Google Click-Fraud Settlement VERY Material

Okay, this is getting ridiculous.  Six days ago, Google CEO Eric Schmidt dismissed the click-fraud issue as "not material."  Now, six days later, Google has agreed to a settlement in ONE click-fraud lawsuit that could reach $90 million.  I'm sorry, even if the lawsuit was baseless, even when you have $6 billion in revenue, $90 million qualifies as material.

To make matters worse, the company released this news on its blog.  A $90 million, precedent-setting payout on a critical issue at the forefront of every Google observer's mind, and the company has an anonymous associate general counsel type up a blog post.  Google needs some new PR people, and it needs them now.

This agreement covers all advertisers who claim to have been charged but not reimbursed for invalid clicks dating from 2002, lawyer Nicole tells us, as though describing a new feature on Google Earth. 

Okay, fine, but far more important, what will happen from here?  Has the the company fixed the problem, if there was one, or will this always be a he said / she said thing?  Is the problem getting better or worse?  Who knows? After breezing through her "update", Nicole just assures us once again that "we believe we manage the problem of invalid clicks very well.  We have a large team of engineers and analysts devoted to it. By far, most invalid clicks are caught by our automatic filters and discarded *before* [sic] they reach an advertiser’s bill.  And for the clicks that are not caught in advance, advertisers can notify Google and ask for reimbursement" 

Then can we assume that, in the future, the tiny percentage of "invalid clicks" that slip past Google's rocket scientists and aren't reimbursed will be dealt with through the legal system?  And, while we're getting updated, what should we assume is the percentage of clicks that the rocket-scientist team "discards" as a percentage of total clicks?  Is this percentage increasing or decreasing?  What about the percentage of Google-approved clicks that advertisers claim are invalid?  Is that percentage increasing or decreasing?  By the way, what percentage of revenue is Google "reimbursing" every quarter?  (Sorry, now that we know the definition of "material" is somewhere north of $90 million, we have to ask).  Is that percentage increasing or decreasing?  And what should we assume will happen now that Google is shelling out money?

For the finance folks out there wondering how we’ll account for this, Nicole continues, moving on with her Earth-to-Google demo.  The "finance folks" out there?  Um, you mean the thousands of shareholders who have been and remain concerned about this issue?  For the finance folks out there wondering how we’ll account for this we can say that the attorneys’ fees (which will be determined by the judge) will be charged as an expense, most likely in the first quarter, once the amount is determined. The credits will be recorded as a reduction to revenue in periods in which they are redeemed.

So should we assume that most of that $90 million will hit revenue next quarter? 

To be clear: It is not about the loss of $90 million (although I think this number qualifies as material). It is about the precedent, the future, and yet another three-stooges PR move.  Google has always suggested it handles click fraud "very well."  As far as we know, it hasn't fixed any problem, improved its detection capabilities, or even acknowledged that there might have been a problem, and it certainly hasn't "withdrawn the product from the market" (a standard way to control future liability).  The click fraud concerns have never been about the past, so what happens from here?

On the PR side, it is hard to know which is more worrisome: That Eric, Larry, Sergey, and the man-hereafter-affectionately-known-as Three-Alarm George would make the decision to have a subordinate deal with this in a blog post, or that the subordinates could be so out-of-touch with the world outside the Googleplex that senior management wasn't even informed.

UPDATE: After several thoughtful comments, I thought some more about the blog vs. press release question.  Please see next post below.

Comments

[Neal Lachman]

Anon, I am just a bit pissed at Google because they have dared to enter in my core business. Yeah, I may be a bit disgruntled. But, let's be honest. Does goof ups of any company not get settled by the way their stock performs? My observations are mere reflections of reality, not some wishful thinking. Now, let's get back to the topic.

[Tom]

Sometimes I think people who don't understand tech, or have never taken a computer programming course, invest in technology.

