Google, Bedeviled by Click Scammers, Fights to Shore Up Stock
Anthony Effinger and Jonathan Thaw, 03/30/06
Click-click. Click-click. On a side
street in New Delhi, past the pushcarts and down the stairs, the
familiar sound of a computer mouse signals trouble for Google
Inc.
Here, under bare fluorescent lights in a basement cubicle,
Rajiv Kumar sells the names of Web sites that pay people to
click on Internet ads. His price: 300 rupees ($6.74).
``There's nothing wrong with any of this,'' Kumar tells a
prospective customer. Clicking is easy, he says.
Easy -- and a legal quagmire. The practice, known in the
industry as click fraud, exploits weaknesses in the pay-per-
click system that has made Mountain View, California-based
Google a wonder of the Web. Google, Yahoo! Inc. and other
providers of online search ads charge advertisers every time
someone clicks on their links. By jacking up the hits, people
artificially inflate those bills and bilk advertisers.
Google, which says it's trying to fight such scams,
nonetheless stands to profit from the traffic, too. Unless the
company or its customers spot the bogus clicks, Google gets paid
for them. On March 8, Google, without admitting or denying
wrongdoing, agreed to pay as much as $90 million to settle its
part of an industrywide lawsuit alleging search companies
charged advertisers for clicks that weren't from real customers.
Click fraud is just one headache for Google and its
investors. Google stock has stumbled this year, after more than
quintupling since 2004. Some investors worry that dodgy ad hits
and intensifying competition, particularly from Redmond,
Washington-based Microsoft Corp., will stunt Google's growth.
Microsoft plans to launch a rival Web ad system -- code named
Moonshot -- this June.
Analysts Miffed
Google has irked Wall Street analysts by leaving them in
the dark about click fraud and other issues, says Scott Devitt,
an analyst at Stifel, Nicolaus & Co., a St. Louis-based
investment bank.
Google refuses to say how many searches people conduct on
its famous search engine. The company doesn't forecast quarterly
sales or profits. Word of its March agreement to settle the
click-fraud suit first showed up on the company Web log, in a
dispatch from Associate General Counsel Nicole Wong.
``A company that tells you nothing about their business
deserves a discount,'' Devitt, 33, says. Devitt issued a
``sell'' on Google stock on Jan. 18, just before the shares
tanked. He raised his rating to ``hold'' on Feb. 6 and then to
``buy'' on March 24, just after Standard & Poor's, a division of
McGraw-Hill Cos., said Google would be added to the S&P 500. In
his ``buy'' recommendation, Devitt said Google's reticence still
was troubling.
`Scares Me'
Click fraud strikes at the heart of Google, whose key word-
based ad network generates 99 percent of the company's revenue,
says short seller David Tice, who manages the $450 million
Prudent Bear Fund. ``That just scares me,'' says Tice, 51,
president of St. Thomas-based David W. Tice LLC. Eventually,
fraud and competition will hurt Google and its stock, he says,
so he's betting against Google.
Google Chief Financial Officer George Reyes told investors
at a conference in New York on Feb. 28 that the company's growth
may slow. Reyes, 51, said publicly what many investors had
privately feared: Google, whose revenue has soared 71-fold since
2001, can't sustain this pace forever.
Eventually, the company -- which takes its name from
googol, the number represented by 1 followed by a hundred zeros
-- will become so large that, based on simple math, its rate of
growth may slow, Reyes said.
Stock Slump
His comments sent Google stock diving 7 percent in a day.
By March 13, the shares had cratered to close at $337.06, down
from their record high of $475.11 on Jan. 11, a 29 percent slide
that wiped out about $41 billion of shareholder value.
Google Chief Executive Officer Eric Schmidt says his
company is going nowhere but up. Since last year, Google has
pushed beyond the $18 billion-a-year world of online advertising
into ad placement on the radio and in magazines. The company
started a pay-per-view video service in January.
``These are very large businesses,'' Schmidt, 50, says in a
telephone interview. He's right: The global ad market --
Internet, broadcast and print -- totaled $404 billion in 2005,
according to ZenithOptimedia Group Ltd., a London-based media
services company.
As part of its expansion, Google in January agreed to buy
Newport Beach, California-based dMarc Broadcasting Inc. for $102
million in cash and a pledge to pay as much as $1.14 billion
more in the future. DMarc enables advertisers to place ads on
more than 500 U.S. radio stations.
