Click-click. Click-click. On a side street in New Delhi, India, past the pushcarts and down the stairs, the familiar sound of a computer mouse signals trouble for Google Inc.
Here, under bare fluorescent lights in a basement cubicle, Rajiv Kumar sells the names of websites that pay people to click on Internet ads. His price: 300 rupees ($6.74).
“There’s nothing wrong with any of this,” Kumar tells a prospective customer. Clicking is easy, he says.
The practice, known in the industry as “click fraud,” exploits weaknesses in the pay-per-click system that has made Mountain View, Calif.-based Google a wonder of the Web. Google, Yahoo Inc. and other providers of online search ads charge advertisers every time someone clicks on their links. By jacking up the hits, people artificially inflate those bills and bilk advertisers.
Google, which says it’s trying to fight such scams, nonetheless stands to profit from the traffic, too. Unless the company or its customers spot the bogus clicks, Google gets paid for them. On March 8, Google, without admitting or denying wrongdoing, agreed to pay as much as $90 million to settle its part of an industrywide lawsuit alleging search companies charged advertisers for clicks that weren’t from real customers.
Click fraud is just one headache for Google and its investors. Google stock has stumbled this year, after more than quintupling since 2004. Some investors worry that dodgy ad hits and intensifying competition, particularly from Redmond, Wash.-based Microsoft Corp., will stunt Google’s growth.
Microsoft plans to launch a rival Web ad system – code-named Moonshot – this June.
Google has irked Wall Street analysts by leaving them in the dark about click fraud and other issues, says Scott Devitt, an analyst at Stifel, Nicolaus & Co., a St. Louis-based investment bank.
Google refuses to say how many searches people conduct on its famous search engine. The company doesn’t forecast quarterly sales or profits. Word of its March agreement to settle the click-fraud suit first showed up on the company Web log, in a dispatch from associate general counsel Nicole Wong.
“A company that tells you nothing about their business deserves a discount,” Devitt, 33, says. Devitt issued a “sell” on Google stock on Jan. 18, just before the shares tanked. He raised his rating to “hold” on Feb. 6 and then to “buy” on March 24, just after Standard & Poor’s, a division of McGraw-Hill Cos., said Google would be added to the S&P 500. In his “buy” recommendation, Devitt said Google’s reticence still was troubling.
Click fraud strikes at the heart of Google, whose keyword-based ad network generates 99 percent of the company’s revenue, says short-seller David Tice, who manages the $450 million Prudent Bear Fund. “That just scares me,” says Tice, 51, president of David W. Tice LLC. Eventually, fraud and competition will hurt Google and its stock, he says, so he’s betting against Google.
Google chief financial officer George Reyes told investors at a conference in New York on Feb. 28 that the company’s growth may slow. Reyes, 51, said publicly what many investors had privately feared: Google, whose revenue has soared 71-fold since 2001, can’t sustain this pace forever.
Eventually, the company – which takes its name from googol, the number represented by 1 followed by a hundred zeros – will become so large that, based on simple math, its rate of growth may slow, Reyes said.
His comments sent Google stock diving 7 percent in a day. By March 13, the shares had cratered to close at $337.06, down from their record high of $475.11 on Jan. 11, a 29 percent slide that wiped out about $41 billion of shareholder value.
Google chief executive Eric Schmidt says his company is going nowhere but up. Since last year, Google has pushed beyond the $18 billion-a-year world of online advertising into ad placement on the radio and in magazines. The company started a pay-per-view video service in January.
“These are very large businesses,” Schmidt, 50, said in a telephone interview. He’s right: The global ad market – Internet, broadcast and print – totaled $404 billion in 2005, according to ZenithOptimedia Group Ltd., a London-based media-services company.
As part of its expansion, Google in January agreed to buy Newport Beach, Calif.-based dMarc Broadcasting Inc. for $102 million in cash and a pledge to pay as much as $1.14 billion more in the future. DMarc enables advertisers to place ads on more than 500 U.S. radio stations.
Google plans to let the advertisers buy air time, record their ads and submit them to radio stations via the Web, Schmidt says. “This thing is going to be a huge, huge play,” he says.
Last year, Google broke into print by selling ad space to advertisers in PC Magazine and Maximum PC. In February, the company expanded its reach to 28 publications, including Car and Driver. As part of a trial, Google allowed advertisers to bid for ad space in such magazines via online auctions.
Meantime, Google is going head to head with Microsoft with a new program, called Google Sidebar, designed to reduce surfers’ dependence on Microsoft’s Internet Explorer browser. Google Sidebar appears as a window on the edge of the PC screen and continuously updates with news and weather.
Schmidt, once known for championing Java Internet software as chief technology officer of Sun Microsystems Inc., says click fraud threatens none of this.
“Believe me, as a computer scientist, we have the ability to detect the invalid clicks before they reach advertisers,” says Schmidt, who has a Ph.D. in computer science from the University of California, Berkeley. “The attacks on us are easily detected.”
Schmidt declines to say how pervasive the click scams are or how, exactly, his company combats them. Doing so would help the fraudsters, he says. Schmidt says shareholders shouldn’t worry: Google monitors every click and refunds advertisers for many of the phony ones.
