In my constant effort to get the widest distribution possible for my blog, I figured a controversial headline might just help. Hope it got you interested.

Seriously though, the headline does have some relevance. Let me explain. First, Eric Schmidt gave a speech recently in which he poo-pooed the significance of click fraud. As reported in Search Engine Journal, Mr. Schmidt gave a speech at Stanford in which he noted: “Eventually, the price that the advertiser is willing to pay for the conversion will decline, because the advertiser will realize that these are bad clicks, in other words, the value of the ad declines, so over some amount of time, the system is in-fact, self-correcting. In fact, there is a perfect economic solution which is to let it happen.”

It sounds so mathematical and smart, doesn’t it. Eric (I’m on a first-name basis with him, since I once talked to him at a Google lunch for five minutes) is arguing that search is an efficient market – over time, rational actors will pay exactly what they can afford for a click – no more and no less (assuming there are other bidders below them). A similar analogy would be the stock market. A stock is priced at what the market thinks the stock is worth. Click fraud is to search what an SEC investigation is to a stock – marketers or investors simply bundle the negative impact into the value they are willing to pay.

Sadly for Eric’s theory, in this instance there is quite a chasm between theory and reality. You see, search engine marketing is currently practiced by a combination of rational and irrational actors. The rational actors are the folks that track their keywords, analyze ROI, and adjust bids accordingly. For these folks, the amount they are willing to pay for a click truly is an efficient value.

There are hundreds of thousands of irrational actors who don’t really know whether a click is converting or not. For these folks, many of their clicks may be fraudulent, but as long as the overall result seems to be profitability, ignorance is bliss.

And speaking of ignorance, should we assume that Eric is ignorant to this truth, or rather that he is doing a little political grandstanding? I think you know the answer. Incidentally, I wrote about this “inefficient market” several months ago. Here’s the link.

In other news, Google announced its new “Quality Score” algorithm, apparently designed to stop “MFA” or “Made for AdSense” arbitrage sites. As stated in the official release: “Following that change, advertisers who are not providing useful landing pages to our users will have lower Quality Scores that in turn result in higher minimum bid requirements for their keywords. We realize that some minimum bids may be too high to be cost-effective — indeed, these high minimum bids are our way of motivating advertisers to either improve their landing pages or to simply stop using AdWords for those pages.”

This is one of those things that you can definitely look at as glass half-full or half-empty. From the half-full perspective, you could argue that it makes sense that Google is trying to stop AdSense arbitrage. After all, sending someone to Google to a page full of Google ads certainly does not satisfy user expectations. And since Google’s entire brand is based on relevancy, poor ad relevancy can lead to some serious problems for Google.

The half-empty perspective argues that this is an example of Google playing God. In essence, Google can decide to adjust the algorithm to exclude whoever they want from their advertising network. Right now, they are using that power to exclude AdWords arbitrageurs. And for most SEMers, that’s not a big deal, because it doesn’t impact us.

But what if Google decided that lead generation sites weren’t providing good user experiences, or comparison shopping engines (which are often nothing more than AdWords arbitrage companies if you think about it), or eBay, famous for sending users to totally useless results?

Ultimately, the beauty of PPC marketing is – or rather was – the fact that it was a level playing field. If you could pay more per click, or had a better click-through-rate, or had a better combination of the two, you would show up ahead of your competitors. That could be changing. In Google’s new Quality Score world (which is incidentally being adopted by Yahoo as well), an advertiser that Google deems as ‘low quality’ has no chance of showing up at the top of the listings, irregardless of the amount he is willing to pay or even the frequency in which users click on his ads!

And here’s the most ironic part: a model based on CPC and CTR is – guess what – an efficient model. It assumes that bidders are rational actors and that over time the bid someone is willing to pay will be directly correlated to the ROI that bidder receives from his ad. You would think that an advertisement with “low quality score” would result in low CTR and low conversions, and thus low ROI. In other words, if I am marketing my “blue widgets” on the keyword “red widgets,” few people should click on my ad and even fewer should buy blue widgets from me. This means that over time, I will simply run out of money and stop bidding on the keyword.

In a rational market with rational actors, this is exactly what happens. Thus, if the #1 bidder for a keyword happens to be an AdSense Arbitrage company, this simply means that this company is better able to monetize a keyword than any other company (or is losing a lot of money). Similarly, when you see eBay advertising on “Buy Nuclear Weapons”, you have to conclude that even though that is an irrelevant ad, enough people must be clicking and buying as a result of the ad to make it worth eBay’s while to buy gazillions of keywords.

Quality score doesn’t enable a truly efficient market, and it puts too much power in Google’s hands. And with Eric Schmidt arguing that click fraud isn’t a problem because the market is efficient and rational, to me this seems like Google having its cake and eating it too.

Tags: click fraud, mfa, adwords arbitrage, eric schmidt, quality score

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1 Comment

  1. Gopi July 13th, 2006

    It seems a lot of non-arbitragers (merchants & affiliate marketers) are affected… How are the accounts you are managing doing?

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David Rodnitzky
David Rodnitzky is founder and CEO of 3Q Digital (formerly PPC Associates), a position he has held since the Company's inception in 2008. Prior to 3Q Digital, he held senior marketing roles at several Internet companies, including (2000-2001), FindLaw (2001-2004), Adteractive (2004-2006), and Mercantila (2007-2008). David currently serves on advisory boards for several companies, including Marin Software, MediaBoost, Mediacause, and a stealth travel start-up. David is a regular speaker at major digital marketing conferences and has contributed to numerous influential publications, including Venture Capital Journal, CNN Radio, Newsweek, Advertising Age, and NPR's Marketplace. David has a B.A. with honors from the University of Chicago and a J.D. with honors from the University of Iowa. In his spare time, David enjoys salmon fishing, hiking, spending time with his family, and watching the Iowa Hawkeyes, not necessarily in that order.