Big Play
Google plans to let the advertisers buy air time, record
their ads and submit them to radio stations via the Web, Schmidt
says. ``This thing is going to be a huge, huge play,'' he says.
Last year, Google broke into print by selling ad space to
advertisers in PC Magazine and Maximum PC. In February, the
company expanded its reach to 28 publications, including Car and
Driver. As part of a trial, Google allowed advertisers to bid
for ad space in such magazines via online auctions.
Meantime, Google is going head-to-head with Microsoft with
a new program, called Google Sidebar, designed to reduce
surfers' dependence on Microsoft's Internet Explorer browser.
Google Sidebar appears as a window on the edge of the PC screen
and continuously updates with news and weather.
This year, Google also took aim at Microsoft Office --
which generates $11 billion a year in sales for Microsoft -- by
buying Portola Valley, California-based Upstartle LLC, which
created Writely, an Internet-based word-processing program. To
fight back, Microsoft Chairman Bill Gates is building in a
Sidebar-like window into Vista, the next version of the Windows
operating system.
Big Plans
Google's billionaire founders, Sergey Brin and Larry Page,
are chasing their own lofty ambitions. Brin, 32, and Page, 33,
have bid for a contract to provide broadband wireless Internet
access to the entire city of San Francisco. They're trying to
make every book searchable on line.
Brin and Page are risk takers, according to Schmidt. ``They
tend to run ahead of me,'' he says.
The future certainly looks bright at the Googleplex, as the
company's Mountain View headquarters is known. Here, the '90s
boom lives on. The California sun glints off silver-and-glass
buildings splashed with purple and yellow.
Before noon, a dozen men, many of them shirtless, kick up
sand on a volleyball court. Workers zip by on company scooters.
One rider screeches to a stop, narrowly missing a frolicking
puppy.
Valet Parking, Massages
The employees here, part of the company's 5,680-strong
workforce, receive valet parking and massages. Googlers get
three meals a day, gratis. Recent lunch specials included
roasted beet spaetzle with Gorgonzola, shredded truffles and
hazelnut oil. Employees drink beer at their regular Friday
meeting. The brews are -- you guessed it -- on Google.
Schmidt, once known for championing Java Internet software
as chief technology officer of Sun Microsystems Inc., says click
fraud threatens none of this.
``Believe me, as a computer scientist, we have the ability
to detect the invalid clicks before they reach advertisers,''
says Schmidt, who has a Ph.D. in computer science from the
University of California, Berkeley. ``The attacks on us are
easily detected.''
Schmidt declines to say how pervasive the click scams are
or how, exactly, his company combats them. Doing so would help
the fraudsters, he says. Schmidt says shareholders shouldn't
worry: Google monitors every click and refunds advertisers for
many of the phony ones.
Following Buffett
Google has been doing things its own way ever since Brin
and Page founded the company at Stanford University in 1998,
building the company's first data center in Page's dorm room.
As Google prepared for its initial public offering in 2004,
Brin and Page vowed to follow the lead of billionaire investor
Warren Buffett and focus on reaching long-term goals rather than
on satisfying Wall Street analysts from quarter to quarter.
``A management team distracted by a series of short-term
targets is as pointless as a dieter stepping on a scale every
half-hour,'' Brin and Page wrote to prospective shareholders at
the time. ``We will optimize for the long term rather than
trying to produce smooth earnings for each quarter.''
The two entrepreneurs have become rich fast. They've each
sold about 17 percent of the stock they owned at the time Google
went public, or about $1.8 billion apiece. It took Microsoft co-
founder Gates six years to unload that percentage of his stock,
according to Washington Service, a Washington-based company that
researches insider sales.
Rich Executives
The IPO and subsequent surge in Google shares have made
other executives wealthy, too. Omid Kordestani, senior vice
president of sales and one of Google's first employees, has
unloaded more than $807 million worth of stock, or about 62
percent of his holdings. Schmidt, who flies his own Gulfstream
jet plane, has reaped about $552 million.
All of these executives have sold according to a schedule
mapped out before the IPO, Google spokeswoman Lynn Fox says.
Anyone who bought Google at its initial price of $85 is
laughing today. Even after the recent rout, those investors have
quadrupled their money. Today, seven-year-old Google has a stock
market valuation of $117 billion. By comparison, Armonk, New
York-based International Business Machines Corp., which traces
its roots back to 1911, is worth about $130 billion.
