The WSJ is reporting that advertisers have filed a lawsuit against Google and Yahoo, complaining that the advertising fees that they were charged, based on how many Google and Yahoo users clicked on their ads, were fraudulently calculated. This article grabbed my attention because the Google S-1 listed click-through fraud as a risk factor:
If we fail to detect click-through fraud, we could lose the confidence of our advertisers, thereby causing our business to suffer.
The registration statement acknowledged that the detection of fraud would not only cause Google to issue refunds to advertisers but would also cause advertiser dissatisfaction and eventual loss of advertising revenue. Google stated the risk in terms of markets, not of litigation. The market for online advertising would react and Google would suffer. However, advertisers have chosen to litigate.
More interesting though is the conundrum of how to price online advertising is a conundrum for transaction engineering (to borrow Prof. Gilson's phrase). My personal opinion is that if you create a system that can be easily gamed, then you take the risk of gaming. But how do you set up a sytem that either cannot be easily gamed or that shifts the risk of gaming to the party most able to prevent it? Here, the search engine has all the information on the incidence rate of fraud and detection of fraud, and the advertiser pretty much has to take that information at face value. How can the agreement be structured so that the advertiser is comfortable with that?
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1. Posted by Eric Goldman on April 5, 2005 @ 12:42 | Permalink
I think you could actually argue that ADVERTISERS have "the information on the incidence rate of fraud and detection of fraud" because only they know how many clicks turn into transactions. Eric.
2. Posted by Bob on April 5, 2005 @ 17:21 | Permalink
This is an old problem, starting with the origin of click-thru advertising. For another company, I repeatedly negotiated down monthly excessive charges in four figures before terminating click-thru contracts. The number of click-thrus exceeded our site's visits by up to six times. One ad agency said they had a problem with their counter. Yes, I agreed.
We did not have this problem with Google.
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