A few years ago, Diane Frerick and Kevin Steele, co-founders of Karaoke Star, a Phoenix-based karaoke equipment seller, were on their way to $3 million in annual revenue.
They owed much of their success to paid search advertising on Google and Yahoo Overture. By bidding anywhere from 40 cents to $3 for keywords revolving around karaoke (such as "karaoke player" or "karaoke song"), Frerick and Steele were able to generate $6,000 a day in sales from $2,000 in advertising, and were watching business grow at a brisk clip -- 35 percent a month compared with the year before. They dreamed of becoming the Home Depot of karaoke.
Media Hack
Then, in the summer of 2003, things came crashing down. Suddenly, the number of clicks on certain keywords jumped from 200 to 800, forcing Karaoke Star to burn through its advertising budget, but $2,000 in advertising yielded just $3,000 in sales. "Our orders went up thousands a day but our bills went up thousands a day," Frerick said. "The increased business cost more than it was worth."
Karaoke Star was a victim of click fraud, a web phenomenon that has been attracting increasing attention. In a way, it's like hordes of virtual ne'er-do-wells impersonating potential shoppers and generating a small fee every time they look at an advertisement. Over time, it can really add up. Karaoke Star estimates it lost close to $500,000 to click fraud. That led Frerick and Steele to plan legal action not just against the company they thought was trying to drive them out of business, but against Google and Overture. (Although all the parties have been served with papers stating Karaoke Star's intent to sue, the case has not yet been filed.)
Of course, Frerick and Steele aren't the first to lose money on fake clicks and hire a lawyer to extract their pound of flesh. Earlier this year, Lane's Gifts and Collectibles, a gift shop that advertises on the web, sought class-action status for a lawsuit against 11 search engines including Google, Yahoo, Ask Jeeves and Lycos, claiming they gouge advertisers. (Wired News is owned by Lycos.) In June, Click Defense, which sells click-fraud auditing tools, sued Google, claiming click fraud cost it a cool $5 million.
Although there's no way to know what percentage of clicks on keyword ads on search engines are fraudulent, estimates range from single digits -- that's what the search engines say -- to 20 percent to as much as 35 percent. Click fraud could even threaten the paid search industry's entire business model. At least that's what George Reyes, Google's chief financial officer, said last year in widely publicized remarks.
Those that stand to gain the most are search networks' content partners, which receive commissions on these fake clicks, and the search engines themselves, because they profit whether ads are legitimate or not. It could be a single user, or a team of users, repeatedly manually clicking on an ad. More likely, the fraud is the product of automated "hitbot" software.
Don't count on the search engines to confront the problem, though. Sure, they pay lip service to cleaning up click fraud, and issue credits -- not refunds -- to businesses they identify as having been victimized by false clicks. Usually, however, these refunds are a pittance compared to the revenue click fraud generates for them.
Recently, BlowSearch, a small meta-search engine based in Brooklyn, New York, beta-tested an application that successfully blocked fraudulent clicks and watched its own traffic plummet, according to a former employee of the company. You can bet that Google and Overture, the two biggest engines on the block, have little desire to repeat this experiment, especially since paid search brings in billions of dollars in revenue for both companies.
For small businesses like Karaoke Star, such widespread, easy-to-perpetrate fraud threatens their very survival.
Frerick and Steele, after sifting through thousands of pages of click data, suspected the culprit was Ace Karaoke, a rival headquartered in City of Industry, California, which entered the business at about the same time the click fraud started. To test their theory, Steele bid on a keyword for a fairly obscure karaoke product that went for 10 cents a click. That day, four people clicked on it. Then Ace Karaoke started bidding on that same word. They went back and forth until Steele raised the bid to $2.95 a click and Ace Karaoke dropped out.
"Then I got slammed," Steele said. "The next day the number of clicks went from four a day to 95, then 91."
Another piece of evidence came from Overture, which inadvertently included an excerpt from an internal investigation that fingered Ace Karaoke as a source of illegal clicks in a Feb. 19, 2004, e-mail to Karaoke Star. Frerick and Steele sent three follow-up e-mails to Overture about the investigation but Overture never responded and subsequently revoked Karaoke Star's status as platinum members without explanation.
But it wasn't until a former employee of Ace Karaoke e-mailed Frerick and Steele a video demonstration of Ace Karaoke's hitbot software in action that they decided to take legal action.
To prove its accusations of click fraud, however, Karaoke Star requires hard evidence -- and that can only come from the search engines, which store vast amounts of pay-per-click information. But they are loath to share it.
"It's frustrating because they're the ones with the data to either show this is happening or isn't happening, yet they won't give it out unless we pull teeth," said Jonas Saunders, one of Karaoke Star's attorneys.
Neither Google nor Overture would comment on the allegations or Karaoke Star's plan to sue. David Sue, founder of Ace Karaoke, denies the charges, and claims he too has been victimized by click fraud.
"Someone is trying to frame us," he said.
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Adam L. Penenberg is an assistant professor at New York University and the assistant director of the business and economic reporting program in the school's department of journalism.
