University of Southern California

'Click Fraud' Legitimate Concern, USC Marshall Study Shows
Third-Party Arbiters May be Needed to Strengthen Industry
March 11, 2008 • by News at Marshall

LOS ANGELES -- March 10, 2008 - Advertiser concerns about online search engines' commitment to battle "click fraud" may be justified, and the industry should consider creating third-party verification groups to quell those concerns, according to a new study by two University of Southern California researchers.

"There's evidence this is problem of more than $1 billion in scope and nobody has taken an impartial look at it before," said Kenneth Wilbur, an assistant professor of marketing at the USC Marshall School of Business. Wilbur collaborated with economics doctoral student Yi Zhu on the study. "The industry may want to consider creating third-party organizations, as other ad-supported media have, to certify the quality of their efforts to combat click fraud."

Search advertising has exploded in the past decade to more than $8 billion in revenues in 2007. Advertisers are increasingly looking to keyword search advertising because it reaches consumers who are looking to buy, and because all their actions online can be tracked and measured.

The downside of keyword search is that it can be manipulated and exploited by competitors or website owners who would display the ads and receive much of their revenues. Click fraud is a catch-all term that applies to online actions that increase a website's search-advertising revenues or exhaust a search advertiser's budget.

The Click Fraud Network (clickfraudnetwork.com), an industry watchdog organization supported by software company ClickForensics, estimates that about one in six clicks on search engines sites was a "high threat" to be fraudulent in the third quarter of 2007. More than a quarter of clicks, some 28.1 percent, on search engines' content network websites were considered a "high threat" to be fraudulent.

The paper by Wilbur and Zhu, "Click Fraud," applies economic theory to build a model of the search advertising market. It mathematically proves that click fraud can increase search-engine revenues under a variety of scenarios. The paper has been accepted for publication in Marketing Science, the top journal in the field of quantitative marketing.

Widespread click fraud has huge implications for the booming online advertising industry. And efforts to quell concerns about click fraud face a difficult Catch-22: If search engines reveal too muchabout how they prevent click fraud, they may reveal how those measures can be beaten. So they reveal little, forcing advertisers to trust what the search engines are doing, even as they have to pay for every fraudulent click that goes undetected.

In 2006, Google CEO Eric Schmidt sparked controversy when he said that eventually, advertiser distrust would depress keyword prices, self-correcting the problem. "In fact, there is a perfect economic solution, which is to let it happen," Schmidt said then.

The new study confirms the impact of click fraud on keyword prices. Advertisers, however,are more concerned about total spending, not justprices for a specific keyword. Click fraud automatically increases expenditures by increasing the number of paid clicks. The question is, when do depressed prices offset the rising expenditures from more clicks?

When a keyword auction is very competitive, click fraud depresses search-engine revenues, the study found. But in less-competitive auctions, click fraud can increase search-engine revenues, reducing their incentive to prevent click fraud.

The study says that the search-advertising industry would benefit by creating a neutral third party to authenticate click-fraud detection efforts. Such an entity could maintain confidentiality, while providing impartial verification of detection methods, an approach common in other advertising-fueled media. Nielsen Media Research measures TV audiences, Arbitron measures radio, and the Audit Bureau of Circulation authenticates newspapers. Even online banner advertising contracts are usually sold on the basis of third-party audience figures from comScore or Nielsen/NetRatings.

"We hope to call attention to the issue of click fraud," said Wilbur. 'We do not doubt search engines' good intentions, but their networks are so wide open that it is difficult to police all the network's users. We have suggested several mechanisms the industry can adopt to build advertiser confidence in the click figures they are getting."


About USC Marshall School of Business
Based in Los Angeles at the University of Southern California, at the crossroads of the Pacific Rim, the USC Marshall School is the best place to learn the art and science of business. The school's programs serve nearly 5,000 undergraduate, graduate, professional and executive-education students, who attend classes in facilities at the main Los Angeles campus, as well as satellite facilities in Irvine and San Diego. USC Marshall also operates a Global MBA program in conjunction with Jiao Tong University in Shanghai, China.


About the USC Marshall School of Business
Consistently ranked among the nation's premier schools, USC Marshall is internationally recognized for its emphasis on entrepreneurship and innovation, social responsibility and path-breaking research. Located in the heart of Los Angeles, one of the world's leading business centers and the U.S. gateway to the Pacific Rim, Marshall offers its 5,700-plus undergraduate and graduate students a unique world view and impressive global experiential opportunities. With an alumni community spanning 123 countries, USC Marshall students join a worldwide community of thought leaders who are redefining the way business works.