Does anyone understand how easy it is to write simple programs against click fraud.
INPUT: take the ip address
INPUT: take the time.

IF STATEMENT: If the same IP address makes the same click within @(variable _one) amount of time, throw out all the clicks from this IP address.

Click fraud solved!!

[bronxite]

"Click fraud solved!!"

what is the amount of time between clicks? It it gets to be too long, the CFO will probably make another later to be withdrawn statement. In any event, those looking to profit from "click fraud" will figure it out eventually, and just extend their time between clicks while using more IP addresses. This is a double edged sword for Google.

[AnonymousCoward]

Tom,

You seem to be unaware of the wonders that proxy servers and autobots can introduce into such a scenario.

[Tom]

Of course my program was simplistic. There are not too many proxy servers out there; and google's in-operation programs are just as sophisticated as the main ones that killed the competition in search. You make a statistical model and block whole ranges of ip blocks that are seen from algorythms to be abusive.

Here is the kicker: at the same time you construct a database for the DOJ--because click fraud is a federal crime. Right Henry?

Face it. Defrauding Neilsen on TV ratings is easy. Click fraud is a non-issue in today's internet environment, because it can be programmed against.

There is no meaningful click fraud--at least at google.

Those who do not understand tech, should not invest in it.

Of course Henry didn't understand it either.

There are some around who are just the mouthpieces of short-selling hedge funds.

That's what's happening here, IMHO.

Tom

[Neal Lachman]

And what exactly would these hedge fund promoters do here? Refer to Google's goof ups? Maybe even dare to comment on the downward spiral of earnings? Maybe they dare to compare real world figures and p/e ratios with an inflated internet stock?

[Still Inside]

Click fraud is an issue to GOOG in the same way that mail fraud is an issue to EBAY.

EBAY takes fraud very, very seriously and they have a significant group dedicated to the problem and some crime-fighting heavyweights on the payroll, if I recall.

They also let investors know that: a) there is always risk in this kind of business; and b) that they have baked the costs of fighting the problem into the numbers.

In GOOG's case, they are telling investors, "there is no problem and we intend to ignore it". That's suicide.

In both cases, the problem can be dealt with with diligence and careful adjustment to the business model, and in both cases the problem can blow up if its not treated carefully.

SI

[GeneticAccident]

I agree 100% with what Henry had to say and all the interesting comments by Neal, Tom and the rest of the Anon family. I work in tech, and it is not as simplistic as you think it is - It requires enormous amount of computation to determine the clickfraud when 100 billion pages are viewed everyday. This is not loading 100 billion records into Terabytes of RAM either. You are running a damn World Stock Exchange on Google Servers.
People in third world countries will become less controllable because of the lack of accountability. Pay per click is a business model that used to work. It no longer will.
I do not like the way the company is behaving either. From what I see, this is the summary of what is happening there - let's leave the numbers out for now - for even we dont know how many clicks we made on the ads today if it is not 0.

1. Inept Management
2. Slowing Growth
3. Click Fraud
4. Ever increasing Cap Ex.
5. Meaningless acquisitions which fall nowhere in the plan - Upstartle is a great example
6. No channel for monetizing other than search which is coming to an end by the way
7. Relentless ( I repeat relentless) insider selling - Not even a single day since the last month's earnings have been without insider sales. Total insider sales are 2.5 billion - source yahoo.
8. Non revenue generating releases - Google Earth, gmail, unlimited mail storage, Google Maps etc.
9. More forays into such non revenue generating markets like online videos etc.
10. More gaffe;s than my 2 year old.
11. Immaturity on wall street (for your reference, Eric Schmidt ran Novell to the ground. Reyes was not the CFO for any publicly traded company till Google. Seregey Brin and Larry Page are 30 and 31 years old who dont even know how to give a press conference).

The only thing that is preventing me from getting into the puts game is the sheer amount of negativity there is with this stock. In 90 0ut of a 100 cases, with such negativity, it is almost a given that this might have a pop by options expiration. After that, I dont see it trading even close to 100.

