Just how important has click fraud been in shaping the growth of the web economy?

Autumn 2011

No discussion on the growth of online advertising over the past 15 years and the disruption of the print industry would be complete without taking a brief look at the problem of click fraud.

Click fraud is the widespread practice of using botnets or a low paid workforce to manufacture large-scale increases in impressions and/or click throughs to improve advertising response rates.

Talk to regular buyers of online advertising and they will tell you that today click fraud is reluctantly factored in as a cost of doing business online. They don't like it but they grudgingly accept that it is all part of online advertising equation.

Click fraud has been with us since the birth of internet advertising and industry estimates on just how big the problem is vary widely. General consensus puts the range of estimates somewhere in between 10%-40%. With the US market being at the higher end of the scale.

Calculating a dollar value for the industry estimates would put its global revenues at somewhere between 3 to 12 times larger than Facebook.

To help you visualize what that means I have prepared 4 charts.

Click Fraud vs Search and Display Advertising

In this first chart I have mapped the problem against the IAB's breakdown of the online advertising market.

As you can see as a worse case scenario click fraud is bigger than Banner/Display, Video and Rich Media advertising combined. The best case makes it as big as online classifieds and bigger than video.

Moving on this next chart illustrates the potential size of click fraud vs the advertising revenue model.

Click Fraud by Type

Again looking at a worse case scenario the click fraud industry is bigger than impression based advertising.

In this third chart what I have done is mapped the range of potential revenues generated by the global online click fraud industry against the other players in the US advertising market.

Click Fraud vs Traditional Advertising Media Market Size

Again the estimates for the worse case scenario makes click fraud a bigger industry than US Radio, Magazines and the TV Broadcast Networks.

The interesting thing about click fraud is of course the question: If it did not exist would the online advertising market be as big as it is today or would it be significantly smaller? It is an important question because online advertising today has grown to become a $54 Billion industry and if you extract 30%-40% out of that market it significantly changes the story.

The answer to that question of course is another question: If click fraud didn't exist would the advertisers expect to be paying less (i.e. the same rate but fewer hits/clicks) or about the same (i.e. higher rate and fewer hits/clicks) to compete in a more efficient market?

In the end it is the cost to purchase equation that matters and as we have seen above on that basis online advertising is no more efficient than traditional mass media advertising.

So even if the effective CTR rate for search fell from 0.91% to around 0.6% would it make any difference to the market?

Advertising and Direct Marketing Response Rates

Advertising and Direct Marketing Response rates

The answer to that, at least for the experienced direct marketing practitioner, is probably not. At the end of the day you measure direct marketing program by conversions to purchase. However if you are just an SME advertiser then you are probably happy just counting impressions and ad responses. So you may be thinking the ad campaigns working because at least you are getting noticed.

This suggests that perhaps some of the growth in online advertising has come from the myth that online advertising is a more responsive platform than traditional mass media channels and if that is the case then one can't help but feel that the traffic generated by the click fraud industry has played some part, however insignificant, in helping to create that illusion.

So one final chart to try to explain the potential impact of click fraud on the web economy.

The chart below maps the trends across the major advertising channels in the USA over the past 15 years. Today the web advertising industry is celebrating because it is bigger than the newspapers, radio, magazine, cable TV and the directories industries. But if we factor in the industry estimates of a 35% click fraud rate then we discover the "legitimate" internet advertising may be only about the same size as radio.

What's more if we take Google's 7 years spectacular growth out of the equation we now discover that the rest of the "legitimate" web advertising industry is potentially the smallest player on the block.

What is equally apparent is, even before we factor in any click fraud and as we have seen before, the web advertising market just isn't growing fast enough to accommodate the wholesale decline across the print sector. The question then needs to be asked is just how much is click fraud a contributing factor in this growing gap in lost advertising revenue as the print media struggles to migrate its business model online?

Click Fraud vs All US Advertising Media Market Size

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