Google CEO Eric Schmidt believes there is a “perfect economic solution” to click fraud: “let it happen.”
Schmidt discussed how the pay-per-click advertising model is inherently “self-correcting” in regards to click fraud during a Stanford University event last March. Schmidt extolled the enhanced trackability of the online pay per click advertising model versus pay per impression models, while acknowledging “smart but evil” people try to “go around system.”
According to Schmidt, Google’s auction-based pay-per-click advertising model is inherently self-correcting.
So in an efficient market, Schmidt and I see eye to eye. But there's some obvious counter-evidence to this: people are making money for doing nothing. So, say I publish a blog, run Adsense, and ring up a bunch of phony clicks (somehow evading Google's algorithm-based detectors). Whether it's Google or the advertisers paying, someone's paying me for cheating. That's a flaw. It may be a tolerable flaw, but a system that rewards people for gaming it is not a perfect system. If the advertisers don't mind (because they've adjusted their expenditure), then it's the Google shareholders who are paying.
So let's say it is the Google shareholders who are paying; maybe the company thinks the cost is worth it. Perhaps the costs (direct or indirect) of aggressively combating would be higher than just paying the cheats. That may be, and if so, then perhaps click fraud just isn't a fight worth fighting.
But even if this is Google's calculus (and this is 100% speculation, though I think the logic is sound), there's still a problem. Click fraud, from month to month, isn't likely to be distributed evenly. Attackers, in their quest to evade Google's watchful eyes, are likely to constantly change their tactics, attack different companies, try different kinds of content to run against ads (and thus get a different mix of ads). In other words, I doubt that click fraud can really be predicted well enough, so that an advertiser can feel comfortable with its ROI projections. And I think that even if the numbers look steady in the big picture, it matters if inconsistency reigns on the micro level.
Ok, so I mentioned the Federal Reserve in the title, so that needs to be tied in at some point. There's a school of thought (which I would very much like to be sympathetic towards, cause it's so delightfully contrarian) that says that Fed activity is entirely irrelevant, that no matter what the Fed does, prices will just correct. So, for example, if the Federal Reserve slashes rates hard, then the prices of goods like oil and housing will just rise in correction. But while that looks like inflation, it's actually not a big deal, because cash will be more plentiful, to cancel the higher prices out. If Eric Schmidt were the Fed Chief, he might say it's self-correcting.
But there's something I'm uncomfortable about in this scenario. Yes, there may be a lot of extra cash sloshing about the system, but its distribution isn't even, or even --gasp -- fair. For example, not everyone has home equity to tap when interest rates are at 0%. And price swings won't necessarily be across the board. Ask the airlines if it makes a difference whether oil is at $35 or 75$. In other words, while cash levels on the whole may rise to meet prices on the whole, there's going to be inconsistent pockets of pain and pleasure. And, taking this one step further, price inconsistency makes business planning hard, which seems bad for the economy. And, bringing it home here, ROI inconsistency, when it comes to advertising online, can't be good for Google or its clients.
This is an interesting solution, and though I don't completely share Schmidt's sanguine view (though I'll concede he has a much better vantage point), I don't share the gloom and doom perspective of many, that click fraud is Google's (and the whole internet's) Achilles tendon.
GOOG 1-yr chart: