A new HotTopics report from Outsell estimates that click fraud represents a $1.3 billion-a-year advertising revenue loss — this includes $800 million wasted on fraudulent clicks plus $500 million held back from pay-per-click (PPC) advertising spending.


Stunningly, in the study of over 400 advertisers responsible for approximately $1 billion in ad spending, respondents estimated that 14.6% of the clicks they are billed for are bogus.

To be fair, in the past the search engines have vehemently asserted that estimates of click fraud have been wildly overestimated — and paid refunds to advertisers who they found were victimized.

Nevertheless, Outsell warns that if current practices and trends continue unabated, PPC spending will not only be significantly reduced, the core business models of leading search engines such as Google, Yahoo! and MSN may be threatened.

According to the report, 27% of advertisers have already slowed PPC ad buying, including 16% of that group who have stopped PPC spending completely. In addition, another 10% of current advertisers acknowledged plans to cut PPC spending in the future.

"Outsell’s research can be seen another way," said David Hallerman, an eMarketer Senior Analyst. "While click fraud is wasted ad spending, how is that waste essentially different than ad dollars spent on TV where the viewer simply walks away in the commercial break? Since the majority of paid search still works, many marketers already factor in such underperforming advertising when they calculate how much to bid and their overall budgets."

As worrisome as click fraud is for the online advertising industry, the biggest problem may be that the search engines are not addressing the problem — often not even acknowledging it.

"[They] are stonewalling on click fraud, to their own and others’ detriment," said Chuck Richard of Outsell, author of the report.

For a recent article in the San Francisco Chronicle, "Click Fraud a Huge Problem," Google did just that, declining to comment. But Gaude Paez, a Yahoo! spokesperson, denied that her company was lax on click fraud. She told the paper that Yahoo! rigorously polices the practice with automated filters and through the years has detected and declined to bill for billions of suspect clicks.

In the end, the argument over whether click fraud is major or merely a perceived threat hardly matters. Unless search engines can quell advertisers’ fears, the engines driving the current growth in online advertising may slow, or even screech to a halt.

More here.