period."
Strange? Not really, 43% of Google traffic now comes from the
notorious Adsense program. Commenced in June 2003 the Adsense
program is a large network of affiliate web sites. Originally
the concept was that quality, private web sites would display
Google ads and the publishers would share in the ads revenue.
In practice the result is a vast network of web sites created
that have no other purpose than to display Google ads in order
to generate revenue for the site owners. The owners take a small
slice of the pie each time someone clicks on the google ad displayed
on their own web site. These ad network amounts to what Perry
Marshall ( a well known expert on Google marketing) calls a "stupid
tax." While sophisticated marketers can opt out of these
networks, the vast majority of advertisers do not and Google
and the Adsense site owners reap the profits.
The Adsense phenomenon is particularly acute in the Mesothelioma arena. Since Mesothelioma is one of the highest CPCs of any search term online (at or near $100 was common until recently) an entire industry has grown up around the term, fueling a massive surge in non consumer traffic. Indeed our own site was flooded with emails of new affiliates gloating and taunting us that they had learned about the term from the Wall Street Journal or Forbes article that mentioned the term at $100 per click, one emailer chortled: "Thanks Forbes for leading me to this site ". At the bottom of every search for mesothelioma and related terms are dozens of "adsense sites" sites created with the sole purpose of displaying Google ads and attempting to profit by a simple game of arbitrage buying low costs clicks and selling high costs affiliate clicks from their own site. The potential for abuse is obvious and documented in litigation against Google for allowing the practice (as well as Google litigating against over zealous site owners, in one suit against a firm who hired 50 full time employees to click on the ads on their own sites.).
An Ebay auctioneer actually sells fully created Adsense sites ready to go to prospective affiliates. The ebay auction invites and explains:
"How About A SECOND STREAM OF INCOME From Your 1,225
Mesothelioma Website
Pages? Use Google's AdSense To Earn Even More Every Month! You
Earn When People Click On Mesothelioma Related "Google Ads"
That Appear On Your 1,225 Webpages! Imagine Displaying Mesothelioma
Ads On Your 35 Websites (That's Over 1,225 Pages On Content)!
Bid Now!
Google has made billions using this technique. Advertisers are getting smarter and more sophisticated ones (ourselves among them) do not have anything to do with adsense. Google has tried to answer its critics and has responded by offering the advertisers the ability to pay a different CPC on the adsense sites and offered cash incentives to re-try the program. It should be noted that Google also has a new targeted site program where advertisers can select certain sites to display ads on- most of these were high traffic Adsense sites that were admitted to the program, though some many be a reasonable alternative to straight Google/AOL display ads.
Yahoo Search Marketing
When Yahoo acquired Overture in 2003 it immediately set about
widening the reach of the ads beyond simply yahoo.com. Overture
at the time had revenues of about 1 Billion, 65% of which were
generated from text ads on yahoo.com. Yahoo has been building
its network largely behind the scenes and has employed a number
of unsavory tactics including ad networks based on adware and
spyware. These are essentially programs that are unwittingly
installed on users computers that generate pop-up ads. The ads
generate revenue for the company whose software has generated
the ads (and of course Yahoo) which are now on millions of computers.
The domain parking companies and "fake
search engines" are rich with fake traffic sources and people
gaming the search feeds.
More openly, but equally dubious is the Yahoo syndication partnerships
which includes sites (essentially fake search engines like ewoss.com
that miraculously deliver traffic.) Yahoo has christened its
the new program Yahoo Publisher Network and bills it as a competitor
to Google's Adense, wherein small web publishers can earn revenue
by displaying Yahoo ads. Thus just as Google, Yahoo has been
building networks honed and developed to the point where they
offer the prospect of guaranteed revenue and traffic, that is
unless advertisers abandon them en mass- which is not likely.
However, there is a strong need to continue to promote the
notion that the price is still really based on performance i.e.
a CPC that represents an actual user. That is after all the sales
pitch and the way the odd idea that a click is meaningful began. When in fact, the majority of the CPC traffic
is no longer derived from consumers looking for the service,
but is in fact the product of a vast staged network of revenue
production in the form of self created traffic or the promotion
of syndicated network traffic from sites created to generate
clicks.
Click Fraud: Confused Debate
The increasing awareness of "click fraud" misses the
real issue for advertisers because the click debate is focused
on competitive click tactics and over zealous Adsense advertisers.
Thus the debate assumes a measurable baseline of natural user
clicks as compared to the fraudulent ones. However a click does
not represent anything in terms of true value as a delivered
click is not a sale or lead. A CPC was a useful measure when
the clicks were really predicated on users searching for information
and the concept of search engines was the integrity of search.
The real issue for advertisers is the spurious idea that the traffic being delivered represents real users and not simply advertising fees based on delivered "clicks." The search engines are now beyond the realm of fraud because the delivered traffic is produced at a level calculated to make money for the companies. In a deft and seemless manner the entire search engine notion has slowly been turned on it head without much of a hue and cry because the "watchdogs" such as Danny Sullivan his search engine watch are now part of the industry. The subtle difference between additional traffic sources and fraudulent ad sources makes it nearly impossible to argue vigorously that a species of fraud is fueling these companies success. Fraud is only useful as a concept in a framework that considers a search engine an organic tool which it no longer is. The fraud has become the process itself, the fraud is institutional and so pervasive it is almost no longer visible. The CPC model as currently conceived consists of costs created by the search engines who are setting what has become in effect a de facto price based on the metrics that deliver ad revenue.
