Posted January 19, 2006 2:45 pm by with 4 comments

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Scott Kessler of Standard & Poor’s recently downgraded Google from hold to sell. In this Business Week article, he explains many of his reasons, including:

When it comes to the building competition, part of what they’re trying to do is diversify beyond Internet search advertising, but they are also trying to make their offerings more inviting and sticky to users. One of Google’s shortcoming is that even though users like its search offering, they don’t spend a lot of time on it. We’re seeing Google trying to provide more personalized services — enabling users to sign in, use e-mail, and access content that’s preselected and determined by the user.

Click fraud is a difficult situation. I don’t know what is being done to stop click fraud on Google Web sites and on its AdSense network, which is advertising technology used by third-party, or other company, Web sites. They have to invest in technology and people around the concept of click fraud to ensure that it doesn’t happen. At some point, this will become an issue that people will talk about in 2006.

I’m still not convinced that click-fraud is going to be the big deal that some analysts have portrayed it to be. Advertisers are already pricing click-fraud into their bids by virtue of measuring the return on ad-spend. Saying Google will face troubles due to click-fraud is like saying Wal-Mart will suffer due to shrinkage. Who walks around their local Wal-Mart wondering how much extra they are having to pay for products because someone else was shoplifting?

  • I never thought of the Walmart example before… interesting. I think companies are interested in making sure Google do their best in controlling a difficult situation. It still boils down to ROI and Google would be wise to get on this problem both ethically and financially. I feel that the first company that can will reduce a companies ROI, driving even more business to their ad program.

  • Hi Andy
    I want to revisit your Walmart analogy. The only flaw is that Walmart is not PROFITING on the shoplifting. Google however has an interest in letting this continue. Lets assume that they don’t refund nearly as much as their net profit on fraudulant clicks. Until the fraud starts to impact their bottomline instead of bolstering, the Walmart analogy is invalid.

  • Fair point.

    However, if the return on ad spend is reduced due to click-fraud, advertisers will not be willing to pay the same amount per click. So while Google would profit from the fraudulent clicks, they would likely lose more from lower CPC rates. So I don’t think they have the level of incentive to let click fraud continue, as most people assume.

    I still feel that a balance will be found, even with click fraud.

  • Me too. A balance is the best that can be hoped for. As far as lowering CPC rates, I don’t feel it is realistic in the short term, even with high fraud. As Google expands it’s ad present onto it’s Earth products and others, traditional media spending will be making at least a small shift (good for your business) and keep demand high. With high demand comes businesses with a higher budget for ROI. As we see with some very competitve keywords, which in turn tend to have higher fraud rates, the price still increases. It is still my point that solving this problem will INCREASE marketshare, value, loyality and profit.