Danny Taggart's Blogarama

A more-or-less daily dose of news, politics, techmology, and any random thoughts that pass through my head.

Friday, December 03, 2004

Google business model in trouble

People have noticed before that Google faces a challenge with fraudulent clicks in its pay-per-click ad model. CNN/Money reports that the problem is much bigger than anyone thought and is potentially life-threatening for Google. We've known that AdSense is being exploited via publishers clicking on their own ads to generate revenue. AdSense is only part of Google's business though. The real menace, which is growing as we speak, is people expoiting the Google search ads, as an offensive weapon against competitors (i.e., I click on your ads to force you to pay money for no leads).

This situation puts Google's entire business model at risk. One problem is that Google actually benefits from this fraud. They know that a system which rigorously measures actual interest in the advertiser's product would generate but a small fraction of their current revenue. It's only because of recent media attention that they're even addressing this issue. This conflict of interest is paralyzing them from enacting real solutions.

Even if Google acts decisively, the financial incentive to commit fraud is great and its cost is very low due to easy automation. There are already third party services out there claiming to detect click fraud, but there are a couple of problems with them:
1. They are worthless unless Google agrees that fraud was actually committed.
2. Clickers will find workarounds because the incentive is enormous. The clickers/anti-clickers will get into a tit-for-tat dialectic, just like the spammers/anti-spammers do now.

My feeling is that as click fraud gets more attention, Google and major advertisers will make half-hearted attempts to solve it. When these half-measures fail to stem the tide of click fraud, advertisers will lose confidence in the system and bail out en masse. I haven't studied how this could impact their stock price, but I have a feeling investors don't fully appreciate the disasterous potential here.