Click Fraud corrections

Google CEO Eric Schmidt says that click fraud has a built-in economic solution—as advertisers see less of a return on their ads due to fraud, they’ll reduce the amount they’ll pay for ads thereby making the value of click fraud drop off.

Scott Johnson disagrees.

Ebay spends $90 million dollars per quarter on Google ads. So lets say that 15% of those dollars are due to fraud. How do you think Ebay feels about spending $13.5 million as a “cost of doing business” with Google. Its easy to make the “cost of doing business” argument when you use percentages or when you’re not dealing with giant campaigns but $13.5 million is real money; there’s no way to rationally say “Let me waste $13.5 million”. None.

Scott’s just plain wrong—but a little right at the same time. Economic laws tell us that click fraud will sort itself out. But I don’t think that Google or anyone else wants to wait for that to happen. There’s something that Schmidt seems to be missing.

As advertisers realize that click fraud is costing them business, they will reduce the amount they are willing to pay for ads. Ad click payments will drop. But click fraud won’t drop at the same rate. You see, there’s just too much economic incentive to create fake clicks. So we have a reduction in ad rates, and a non-similar reduction in fraudulent clicks. We still have fraud, so advertisers continue to reduce the amount they pay. This continues on until CPC rates decline to the point that they’re irrelevant.

The problem is that the benefit to the advertiser approaches zero much faster than the benefit to the fraudster. It is cheap—and getting cheaper—to create click fraud. This isn’t a scenario that CPC ad vendors should look forward to.