A perspective on why click fraud won’t ruin the domain name industry.
Google (NASDAQ: GOOG) CEO Eric Schmidt learned an important lesson in July 2006. When asked at an economics conference if there was an economic answer to click fraud, Schmidt said “Let’s imagine for purposes of argument that click fraud were not policed by Google and it were rampant … eventually the price that the advertiser is willing to pay for the conversion will decline because the advertiser will realize that these are bad clicks. In other words, the value of the ad declines. So, over some amount of time, the system is, in fact, self-correcting. In fact, there is a perfect economic solution, which is to let it happen.â€
Taken in the context of an economic summit, and prefacing his comments with the caveat that this was not Google’s answer to click fraud, his arguments make sense. But taken out of context, as they were in the media, these comments sound like Google isn’t doing anything about click fraud. Schmidt quickly learned that he’s now a politician. Politician’s comments get taken out of context frequently.
But Schmidt is right. There are two types of click fraud. One has an economic solution and the other has a technology and policing solution.
The first type is universal click fraud. This is click fraud that hurts advertisers equally. Examples include someone clicking on Adsense ads or sending a bot to do the same. Because this doesn’t affect one advertiser more than its peers, the fraud simply gets priced into the advertiser’s bidding. Advertisers don’t care about click prices. Advertisers care about conversion prices. If a mortgage click costs $2 and one out of twenty people completes a lead form, the conversion cost is $40. If there is click fraud, the conversion rate will go down. If the lead form starts converting at one of forty, the advertiser will lower its bid price to $1.
The second type is targeted click fraud. This is fraud against a particular company, such as a competitor. This changes the economics of the conversion price and puts companies on uneven footing. This must be addressed with technology and heavy policing.
The domain name community is concerned about click fraud. Pay-per-click is the lifeblood of our industry. In Domain Name Wire’s 2006 domain survey, 34% of respondents said changes in the pay-per-click market are the biggest threat to the industry. That’s more than any other threat.
But over the long run this issue will not affect the industry much. A combination of economic and technological forces will help. But a shift in advertising methods will make pay-per-click irrelevant. Eventually, most advertisers will pay domain name owners for each conversion, not each click. Affiliate programs already offer this platform. Google is testing it. And Idealab, the incubator responsible for launching the entire paid search market, has a new startup applying the pay-per-conversion method to search marketing (Snap.com).
So rest easy, my fellow domainers. Click fraud won’t sink us.
Just don’t click on any ads on your own domains.
Steven says
I do not agree at all.
Google has ignored the click fraud issue until 2006.
Shame on them.
Editor says
Steven, I don’t think they’ve been ignoring it. They have given advertisers credits for bad clicks since day one. They’re technology for discovering these clicks is quite good, too.