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The Federal Trade Commission believes that no place is more fraud-friendly than the web. The agency estimates that more than one in 10 Americans (perhaps as many as 30 million people in this country) have fallen victim to fraud. Last year, internet-related fraud complaints surpassed all others, comprising 55 percent of all digital malfeasance, and for the first time the net supplanted the telephone as the most popular initial point of contact for dupers to meet dupees.
An almost endless array of clever schemes exists to separate consumers from their money. There are cross-border scams that consist of fake foreign lotteries, phony prize promotions, advance-fee loan cons and the infamous Nigerian scam. Charity scams take advantage of consumers' generosity while so-called home-opportunity scams zero in on people looking for an easy way to make a few extra bucks. Identity thieves "phish" for personal information, like account numbers and PINs, which they use to sink your good credit (while sucking every penny out of your bank account). Pop-up spammers rely on nefarious methods to secretly wrest control of your PC desktop so they can pummel you with ads. Auction fraud accounts for half of the complaints the agency receives.
It's no wonder the FTC believes it's crucial to take action. According to Howard Beales, director of the agency's consumer-protection bureau, who last spring testified http://www.ftc.gov/os/2004/03/bealsfraudtest.pdf before a Senate subcommittee, these types of fraud cause "significant injury to consumers and harms public confidence in the internet as an emerging marketplace."
There is one type of fraud, however, that could potentially be more damaging to the internet than any of these, yet the FTC hasn't done a thing about it.
I'm talking about click fraud -- the practice of skewing pay-per-click advertising data by generating illegitimate hits. Click fraud takes advantage of the increasing popularity of performance-based ad arrangements on the net, and the dramatic rise in the cost of online advertising. Those that stand to benefit most are search networks' content partners, which receive commissions on these fraudulent clicks, and competitors intent on playing dirty by inflating a rival's pay-per-click spending to stretch their advertising budget.
But in the end, it's the Googles of the world that are particularly vulnerable, something the company is well aware of. In its pre-public offering documents http://www.secinfo.com/d14D5a.127t8.html, Google flagged "fraudulent clicks" as a risk worth noting: "We have regularly paid refunds related to fraudulent clicks and expect to do so in the future," it said. "If we are unable to stop this fraudulent activity, these refunds may increase." At stake is nothing less than the integrity of the company's entire ad revenue model. "If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively affect our net revenues and business."
The net revenues generated from the fees advertisers pay Google when users click on ads delivered to Google Network members' websites made up 21 percent of the company's net revenues for the first quarter of 2004 . Google is counting on the percentage to grow dramatically in the future, which it hopes will convince Wall Street that the company has a viable long-term plan for growth.
Of course, Google is not the only company that is vulnerable. So are FindWhat.com http://www.findwhat.com/, Kanoodle http://www.kanoodle.com/, and Overture http://www.content.overture.com/d, all of which have pay-per-click revenue models.
Click fraud can be carried out in several ways. The simplest: Hire a legion of low-wage workers to click manually on web ads. For instance, The Times of India reported on a new type of gray-market outsourcing: A growing number of Indian housewives, urban professionals and college grads are hired to sit around and click on ads for hours on end. They make between 18 and 25 cents per click and earn up to $200 a month.
In places where labor costs are significantly higher, would-be defrauders rely on computer scripts to mimic human behavior. In March, the Secret Service arrested Michael Anthony Bradley, a 32-year-old programmer from California, for extortion, and in June the Department of Justice charged him with one count of interference with commerce by threats and 10 counts of wire fraud. Bradley had threatened to release software he dubbed Google Clique -- designed to defeat Google's AdSense program -- to spammers unless the company paid him $100,000.
How prevalent is click fraud? Dmitri Eroshenko, chief executive and founder of Clicklab, a web analytics firm, likens it to spam and claims that as much as 50 percent of pay-per-click advertising in some competitive categories could be the product of bogus clicker syndrome. Of course, Eroshenko has a vested interest in hyping the problem: His company markets a tool to identify it. But that doesn't mean he's wrong. The truth is, nobody knows for sure.
So where is the FTC? In recent months, the agency has found the resources to take on funeral homes in New York and Massachusetts, settle a price-fixing case with a New Mexico physicians group and handle a $1.6 million judgment against a porn operator that billed Americans for multinational internet access without their consent. But it hasn't done anything about click fraud.
Although Eileen Harrington, director of marketing practices for the FTC, says the agency is always interested in the integrity of advertising, click fraud "isn't the most direct form of consumer fraud," since "consumers aren't directly affected."
But consumers do have a stake in the integrity of the internet. That's why the FTC should take action.
- "Click Fraud Threatens Web," Adam L. Penenberg http://www.penenberg.com/, Wired News http://www.wired.com/, 02:00 AM October 13, 2004 PT, http://www.wired.com/news/culture/0,1284,65324,00.html
Adam L. Penenberg is an assistant professor at New York University and the assistant director of the business and economic reporting program in the department of journalism.