My $0.02

[GeneticAccident]

Oh yea, and I forgot one more thing where all Ph.D's screwed up collectively not too long ago - Long Term Capital Management.

[Steve]

As a FORMER advertiser with G, I'm hot under the collar! I've spent a pile of money with Adwords and am just now learning of all the problems with Click fraud etc. I'm not an expert with managing the PPC campaigns - mainly because I'm a do-it yourselfer who has little time to learn the in's and outs of it all. Nonentheless I do my best to try and see what ROI I get but that's not my point here. After reading G's blog report regarding that settlement it felt like this. Imagine you have been paying a newspaper for a few years for classified advertising. Your monthly bill arrives and you find a little note inside that says you may be entitled to a refund because we billed you daily but some days we forgot to print your ad. However, if you would like a refund, please tell us within 60 days which newspaper editions your ad did not appear in. And by the way, our engineers are so smart, this glitch doesnt happen that often, but it does happen.
In fact, we just had to pay $90 million to settle our first lawsuit about this.
A non-material amount in our opinion. Huh? I'VE BEEN HAD!

[Anon]

Genetic, Your points 1, 10 and 11 are all related, then why make them three individual points. And there are a lot of baseless allegations that makes your whole post look like it's written by a two year old. Here are some of them:
> 8. Non revenue generating releases - Google Earth, gmail, unlimited mail storage, Google Maps etc.

I believe Google mentioned at the analyst meeting that they plan to monetize Google earth and maps. BTW, a paid pro version of Google maps is already available

> 9. More forays into such non revenue generating >markets like online videos etc.

That's BS - we already know the business model behind the video.

> 6. No channel for monetizing other than search >which is coming to an end by the way

So people will stop searching or will $ stop flowing into internet ads? The other point about channel is addressed by answers to 7 and 9.

I can go on about each point but I see that your whole post is just about making baseless points. In fact, people like you, Neal etc. seem to just be pissed off with Google for either infringing on their business OR you are looking to make some money off shorting the stock. If so, then you should better stick to the finance message boards and let other people do more meaningful conversation.

[Anon]

Correcting one sentence:
"BTW, a paid pro version of Google maps is already available" should be "BTW, a paid pro version of Google earth is already available"

[Still Inside]

Anon:

I'm the kind of person that will scroll down to the negative reviews of a product or a hotel to see what the problems are. I assume positive reviews are all going to be the same.

In this case, in the last few weeks I've been looking all over for GOOG bull cases. If you can point us to one here, that would be great. Please try to find one printed after the stock fell below 400.

In your post I found three positive points:

1) That GOOG is going to make significant money selling "pro" versions of GOOG maps. A lot like APPL makes tons of money selling pro versions of Quicktime*. (*They don't).

2) GOOGs other markets will make them a lot of money. This is certainly a bull GOOG argument, and one I've heard a lot back in the roaring 2005s. If there is money to be made here, GOOG has not shared with anybody how it will be done. You can bet on them on pure blind faith, but you can do that with any company.

3) GOOG has other channels besides Search for monetization. This is true, but none have proven even 1/10th as profitable as Paid Search on a per eyeball basis. Paid Search is an superb advertising medium because people searching for things are often searching for things to buy. Reading the news or your email is not the time you want to buy something.

GOOG is a one hit wonder. The bull case for GOOG is that their one hit continues to hit (pretty likely in my opinion), and they don't fuck it up by losing focus and getting bored with it (less likely in my opinion, and getting worse day by day).

All that said, the one deal-breaker for me is the management team dumping their own stock as fast as they can. There's no excuse for that.

SI

[web20guy]

If soemeone can build a product targeting click fraud that works, google will pay anything to buy them. anyone interested?

[Anon]

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Sometimes I think people who don't understand tech, or have never taken a computer programming course, invest in technology.

