The Google auction driven Pay Per Click advertising model responsible for the company’s $113 billion market cap is inherently vulnerable due to 1) click fraud and 2) bid price inflation.
In “Click Fraud: What does Google fear?” I discuss Google’s strategic assault against the work of click fraud consultants.
posting at the Google blog of a Google engineers’ penned ‘Troubling findings on how some third parties detect click fraud’: The Google 'findings' purport to expose the 'work of several click fraud consultants'...
fictitious clicks: events which are reported as fraudulent, but are never recorded or charged as ad clicks by Google.
Google’s efforts to undermine third party click fraud auditing services is but the latest tactic employed by Google in an aggressive public relations campaign to sway the public to believe that Google has the click fraud problem “under control.”
Google now calls click fraud “invalid clicks” and purports to provide advertisers data proving they are “filtering out” invalid click activity.
The Google AdWords feature claiming to provide advertisers a “detailed picture of invalid click activity,” however, merely reflects Google self-reported, internally generated data.
Google AdWords FAQ acknowledges such:
By creating an AdWords account, advertisers agree to accept the Google AdWords reporting system and reported metrics as provided in the AdWords program Terms and Conditions. We rely on our own servers' weblogs to supply site traffic data to include in your reports. Similarly, we rely on our data to determine whether a credit for invalid clicks is due.
BID PRICE INFLATION
The most powerful arsenal Google has in its public relations battle against click fraud, however, is Google’s classic ROI argument.
Google rarely publicly discusses a ROI rationale to support its contention that click fraud is not a problem, following Google CEO Eric Schmidt’s “let it happen” perfect economic solution presentation. An ROI, cost of doing business analysis, however, is the foundation for their confidence in Google advertiser acceptance of Google assurances that click fraud is not a problem.
Schmidt repeatedly asserts his belief in the superiority and invincibility of Google advertising products by touting what he claims is the unprecedented Google trackability and ROI.
In “Google CEO Eric Schmidt on recession, competition: Google makes more money” I cite Schmidt during last month's Q2 earnings conference call:
when organizations are under stress, they focus on the best economics, because they don't have as many opportunities, they have to be much more careful. We continue to believe that the Google advertising system is literally the best place to put your sales dollars. In a theoretical global recession such as what you were asking about, I'm sure that we would benefit by the fact that our performance is simply better than the other alternatives.
I also cite Schmidt at a press Q & A I participated in at the recent Search Engine Strategies Conference:
Google’s bottom line will be positively affected by both additional competition and in the event of an economic downturn, Schmidt also expressed…confidence in Google’s ability to continue to generate outsized gross margins, and to increase those margins.
During the Q & A, I suggested to Schmidt that his belief in advertisers’ willingness to continuously bid up the prices they pay for participation in AdWords might soon be tested.
I asked Schmidt if he was concerned that there might not come a day when advertisers object that Google’s out-sized gross margins are achieved at the advertisers’ expense and, subsequently, decide to revert to advertising purchase behavior more aligned with their own interests, that is to bid down prices to achieve higher ROI.
Schmidt emphatically responded: NO.
Schmidt’s supreme confidence in Google’s ability to continue to spur higher advertiser bid prices was also put forth during the company’s investor conference call last May:
There is a bizarre and curious aspect of competition in the advertising networks that I think many people do not understand, and it's worth explaining. The entrance of new competitors in a market which is untapped stimulates more advertisers and more advertising dollars…
So there's a net positive effect of the increasing competition.
That will be true until the targetability model that we are all pioneering here hits some natural limit. We're not anywhere near that limit. I'm sure there is such a limit. But we are nowhere near it. There's evidence that keyword prices could rise significantly. Budgets are typically under-spent, that people would spend a great deal more money in our advertising model if we had the products and services that could capture and exploit that with the appropriate measures.
Achilles statue, moment of dying, Achillion Palace, Greece.
While Google publicly touts what it says is the inherent targetability and ROI of its Pay Per Click advertising model, the company’s falls short of providing advertisers absolute clarity on the performance of their Google ad spend.
According to the Google AdWords FAQs:
Return on Investment (ROI)
The benefit gained in return for the cost of your ad campaign. Although exact measurement is nearly impossible, your clickthrough rate and your conversion rate combined with your advertising costs, can help you assess the ROI of your campaign.
To date, Google is profiting from the relative advertiser cost advantage of online ad spends, versus traditional print or broadcast placements.
Continuously rising Pay Per Click bid prices, however, coupled with the grossly unknown click fraud factor, renders Google’s unprecedented gross margins vulnerable.
As I reported yesterday in “Click Fraud: Google served with class action complaint claiming 'unfair business practices',” Google is again the target of legal action for click fraud liability:
Samuel Lassoff, a Philadelphia-based attorney, told me he filed a class action complaint against Google, Inc., in the United States District Court, Eastern District of Pennsylvania, accusing Google of: 'breach of contract, negligence, unjust enrichment and unfair business practices,' due to click fraud.
According to Lassoff’s filing:
In December 2005, plaintiff received an invoice regarding his Pay Per Click advertrising, where it was discovered that plaintiff was the victim of hundreds of dollars worth of fraudulent clicks… The defendant engaged in a scheme to hide their negligent handling of plaintiff’s advertising account. The defendant never warned the plaintiffs of fraudulent clicks or made any recovery efforts for the plaintiffs.
Given Google’s search market dominance, its lack of transparency and a $113 billion market cap, such click fraud liability claims will undoubtedly continue to surface.
The day will also come, undoubtedly, when advertisers demand third-party audited click fraud accountability of their ad spends with Google.
In “Google 'search shrinkage': click fraud debated in blogosphere,” I liken a "cost of doing business" analysis of click fraud to the "shrinkage" analysis common in the retail industry:
advertisers historically have demanded media accountability via audited circulation numbers and 'make goods'; high Google traffic and conversion statistics have led advertisers to accept a new notion of search 'shrinkage.'
While retailers know that retail shrinkage is negatively impacting their profits, and Google advertisers understand that "search shrinkage" is negatively impacting their ROI, reaction to the negative impact of shrinkage is quite different.
The retail industry is committed to eradicating retail shrinkage… Regarding losses experienced due to charges for fraudulent clicks, however, Google advertisers are considering the negative impact on profits as a "normal" cost of doing business, rather than as a deceptive theft. Google advertisers are not committed to eradicating "search shrinkage," at least not yet.
Google knows is at risk from both click fraud liability and rising Pay Per Click prices.
In “The Google risk list: Eight vulnerabilities impacting Google” I cite Google acknowledging its potential click fraud liability exposure:
If we fail to detect click fraud or other invalid clicks, we could face potential litigation as well as lose the confidence of our advertisers, which would cause our business to suffer. We are exposed to the risk of fraudulent clicks and other invalid clicks on our ads from a variety of potential sources…
If invalid clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising programs because the invalid clicks will not lead to potential revenue for the advertiser. This could lead the advertisers to become dissatisfied with our advertising programs…further litigation, as well as potentially leading to a loss of advertisers and revenues.
In the company’s 2005 Annual Report Google acknowledges:
We generate our revenue almost entirely from advertising, and the reduction in spending by or loss of advertisers could seriously harm our business. We generated approximately 99% of our revenues in 2005 from our advertisers. Our advertisers can generally terminate their contracts with us at any time. Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively affect our revenues and business.