Google has many cheerleaders on Wall Street. No fewer than
32 analysts called its stock a ``buy'' as of late March,
according to data compiled by Bloomberg. In the space of seven
years, Google has become more than a company; it's become part
of the English language. To google is to search the Internet.
451 Million Visits
Google runs the most widely used search engine on the
planet. Reston, Virginia-based ComScore Networks Inc. says 451
million people visited Google during January alone. That
compares with 243 million visitors to Yahoo's search engine and
161 million for Microsoft's MSN search engine.
To its fans -- and Google has many -- the magic of the
company is that it enables advertisers to reach motivated
consumers directly.
Google the phrase mountain bikes, for example. All of those
blue ads are the result of Google AdWords, a proprietary program
that sets the ads' price through continuous, real-time auctions.
How much advertisers are willing to pay depends on what they're
selling.
On March 8, advertisers paid anywhere from $11.94 to $17.28
per click to have their ads appear whenever people searched on
``mortgage.'' ``Plasma TV'' went for $2.42 to $3.03. ``Pizza
delivery'' topped out at $1.13.
AdWords Revenue
Where those ads appear on www.google.com and their order in
the sponsored links column on the right of each search results
page depends on advertisers' bids and how often surfers click on
the links. If no one clicks on them, Google removes them.
In 2005, AdWords links on Google's own sites, such as
www.google.com, generated $3.4 billion, or 55 percent, of the
company's $6.1 billion of revenue.
The rest of Google's 2005 revenue -- $2.7 billion -- came
from AdSense, another Google program. Launched in 2003, this one
enables third-party Web sites to sign up on line to display ads
sold by Google. Advertisers pay Google, either by the click or
by the number of times the ad is shown, and Google passes most
of the money along to the third-party sites.
Fraudsters try to profit from AdSense. By clicking on the
ads on their own Web sites, scammers run up the bills that
Google sends to advertisers and, in turn, the amount of money
that Google passes on to the fraudsters' sites.
Range of Estimates
How serious is the threat? That depends on the person you
ask. Michael Caruso, co-founder of San Francisco-based
ClickFacts, a firm that tries to help advertisers fight the
fraudsters, says scammers generate 40 percent of the clicks in
some accounts. By contrast, Jeffrey Herzog, CEO of Scottsdale,
Arizona-based iCrossing Inc., a firm that helps companies
advertise on the Web, puts the industrywide figure at one click
out of every 100.
Jalali Hartman, director of strategy at MEC Labs, a
Jacksonville Beach, Florida-based unit of Digital Trust Inc.
that tests ways to advertise on the Web, says he's tried to
measure how much the fake traffic costs advertisers.
In July 2005, Hartman, 30, placed an ad for one of his
client's products -- a newsletter aimed at U.S. investors -- on
www.google.com. Then he raised his bids on some of the search
terms and had Google distribute the ad over the AdSense network.
Within two days, his daily bill rose 10-fold to $4,300, he says,
with many of the clicks coming from India.
Illicit Clicks
Hartman says an AdSense representative at Google told him
the clicks looked suspicious. Two weeks later, Hartman says he
got an e-mail from Google saying the company had refused to
refund the cost of those clicks.
Hartman questions whether Google is doing all it can to
fight click fraud and reimburse advertisers, given that the
company gets paid for the illicit clicks as well as the
legitimate ones. ``Just assume that 15 percent of your
advertising is fraudulent, but you're getting paid,'' Hartman
says. ``How proactive do you get?''
Not proactive enough, according to a class-action suit
filed against Google in February 2005 by Lane's Gifts &
Collectibles LLC, an online retailer based in Texarkana,
Arkansas. Several other search companies, including Sunnyvale,
California-based Yahoo, were also named in the suit, in which
Lane's Gifts seeks class-action status.
Settlement Agreements
After Google announced its $90 million agreement to settle
the suit, Yahoo said it will fight on. ``We stand firmly by our
proprietary click-protection systems and look forward to
vigorously defending our position,'' Yahoo spokeswoman Gaude
Lydia Paez says.
Google didn't trumpet its settlement agreement. Wong, a
company lawyer, posted the news on one of Google's Web logs.
``You may remember that last February, Google was sued in
Arkansas over what is commonly called click fraud,'' Wong wrote.
``We're very near a resolution in that case, so we thought we'd
offer an update.''
The agreement would resolve customer complaints going back
to 2002. Arkansas Circuit Court Judge Joe Griffin had scheduled
a hearing for April 3, to consider the agreement.
