Ahead of GOOG Earnings: 30% of Google Revenue At Risk From Click-Fraud? (GOOG)

| About: Alphabet Inc. (GOOG)

When Google discusses its Q4 results in its conference call at 4.30 pm EST today (we hope to have the transcript up here a few hours after the call ends), many people will be listening for comments about click-fraud.

The click fraud issue was once again raised (dredged up?) by the NY Post's Sam Gustin (via Trader Mike). He writes (my emphasis):

Google's long-simmering click-fraud problem could explode into a billion-dollar headache for the Web giant, some Web marketing experts are warning.

In fact, a growing number of Google-watchers claim the search giant is ignoring the click-fraud issue because it's so large.

Click-fraud happens when surfers click on Goggle advertisers with no desire to get to the advertiser's site. Knowing Google charges advertisers based on how many surfers click on their ads, the fraudsters click on the ads simply to drive up the advertiser's costs.

The fraud also falsely inflated Google's revenues. The estimates on the Street, if even close to being true, could rock the stock market darling, set to announce fourth-quarter results Tuesday. "If Google were to implement a method for stopping click fraud today, it would lose 30 percent of its revenue overnight," said Joseph Holcomb, a search marketing expert. Holcomb estimates that almost one-third of all clicks on Google's network are suspect, thanks to sophisticated software programs known as "click bots" or "hit bots" that mimic human activity and fool search engines into believing the clicks are legit.

With Google set to report about $6 billion in annual revenue, Holcomb's estimate would put $2 billion in top-line revenue at risk. Google denies the problem is that large.

Stock-related comment:
This sort of article strikes me as a strong positive for Google. Spurious walls-of-worry are generally good for stocks, and the click-fraud issue is entirely bogus. The beauty of the PPC-ad auction system is that advertisers set their budgets based on the return on investment. (Price paid = number of clicks x conversion-to-sale rate x profit per conversion.) So more fraudulent clicks simply mean that advertisers bid less per click. Eliminate the fraudulent clicks, and the drop in the number of clicks is offset by the rise in the conversion rate, so advertisers spend... exactly the same amount. So much for a 30% drop in Google's revenue!

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