The Bill for Bad Clicks

Click fraud is a $1.3 billion problem that affects Google(GOOG Quote - Cramer on GOOG - Stock Picks), Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) and Microsoft's(MSFT Quote - Cramer on MSFT - Stock Picks) MSN, along with publishers and advertisers, according to a report released Wednesday by market researcher Outsell Inc.

Click fraud is a long-standing concern of search engines, who charge advertisers based on the number of times someone clicks on their ads. The problem manifests itself in many ways, such as when someone clicks on the ads of a competitor to drive up their marketing costs. Other times, Web site publishers improperly click on their own ads to get revenue.

The company, which estimates that 14.6% of all clicks are invalid, reached its conclusion from a survey of 407 advertisers who together spend $1 billion annually. Outsell, which pegs the U.S. search market at $5.5 billion, estimates that $800 million in search advertising spending is wasted. The survey also found that 27% of advertisers have cut their spending, on average, by 33% because of concerns about click fraud, equal to $500 million in lost revenue for the search engines.

"That means that the industry -- as fast as it growing -- is being dragged back," says Chuck Richard, Outsell's media analyst. "Because the search engines don't report on their statistics, advertisers are free to dream up whatever numbers that they want."

Click fraud is very hard to quantify because there is no standard definition of what it is, and the problem is hyped by companies who are trying to sell anti-click fraud services. In addition, search engines, which refund money to click-fraud victims, don't provide advertisers specific information about which clicks were invalid, says Kevin Lee, former chairman of the trade group Search Engine Market Professional Organization

"It's something that marketers should be paying attention to," he says, adding that Outsell's 14.6% fraudulent click estimate is higher than others he's seen. "People who sell reports are similarly tempted to hype the number."

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