Does anyone understand how easy it is to write simple programs against click fraud.
INPUT: take the ip address
INPUT: take the time.

IF STATEMENT: If the same IP address makes the same click within @(variable _one) amount of time, throw out all the clicks from this IP address.

Click fraud solved!!

Posted by: Tom | March 09, 2006 at 08:05 PM
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Well Tom,
I'm a former microprocessor designer for one of the the biggest powerhouses in the world, I'm architected microkernel OSs and written plenty of code. I'm also a little different in the sense that I've also run a large business and have been a consultant to some of America's greatest companies and their executive teams. I've also got an IQ of 148. For someone who would post what you posted, I might need to interpret that. I'm not stupid. (I'm setting you up with your demeaning post as you might be able to fool dimwitted MBAs, or so you appear to insinuate, but you aren't fooling everyone. Maybe you should get an MBA. It would likely enlighten you from the myopic view through which you view others.)

Your post is pure bullshit. One thing you may fail to realize is that there are alot of people smarter than you that can easily figure a way around your foolish notions. Why, pray tell, do you not think a legion of PhDs at Google and every other organization around the globe have not implemented your "elegant" solution?

Google is headed to $170 or less in a major market correction that will play out this year. And it doesn't have anything to do with Google's problems. It has to do with the problems the market will have as earnings contract across the board and risk appetites become very anemic.

Hey, next time, don't be so delusional that you think you can bullshit your way to intelligence.

[Ryan]

I am surprised that there hasn't been more discussion on this site regarding Google's most recent purchase of a company which provides online word processing. Seems to me like this could be an interesting and very big profit center for Google if they can get people to make the switch...

[Neal Lachman]

anon, I heartly congratulate you with such a staggering IQ and such a great track record. I hope Google will hire you, then you can join the greatest minds on the planet.

[Still Inside]

Ryan:

The discussion in question has already happened several times on this blog, and is core theme of mine and several others here. GOOG is getting bored with their sucessful cash-cow business, reinventing themselves as the MSFT-killer company, and directly attacking MSFT entrenched businesses.

The only non-absurd scenario I can carve for this move is them building their case with the DOJ when MSFT wipes them out in 18 months by bundling a search engine in Vista (its called Windows Live btw). That's pretty absurd too, but its the least absurd reason I can think of.

SI

[Neal Lachman]

SI,

If I remember well the European MS executive, Neil something, last week said that they won't be bundling the search engine in the new operating system. But you are right, if MS did, it would be a masterstrike... be it troublesome in terms of Google and the like screaming "unfair competition" to the DOJ, up to the European Commission and the emperor of Japan.

[PJ Brunet]

I pointed this out 7 months ago...

http://knowingart.com/24/beyond-fully-rendered-ads/

This is just the beginning.

[Neal Lachman]

PJ,

Great post on your blog. I am glad I read it because it gives a rare view on the inside workings of the adsense and adwords business model. I hope for Google that they clean up their act, and start focusing back on the search industry and its directly related services.

What is really important is that maybe a small company will come up with an even more revolutionairy eyeball/click-through concept, and forms a strategic partnership with MS, Yahoo or Ask. Then the boxing match will really start.

[Neal Lachman]

"Writely is in a developing "beta" stage, like many of Google's products, and is "far from perfect", according to Ms Mazzon." (FT article 9 March - http://news.ft.com/cms/s/52de93d8-afdb-11da-b417-0000779e2340.html)

[Walt Gibson]

How many Google Advertisers check their website statistics? I find no evidence of click-fraud, yet our statistics show nowhere near the click-throughs that Google charges us for. We therefore paused all ad campaigns with them, yet they are still racking up the (unsubstantiated) clicks!

Of interest: Most of our actual clicks come from our Verizon ppc's at SuperPages.com.

[pictures male medical fetish]

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[Joseph Fiore]

Making sense of the senseless