It’s the problem that Google insists isn’t a problem and a topic that many online advertisers would prefer to ignore, but click fraud is potentially the biggest threat to the cost-per-click (CPC) advertising market.

And according to Click Forensics, “the leading provider of click fraud prevention solutions that help online advertisers and publishers stop click fraud before it happens,” click fraud is on the rise.

On January 31, Click Forensics published its latest Click Fraud Index. It showed that:

  • In Q4 2007, the “overall industry average click fraud rate” increased to 16.6% from 14.2% in Q4 of 2006.
  • The average click fraud rate of CPC ads that are displayed on content networks such as Google AdSense was 28.3% in Q4 2007, up from 19.2% in the same quarter of 2006.
  • Botnet-originated click fraud rose 15% between Q3 2007 and Q4 2007.

Of course, these statistics are far-from-definitive in my opinion. That’s not only because click fraud is often difficult to define and identify, but because Click Forensics sells solutions that are designed to fight click fraud, it obviously has an interest in playing up the problem. As such, the company’s report should be taken with a grain of salt.

Nonetheless, click fraud has been the elephant in the room for the CPC advertising business for some time and based on my personal experiences and the anecdotes relayed to me from associates and friends, I personally believe that click fraud is a real problem.

While it’s difficult to quantify accurately, the extent of the problem is probably closer in size to the picture painted by Click Forensics than that painted by companies like Google, which contend that they have effective measures in place to defend against it.

Given that CPC advertising is now a multi-billion dollar business, has spurned an entire ecosystem of consultants and service providers and is considered by many to be the most accountable form of online advertising, it’s clear that click fraud is a sensitive topic that has the potential to undermine the health of the online advertising business.

Even if you personally believe that the extent of click fraud has been overblown, perception is reality and reports like that issued by Click Forensics do have the potential to change perceptions.

At the end of the day, however, reports, personal experience and anecdotes shape my beliefs less than a logical evaluation of the situation.

I believe that click fraud is happening on a wide scale because it simply wouldn’t make sense if it wasn’t.

As Melissa Lafsky of the Freakonomics blog at New York Times asks:

“…if a criminal act is profitable, widely-practiced, seldom prosecuted and unusually easy to carry out, how many people will commit it?”

The answer, is logically, quite a few. And, like any other criminal enterprise, the extent to which the most sophisticated individuals will go to maximise the profits is significant. After all, click fraud is a perfect vehicle for fraud:

  • The barriers to entry are low. Setting up websites and joining CPC content networks such as Google AdSense is a simple, low-effort process and there are a number of easy ways to engage in click fraud that don’t require much skill.
  • The odds of being detected are fairly low. Major CPC services see millions upon millions of clicks. This provides the perfect cover for nefarious activity. While I don’t doubt that advanced fraud detection systems have been developed by major CPC networks, the volume of clicks certainly favors the fraudsters, especially those who are most sophisticated and use techniques such as botnets to mask their activities.
  • There are few consequences if caught. Unlike criminal activities (i.e. identity theft) for which punishment can be severe, click fraud is low-risk. To my knowledge, nobody has ever been prosecuted criminally for click fraud, even though Google curiously had authorities drop a case against a man who tried to extort the company over a click fraud application he created. At worst, a criminal or opportunist will find his or her account terminated. For sophisticated criminals who are used to disappearing and reappearing, this is hardly a deterrent.

Beyond the fact that click fraud is a perfect vehicle for criminals and opportunists, however, I think that the biggest factor in making CPC fraud a serious problem is that the economics of the CPC business align the interests of the Googles of the world more with fraudsters than with advertisers.

While it’s obvious that Google, for instance, would not be well-served by letting click fraud run rampant, it’s also obvious that Google is a direct beneficiary of click fraud – Google makes money when AdSense fraudsters generate clicks.

Even if this benefit is not intentional, Google is faced with a difficult balancing act. It clearly cannot allow blatant fraud attempts to occur unchecked, but it has less incentive to try relentlessly to weed out smaller and more sophisticated attempts that are unlikely to be noticed by advertisers.

At the end of the day, I think the reason Google had authorities drop a case that prosecutors considered a “slam dunk” is that the case threatened to provide a detailed look inside the world of click fraud.

Maintaining an environment where the topic is relegated to speculation and debate was more important than seeing an individual extortionist prosecuted for his actions. After all, billions of dollars are at stake.

In my opinion, click fraud will eventually have to be dealt with more effectively. I no longer use CPC advertising because of it and I have associates who have either made the same decision or who have cut their CPC budgets significantly.

Like all forms of advertising, CPC has its strengths and weaknesses. It is not a panacea and never was, but it also doesn’t have to be a perfect vehicle for fraud.

Pretending that it hasn’t become one isn’t doing CPC stakeholders any favours in the long run.