In our discussion of keyword-based advertising, we focused quite a bit on keyword auctions where search engines would sell ad slots to the highest bidding advertisers. In our model, the value of a slot to an advertiser was determined by the expected clickthrough rate multiplied by the value of each click to the advertiser. However, what happens if the value of each click to the advertiser is overestimated? The advertiser ends up paying for more than they get in return.

As discussed in the Wired article, “How Click Fraud Could Swallow the Internet,” the pay-per-click model commonly used by search engines in generating revenue from advertising slots is easily and frequently exploited by click fraud. One big difference between our model and this model is that advertisers pay the search engine each time their ad is clicked. One type of click fraud involves a company’s competitor clicking on that company’s ads with the intention of using up that company’s marketing budget. Another common variety involves some website, carrying ads from a search engine and splitting the pay-per-click revenue with the search engine, where the website owner invites click fraud so he/she may profit from it. Fraudulent clicks are estimated to make up anywhere from 10-50% of all clicks, and some advertisers are not happy. A class action lawsuit against Google alleging that the Internet advertising giant had overcharged advertisers without taking click fraud into account was settled for $90M out of court.

The generic solutions preventing overcharging advertisers include ignoring repeated clicks from the same IP source, clicks which come in rapid succession, and probabilistic models. The more elegant methods are not discussed by search engines for security reasons. The techniques for generating click fraud revenue are perhaps most interesting. Spammers can create spam blogs called splogs, which copy pieces of popular websites along with certain keywords, sign up as an affiliate of a search engine, then link themselves to popular websites in order to be listed high among search results. Confused users end up on these sites and click on ads which generate revenue for the site owners. Perhaps most dangerous fraud technique is the zombie network, where rogue hackers control multiple computers without the computer owner’s knowledge, and can therefore create click fraud from different IP addresses and at random intervals. Such a network was recently discovered by Dutch police where 1.5M computers were controlled by 3 men.

The difficulty in both our auction model and pay-per-click is appropriately determining the value a click has to an advertiser. The big thing nowadays is the pay-per-action model where an advertiser sets a value for a clicker performing some action on their site(such as filling out a form or buying a product), and then pays the search engine. This, however, requires more cooperation between search engine and the advertiser. The fight between click spammers and search engines/advertisers is only likely to get bigger as Internet advertisement continues growing. As it grows, it will also become more interesting as technological factions fight to break or protect the economic models that drive Internet advertisement.