At the Googleplex, Shuman Ghosemajumder, Google's top click
cop and a brown belt in karate, says Google does everything it
can to fight click fraud. ``This is an issue that we take very
seriously,'' Ghosemajumder, 31, says. ``It's definitely in our
long-term interests to deal with this issue.''
Click Patterns
Ghosemajumder says Google is so good at monitoring the
origin and patterns of clicks that the rogue ones rarely reach
advertisers' bills. If advertisers do complain, Google
investigates the dubious clicks and, if the hits are bogus,
refunds money to advertisers, he says. Ghosemajumder declines to
say how Google weeds out the dubious clicks.
Lane's Gifts, which sells dolls, toys and teddy bears, did
what few Google advertisers dare to: It complained publicly.
Many small companies are reluctant to grouse about click
fraud or demand refunds, says Michael Leonard, CEO of
Authenticlick, a Los Angeles-based firm that tries to help
advertisers fight click fraud. Advertising on Google is too
important to them. They fear that if they make a fuss, Google
might stop carrying their ads, he says.
``They're terrified,'' Leonard, 37, says.
Google says it encourages advertisers who suspect click
fraud to contact the company.
Fighting Back
A few other advertisers have started to fight back. Scott
Boyenger, CEO of Raleigh, North Carolina-based Click Defense
Inc., an anti-click fraud firm, sued Google on behalf of its
customers in June 2005, in U.S. District Court for the Northern
District of California in San Jose, for breach of contract,
unfair business practices, unjust enrichment and negligence.
The suit alleged that Google had been lax in fighting click
fraud. Boyenger, 37, sought class-action status for the suit.
``Google has an inherent conflict of interest in preventing
click fraud since it derives the same amount of income from each
fraudulent click as it does from each legitimate click,'' the
suit says.
Google denies the claims. U.S. District Court Judge Ronald
Whyte dismissed the claims of negligence and unjust enrichment
last September. Whyte plans to hold a hearing on granting the
suit class-action status in mid-May.
Clarence Briggs III, CEO of Advanced Internet Technologies
Inc., a Web site-hosting company in Fayetteville, North
Carolina, took up Boyenger's fight in December, when AIT
replaced Click Defense as the representative plaintiff.
`They Refused'
Briggs, a former company commander in the U.S. Army's 82nd
Airborne Division, says click artists ripped off AIT, and Google
refused to refund the money. Clicks from China, India and Russia
helped drive AIT's monthly advertising bill to as much as
$40,000, says Briggs, who fought during the 1991 Gulf War and in
Panama before that.
``We lost a lot of money,'' Briggs, 45, says. ``We asked
for the money back. They refused.''
AIT plans to pursue its class action despite Google's
agreement to settle with Lane's Gifts, says AIT's lawyer, Brian
Kabateck, of the Los Angeles law firm Kabateck Brown Kellner
LLP.
``If CEOs really knew what was going on, they would take a
very dim view of this,'' Briggs says.
Back in New Delhi, Kumar is busy recruiting clickers. The
sign on the street outside his basement cubicle reads Data
World. The tile-floored office, little more than a walk-in
closet, contains two desks, two telephones and two aged PCs.
Dirty white partitions separate Kumar's office from the other
cubicles in the basement.
Recruiting Clickers
Pick up the Times of India on any Sunday, and you're likely
to find half a dozen ads promising money for surfing the Web.
Data World ran one on Feb. 5, looking for people to work from
home or from cybercafes. Those who reply and turn up at Data
World fill out forms with their names, ages, employers,
telephone numbers and e-mail addresses.
Kumar, who stands about 5 1/2 feet (1.7 meters) tall and
wears a thin mustache, provides a list of Web sites that pay
surfers. He says he's recruited about 300 clickers during the
past year or so. ``We've been doing this for a year and a half
and haven't heard of any problems,'' Kumar says.
Across town, Jagriti Bora tends another click network,
Shipranet. Bora says Shipranet has recruited about 1,000
clickers. She says it's perfectly all right to click on ads.
``There's nothing wrong with looking through a shop window even
if you don't buy,'' she says.
Bot Invasion
Assistant U.S. Attorney Matthew Parrella, who runs the
computer hacking and intellectual property unit of the U.S.
Department of Justice in San Jose, California, says the U.S. can
prosecute alleged fraudsters anywhere in the world provided the
servers they attack are located in the U.S. Computers abroad,
however, are beyond U.S. jurisdiction, Parrella says.
