Click Tricks Irk Google

Investors struggle to get a handle on click fraud.
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Google

(GOOG) - Get Report

investors can probably scratch click fraud off their list of worries ahead of Tuesday's fourth-quarter earnings release.

While advertisers are concerned about click fraud, so far the problem doesn't appear substantial enough to cause them to cut back on their search advertising spending. For now, click fraud is more of an annoyance, one that advertisers say that Google and its rivals such as

Yahoo!

(YHOO)

need to remain vigilant in combating.

"Click fraud is an issue for the search industry," says Dean DeBiase, chief executive of search and digital marketing firm Fathom Online. "This year the search sector is projected to grow at a robust rate of 25%-30%, so while click fraud is an issue, it is certainly not deterring or threatening the growth of search marketing."

The specter of click fraud has hung over Google ever since Chief Financial Officer George Reyes described it in a 2004 interview as a "threat" to Google's business model, which relies on the sale of advertising using a pay-for-click model. In its latest 10-Q, Google says that if it fails to curb the problem the company "could lose the confidence of its advertisers."

Despite the ominous sounds of these warnings, there is no sign that the fear of click fraud is hurting Google's earnings. Fourth-quarter results, which come out Jan. 31, will show Google's sales excluding some costs almost doubling to $1.29 billion on earnings per share of $1.76, according to Thomson Financial.

Anecdotal evidence abounds in media reports that advertisers are getting ripped off by click fraud. Figuring out the extent of the problem is difficult because the problem also is being hyped by companies that sell services to fight it.

JupiterResearch analyst Sapna Satagopan estimates between 5% and 10% of ad traffic is fraudulent. While that's a good-sized chunk of traffic, her estimate falls far below other forecasts, which have the scourge as high as 30%. She emphasizes that click fraud hasn't done much to dampen the enthusiasm among advertisers for search.

"I wouldn't put it anywhere beyond 1 or 2 percent who are reconsidering their search marketing campaign," she says.

Google doesn't disclose how much money it refunds to customers because of click fraud or offer any data on its efforts. The company, though, stresses that it takes click fraud seriously as does Yahoo!, its nearest rival in the search market.

"We have been aware of this issue since the beginning of our advertising network," says Google product manager Shuman Ghosemajumder in an interview. "We try to automatically distinguish between what we would consider between valid and invalid clicks."

Click fraud occurs for various reasons. Some advertisers try to click on their rival's ad to drive up their costs and weaken their competitive positions. Other times people compete on their rivals' ads to make it appear as though their victim is trying to improperly inflate traffic to their site.

Google tries to stop the invalid clicks from reaching advertisers' accounts. That effort often is successful, which minimizes the amount of money that it's forced to refund customers, Ghosemajumder says, declining to be more specific.

Yahoo!, which has been increasing spending on people and technology to flight click fraud, sees it as a "serious but manageable issue," says John Slade, who oversees Yahoo!'s anti-click fraud initiatives, in an interview. The company tries to keep its methods close to the vest.

"You don't want Brink's publishing on the Internet

the time and details of when their armored car is going to be pulling up to your local bank branch,'' he says.

Advertisers may face difficulty in getting refunds as the click fraud methods become more sophisticated.

"It is certainly not going to bring the Internet to its knees," said Michael Kessler, the head of New York-based Kessler International, which advises companies about the problem. "Companies are paying hundreds of thousands of dollars that they shouldn't be paying. The fraudsters out there have got it down to a science."

Google tries to process refund requests as expeditiously as possible, Ghosemajumder says. The company also kicks people out of its AdSense and AdWords programs who are found to be abusing the system, he says. Advertisers buy keywords on Google's Network through AdSense. AdSense allows publishers to post Google ads on their Web pages.

The impact of click fraud may be visible in Google Network revenue, says Scott Kessler, an equity analyst with Standard & Poor's, who has one of the few sell ratings on the stock.

During the third quarter, revenue on the network, which uses AdSense, grew 76% -- compared with 115% gain seen in sales on Google's own sites.

"There are a lot of folks out there and in some cases at people at large and small organizations that are starting to dip their toes into the pool of Internet advertising," S&P's Kessler says. "That is where the impact could lie in the coming months and years." Scott Kessler and Michael Kessler aren't related.

As search engines grow in popularity, so will the incentive to cheat. Spending on search engine marketing is expected to top $11.1 billion by 2010, up from $5.75 billion in 2005, according to data from the Search Engine Marketing Professional Organization.

"There is no question it will get worse. It's just too easy to do," says Internet entrepreneur and blogger Mark Cuban in an email interview. "Kids are setting up Web sites on a daily basis and getting their friends to click on each others' sites. I don't know how big a percentage of total

pay per click business it is, but in absolute dollars, it's not trivial."