Google 'search shrinkage': click fraud debated in blogosphere

Google CEO Eric Schmidt contends that Google advertisers being billed by Google for fraudulent clicks is not inherently troublesome because, in a "perfect" economic sense, the money paid for the invalid clicks will be factored into advertisers' ROI calculations as part of the cost of doing business with Google.

In my story last week, "Click Fraud: deceptive business practice, or cost of doing business.” 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. The DMReview published in its February 4, 2005 issue:

Retailers Cuting Inventory Shrink with SPSS Predictive Analytics Softwaare

Major retailers are harnessing SPSS predictive analytics software to reduce inventory shrinkage through stocking, placement and monitoring of those retail items most likely to disappear. Retail shrinkage - a reduction in inventory primarily due to shoplifting and employee theft - spikes dramatically during the Christmas season.

While retail shrinkage has shown a long-term decline, it still remains a huge problem: recent figures from the University of Florida's National Retail Security Survey peg shrinkage at more than $34 billion per year...

With retailers counting on part-time seasonal help during the holiday season, inventory reduction poses a daunting problem for retailers and consumers alike. Experts believe that the average family spent $400 more last year than it should have to cover the costs of stolen merchandise.

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.

Here is a taste of what fellow bloggers have to say on Google, click fraud and Eric Schmidt:

James Gross, JG etc.:

Eric Schmidt’s comment's on click fraud being ’self correcting’ has to be looked at as a terrible PR blunder for Google.

There is a much bigger problem to click fraud than just advertisers maintaining an “efficient buy”. In the Web 2.0 world of easily being able to create content; spam, spammers, and the people making money in fraudulent ways are creating a system that can potentially cripple the net we know.

Schmidt claiming efficiency in this case, is like the cost-benefit analysis Ford had used to compare the cost of an $11 repair against the cost of paying off potential law suits. Regardless of how inefficient other mediums of advertising are, “we are right, you are wrong” economic efficiency talk does nothing good for the ecology of the net.

Scot Karp, Publishing 2.0:

In theory, he’s right, but theory may not be the issue. The market-driven solution will only work if advertisers are willing to play along, and...they may not be.

To get a sense (no pun) for how much AdSense has become an end unto itself, from gaming to outright fraud, all you need to do is Google “ASense” and check out the ads — a cottage industry of “get rich quick” schemes has grown up around AdSense.

Joseph Weisenthal, The Stalwart:

in an efficient market, Schmidt and I see eye to eye.  But there's some obvious counter-evidence to this: people are making money for doing nothing.  So, say I publish a blog, run Adsense, and ring up a bunch of phony clicks (somehow evading Google's algorithm-based detectors).  Whether it's Google or the advertisers paying, someone's paying me for cheating.  That's a flaw.  It may be a tolerable flaw, but a system that rewards people for gaming it is not a perfect system.  If the advertisers don't mind (because they've adjusted their expenditure), then it's Google shareholders who are paying.

Nick Wilson, Peformancing

I don't claim ot be a click fraud expert, but to dismiss it as "self correcting", whilst appearing to be very neat and clever (particulary as the GOOG biz model depends upon PPC), just doesn't ring right

Don Dodge on the Next Big Thing:

There are of course a class of web sites that are set up solely for advertising fraud. Anyone who allows their ads to be run on these sites gets what they deserve.

Advertisers should hold Google accountable for click fraud by lowering their bids on key words. They should also try Microsoft AdCenter or Yahoo to see how click traffic quality compares.

UPDATE: "Court expert on CPC model: 'inherently vulnerable to click fraud' " and "Click fraud: are advertisers sufficiently protected? "