Deliberately paying people to click on ads surreptitiously
or using software to run up hits automatically constitutes
fraud, he says.
Some click artists have begun using software and computer
viruses to unleash armies of automated clickers, or clickbots,
to spirit away even more money, says Merrick Furst, associate
dean of the College of Computing at Georgia Institute of
Technology in Atlanta.
In January, a bot master named Jeanson James Ancheta
pleaded guilty to commandeering 700,000 PCs for spammers.
Ancheta, 21, pocketed about $60,000 with that and other Web
schemes, according to his plea agreement, filed in U.S. District
Court for the Central District of California.
Stealth Armies
Turning a bot army loose on Google would be easy, Furst
says. A bot master could set up a Web site, sign up on line for
Google AdSense and have Google display ads on the site. Then the
bot master could direct his bots to click the ads.
``The clever ones don't click all at once,'' Furst says,
adding that he doubts Google can spot these stealth armies.
``They think that by looking at the patterns of clicks on a Web
site that they can tell if it's click fraud,'' he says. ``I
don't think they're right.''
Google could curb click fraud by refusing to show ads on
third-party Web sites through its AdSense network. Google,
though, needs to be on those sites to keep growing, Furst says.
Because most Web sites don't get many visitors, Google has to
place ads on thousands upon thousands of sites, making its
network hard to police, he says.
Whac-a-Mole
San Francisco-based LookSmart Ltd., a Google competitor
named in the Lane's Gifts suit, cracked down on click fraud --
and its sales tumbled, CEO David Hills says. He says he set out
to eliminate bad clicks when he arrived in 2004.
That sent LookSmart's revenue plunging 46 percent to $41.4
million in 2005 from $77 million in 2004.
The click artists are relentless, Hills, 50, says. ``It's
like the game Whac-a-Mole,'' he says. ``Every time you get rid
of them, they try to get into the network someplace else.''
Seth Besmertnik, a former Google advertiser, says click
fraud will eventually sour advertisers on the cost-per-click
model on which Google's future depends.
Besmertnik, 24, says he used Google and Yahoo for three
years to advertise an online business card service. He usually
paid $3 to $5 per click to appear when someone typed ``business
card'' and other terms into the search engines. He says he
became frustrated with the number of suspicious clicks -- and
with Google's unwillingness to address them. He sent e-mails and
usually got a form e-mail back.
Flat Fee
So in 2004, Besmertnik started a company called Link-
Experts LLC. Instead of billing advertisers by the click,
LinkExperts charges a flat monthly fee to place ads on sites
such as www.casualliving.com. Scammers can click all they want
without driving up advertisers' bills.
Besmertnik says he thinks 20 percent of clicks on Google
are fraudulent. He, too, questions the company's willingness to
fight the problem. ``If there was no click fraud, Google's stock
would be down to $150 by now,'' he says.
To combat fraud, some Internet advertising companies have
moved from a cost-per-click system to cost-per-action model.
Westlake Village, California-based ValueClick Inc., for example,
charges companies when surfers buy a product or sign up for a
service.
Google is testing its own cost-per-action system. Some
Google ads now carry a phone icon. Click on that, and Google
asks for your phone number and automatically calls you and
connects you to the advertiser.
`You'll Have Mail'
The search-based ad industry is about to get more crowded.
Microsoft has spent three years and undisclosed millions
perfecting its new ad system and already has 3,500 advertisers
trying it out in the U.S., says Tarek Najm, the engineer who
leads the project.
``For anyone else, that's a launch,'' Najm, 40, says.
Moonshot, officially known as AdCenter, will offer features
not found on Google. Advertisers will be able to target their
ads to specific demographics, such as women ages 20 to 30, Najm
says.
Microsoft will deliver such target markets by melding the
data it has on millions of users of its Hotmail service and its
MSN Web site with demographic data such as postal codes.
Microsoft says it won't mine data that could be used to identify
specific users.
``We have the best technology out there,'' Najm says.
For now, the future of Google -- and its stock -- depends
on the click of a mouse. Each one brings in the money that
Google needs to keep growing. The question for advertisers and
investors is, How many of those clicks are for real? Google
won't say.
In the meantime, the likes of Bora and Kumar tend their
click networks far from the comforts of the Googleplex. One
February afternoon, a young, unshaven man carrying a motorcycle
helmet arrives at Bora's tiny second-floor office.
``Will there be regular work?'' he asks.
``You'll have mail,'' Bora says.
And with that, a new clicker is born.
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