AdMoolah News and Views

As reported by ZDNet, Google’s CEO Eric Schmidt had this to day about the click fraud problem:

According to Schmidt, Google’s auction-based pay-per-click advertising model is inherently self-correcting. Schmidt’s scenario for what would happen if Google did not police click fraud and it was “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.

This type of attitude is bad news for publishers. If this were too happen the advertisers wouldn’t mind because they are paying less per click for fewer real clicks, so their ROI stays the same. Google wouldn’t mind because they are still getting paid for every click whether fraudulent or not. The click fraudsters would love it because they would be making lots of easy money. The only losers ion the equation would be the legitimate publishers. They would be earning less per click.

Note that this was a “what if” scenario, not something that Schmidt acknowledged was going to actually happen. It’s still scary that he thinks this is a “perfect economic solution” when the fraudsters are getting rich and the real publishers are losing out. Doesn’t sound perfect to me!

There has been a lot of talk recently about how click fraud is killing Cost-Per-Click (CPC) . Reports of bot nets generating fraudulent clicks have been appearing for a few months in places like ClickZ and JenSense . In early June, Mark Cuban expressed his opinion in a piece called Why I think ClickFraud is far greater than imagined.

More recently Outsell, Inc. published a report that click fraud is costing advertisers $1.3 Billion and that fraudulent click account for 14.6% of all clicks. This led to many mainstream news source such as The Financial Times and BusinessWeek to report these problems with click fraud and question the long term health of the CPC market.

Something else that has been seen as a sign that CPC is in trouble is that Google has recently started to experiment with CPA ads. Because of this some people concluded that Google itself worried about CPC in the future.

Are CPC programs such as AdSense and YPN really dying? Is click fraud going to kill them? Many people are predicting that CPC market will collapse the way the CPM market did several years ago. But, I think there are some important difference between the collapse of the CPM market and the current CPC market.

1. The CPM market reached its heights along with the Internet bubble. Web sites were willing to pay extraordinary amount just to get “eyeballs”. The more eyeballs they had the bigger there IPO would be. The CPC market is not in such a bubble.
2. One of the major problems with CPM advertising was that it was difficult to measure the effectiveness of it. With CPC advertising and good analytics, it is much easier to measure the exact ROI (Return on Investment) advertisers are getting for their money. If CPC ads were not working for the advertisers they would stop using them. Click fraud does happen and will continue to, but as long as the overall ROI of a CPC advertising campaign is positive, advertisers will continue to use them.
3. Google’s experiments with CPA does not automatically mean they are giving up on CPC. Google is constantly experimenting with new product and new ways of doing things. They are willing to try anything, see if it works, and when it does, they will introduce it as a full fledged product. Google generally does not introduce new products in a reaction to something, they are continually trying out new ideas.
4. There will always be advertisers that will want to use CPC instead of CPA. For example, car manufactures want people to visit their web sites and learn about their cars. They are not expecting to actually sell a car when someone clicks through to their web site. It is difficult to tie a visitor to a major car manufacturer’s web site to a specific action to charge via a CPA program.

All that being said, I do thing CPC is coming under some pressure. For certain industries, CPA ads can provide a better model for advertisers. Smart advertisers will try CPM, CPC and CPA campaigns and see which has the best ROI. Sometimes CPA will beat out CPC programs. Click fraud is another danger. If Google and Yahoo cannot keep the click fraud under control advertisers will need to drop their bid per click to maintain the same ROI. CPA ads can be harder to game than CPC ads, so they may have an advantage in this area.

I do believe that CPC ads are in there heyday right now, and prices may fall. Smart publishers will experiment with all type of advertising, CPM, CPC, CPA, Fixed price, or any other arrangement they can think of. Each niche and each website will benefit from different combinations of these types of programs, the publishers who make the most money will be the ones who maximize their revenue, regardless of the type of program used.

Google announced today that they are making things tougher for Made-For-AdSense (MFA) sites who use AdWords for advertising.

Google had this to day:

As you may recall, we began incorporating advertiser landing page quality into the Quality Score back in December 2005. Following that change, advertisers who are not providing useful landing pages to our users will have lower Quality Scores that in turn result in higher minimum bid requirements for their keywords. We realize that some minimum bids may be too high to be cost-effective — indeed, these high minimum bids are our way of motivating advertisers to either improve their landing pages or to simply stop using AdWords for those pages, while still giving some control over which keywords to advertise on. Although it is counter-intuitive to some who hear it, we’d rather show one less ad than to show an ad which leads to a poor user experience — since long-term user trust in AdWords is of overarching importance.

From time-to-time, we improve our algorithms for evaluating landing page quality (often based on feedback from our end-users), and next week we’re launching another such improvement. Thus, over the coming days a small number of advertisers who are providing a low quality user experience on their landing pages will see increases in their minimum bids.

I see this as a direct attack against MFA sites. MFA sites are sites which display AdSense ads and provide no useful content. Usually the content is simply copied from search results. These MFA sites target high paying keywords while using very low bids on the AdWords system to get traffic. Since there is little useful content on the pages, users end up often clicking on the ads. Many AdSense publisher despise these sites because they drive down the cost of an average click and do not provide users with any useful information.

The Google AdWords Landing Page and Site Quality Guidelines clearly state that MFA type sites are not considered quality sites:

• In general, build pages that provide substantial and useful information to the end-user. If your ad does link to a page consisting of mostly ads or general search results (such as a directory or catalog page), provide additional information beyond what the user may have seen in your ad or on the page prior to clicking on your ad.
• You should have unique content (should not be similar or nearly identical in appearance to another site).

If this works out the way Google intends, it will be good for everyone in the AdSense ecosystem: publishers, advertisers and users. The only ones who will be hurt will be the MFA producers.