The lawsuit by Kinderstart against Google, while an interesting issue, is small potatoes compared to what many consider to be the real elephant in the room: click fraud.  Both Yahoo and Google have already run into legal trouble -- resulting in relatively small monetary settlements -- regarding such allegations.  Today the San Francisco Chronicle discusses a new report by Burlingame market researcher Outsell Inc. suggesting that click fraud cost merchants $800 million last year and is a signficant enough threat that 27% of merchants are cutting back on click-based advertising.

Coincidentally, over on ZDnet, Digital Micro-markets blogger Donna Bogatin has recently been discussing both Microsoft's and Yahoo's assessments of and attempts to thwart click fraud, concluding that click fraud prevention could be the next great search engine differentiator.  She also suggests that Google has lagged behind its competitors in facing this issue publically. 

Now this is hardly a new problem. It has been around long enough to have spawned a whole set of start-ups aimed at prevention.  But the fact that it won't go away -- and if the Outsell report is accurate, may actually be getting worse, at least from the merchants' perspective (and who else counts?) -- may suggest that cost-per-click needs an upgrade.  The next step, of course, is the cost-per-action model that some analysts and customers are pressing for.  Some sites already offer this and Google is reportedly experimenting with it as well. 

But CPA is a very slippery slope.  The issue goes back to why online publishers traditionally resist cost-per-click pricing for display advertising: your revenue becomes dependent on the advertiser's creative.  A good ad is going to get more clicks than a poorly executed one.  CPA action takes that dependency a step further: the search engine's revenue depends on both a well-designed pitch after the click plus an enticing offer.  If the advertiser fails on either of those points, you're not going to get paid and your inventory isn't generating revenue.

If I ran a search engine, I'd be spending a lot of time and energy trying to maintain the credibility of my cost-per-click business. If the market really does turn to cost-per-action, we may end up looking back on these as the Golden Days of search engine advertising, when the money just fell from the sky. 

New report: click fraud worsening? originally appeared on BloggingStocks on Wed, 05 Jul 2006 12:25:00 EST. Please see our terms for use of feeds.