Monday, July 10, 2006

Google on Click-Fraud

Google's CEO Eric Schmidt has an interesting take on click-fraud for online advertising: "let it happen".

Schmidt's argument is a purely economic one: the price of online advertisments will ultimately depend on the amount of fraud. As the amount of fraud increases, the price of the ads will drop, until they drop so low that it isn't worth the cheaters' efforts to commit fraud. In time, there will be an equilibrium state where the price is just low enough to make the amount of fraud bearable but not high enough to encourage more.

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.

Pretty standard Economics 101. From a purely economic point of view, Schmidt may be right... but I can imagine an awful lot of their customers are feeling quite nervous about now. Given that Google's bread-and-butter comes from online advertising, I'm thinking Schmidt is probably regretting saying what he did.

And on the other hand, he might be wrong about click-fraud not mattering. There is no real reason to imagine that the equilibrium point must be at some positive cost per ad. It may be that the equilibrium price is lower than Google's cost of supplying the ads, making it uneconomic for Google to provide that survice no matter how many advertisers they have; it might be that committing click-fraud becomes so cheap that it drives the equilibrium price all the way to zero. At the point that advertisers will surely reason that, no matter how cheap the ads are, if none of the clicks come from real people, it isn't worth paying even a penny for them. That would really do some damage to Google's business model.

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