The Bill for Bad Clicks

The 27-page report criticizes search engines for providing no data to back up their often-stated claims that click fraud is under control and has no material impact on their businesses. Investors, too, are concerned about click fraud and likely will question the search engines about it when second-quarter earnings are released later this month.

"The current 'don't ask, don't tell' stalemate is impeding progress at a time when 27% of advertisers say they will reduce their pay-per-click spending and another 10% say they intend to do so," Outsell says. "The industry must openly acknowledge that there is a major problem, adopt independent audits and open itself to new approaches."

In response to the study, Yahoo! and MSN reiterated that they take click fraud seriously and are continuing to work on ways to thwart it. Yahoo! hadn't seen Outsell's report. MSN had no immediate comment. Google, which didn't respond to request for comment, has made similar statements in the past.

Search engines have long argued that they can't reveal data about click fraud for security reasons, an argument that Outsell disputes.

"The actual scale of the fraud, plus the buzz in the marketplace among advertisers and in the press makes this an issue that won't go away," Outsell says. "Search engines need to report the fraud they intercept, the fraud they refund, the claims they reject and the trends over time."

Worries about click fraud will continue, since spending on search is expected to hit $11.7 billion in the U.S. by 2010, up 170% from 2004, according to Forrester Research. The majority of the spending occurs on Google, the No. 1 search engine.

Last week, Yahoo! reached a settlement in a class-action lawsuit regarding click fraud. Earlier this year, Google settled a similar case for $90 million.

For now, Wall Street is willing to give the search engines the benefit of the doubt.

"The key point that is missed often is that click fraud, no matter how big or small, is already built into the pricing mechanism in the market because of the unique structure of paid search," writes Safa Rashtchy, an analyst with Piper Jaffray, who thinks that the Outsell report overstates the problem of click fraud. "Nobody is continuing to use search and lose money because of click fraud, and search is not facing the risk of declined usage because of that -- it's already there. It is like viruses on the computers and the Internet -- we continue to do our work, but with some hassle from time to time.''