Price- Getting it Right: A Theory of How Search Engines Establish Price
Another component that is fueling the highly fluctuating market in PPC advertising is pricing. Under perfect market conditions the cost per click would reflect a market efficient price. Since there can never be a truly efficient market, the search engines decided to design a pricing model that would aim for it: the auction system. The auction system promised to deliver the best price by allowing competitors to duke it out in bidding wars and arrive at or near an efficient price.
More importantly the auction system educated the search engines, it let the search engines know what terms had value and gave them a wealth of market data. The self service advertising system in essence opened the doors to the innermost secrets of millions of businesses. By mining this data the search engines realized that the auction system did not produce the desired efficiency in price for myriad reasons: changes in ad budgets, aggressive competition that hindered new entrants, advertisers content with a low price etc etc My own experience evidences this dramatically. I had a #1 position for "mesothelioma" locked in at $100 per click in Yahoo for 6 months in 2004- at the time $100 was the maximum bid and we were the first to bid at that price and thus all competitors were below us no matter what their bid (they all bid $100). At this seemingly staggering CPC we were very comfortable. Then, a few months later Yahoo decided to lift the limit and allow bid prices up to $999. This threw the bidding into flux, but failed to produce the desired optimal price and the search engines embarked on a more sophisticated plan. Noting that today 12/05 that the CPC for "mesothelioma" is around $10 and the costs are similar. Google's system has long been ahead of Yahoo's as a revenue model and is even less transparent.
Although we do not know the exact mechanism the known facts and my experience lead to the conclusion that the networks that have been created can be accelerated to generate clicks as the search engines decide to in effect create a differential price without relaying on the advertisers moving bids up or down. As illustrated by the case of mesothelioma: In 2004 while locked at #1 the number of clicks averaged about 20 per day for a cost of around $2000 per day. In December 2005 the number of clicks averages over 100 per day on that term for similar daily costs at a CPC of $10 to $20. Thus in the case of high value search terms the engines are attempting to deliver traffic to a point of efficiency. Since the search engines cannot know the efficient price they experiment with the delivered traffic. Google again seems way ahead on this ability. Thus on the term Mesothelioma, the engines know from past revenues that up to X dollars has been spent per day, they can push the traffic up to and beyond X to determine what the market will tolerate.
This process probably called something like "traffic testing" or "break point" inside the search engine companies, and has the effect (or at least the aim) of getting at the most efficient price per keyword rather than simply leaving it up to chance and random bidding wars. The metrics of this process need more research.
Getting Leads, Signing Cases: The Effect of The New Dynamics
The overall increase in delivered traffic has changed the way marketing is done and has made budgeting more difficult. To name a few areas, the new market has had the following effects:
1) Timing. Since the traffic delivered is no longer the result of spontaneous user search, time period adjustments are critical. Evenings, weekends, days where leads are not likely to be produced need to be regulated. In the recent past such times were slow and traffic was slow. The ads could be safely left alone with sustaining high costs. Today these times can produce similar costs and no leads. Bid adjustment on high traffic terms has become important in budgeting.
2) Lower bids. A dramatic unintended effect of the de facto differential pricing is that the bid price of keywords has fallen across the board. Terms like PPH, mesothelioma, Erbs Palsy, CP etc all are at about 25% of historic highs. In case of meso the bid is 10% of what is was in January 2005- with similar costs per day. Advertisers have had a readjustment period, sometimes a painful one. In many cases this has benefited my advertisers, eliminated or slowed competitors confused by the new landscape.
3) Uncertainty and monitoring. The new traffic is delivered sporadically and is not uniform. In many cases the engines adjust the number of clicks up or down in short periods. Advertisers generally can tolerate an up cycle and adjust bids downward, many competitors who do not end up exhausting budgets quickly. The uncertainly and fluctuation probably also has the effect of confusing advertisers to the point where they either give up or overspend and also makes the market an opaque battleground in the near term.
Conclusions: Main Points
1) Advertising costs online are based on delivered traffic determined
by the search engines and not solely on actual consumers clicks.
2) The search engine concept has shifted from being an organic
search tool to a commercial enterprise.
3) The search engines have created and partnered with large networks
of sites that deliver traffic that does not produce consumer
inquiry.
4) The traffic is probably delivered to maximize revenue as well
as to determine the best price per keyword.
5) The process being employed by the search engines has the effect
of creating uncertainty and confusion for advertisers.
6) For advertiser purposes the current market in its uncertainty
has many benefits that reward the diligent and aggressive advertiser.
These market conditions create inefficient and dynamic pricing,
along with poorly informed and less prepared competitors.
Note: I wrote this Article in Jan 2006 and
revised it Slightly Since.
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