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Last week Google settled claims against it related to click fraud. The Internet Stock Blog has covered click fraud since December 2004. The issue resurfaced with comments by Google's CFO in January 2005 and the Times of India's provocative article about click fraud. But I've always been sceptical about the size of the click fraud problem, largely because the auction market for pay per click ads means that advertisers should price according to their ultimate return on spending, including click fraud.

Now, with the Google settlement, the issue seems to have been settled. Here's Citigroup analyst Mark Mahaney's summary:

Mark Mahaney Smith Barney Citigroup Summary

• Yesterday [March 8th], Google announced that it had agreed to pay up to $90MM in legal fees & advertising credits to settle a lawsuit related to click fraud. The settlement is not final, but Google's Associate General Counsel stated that the attorneys' fees will be charged as an expense, most likely in Q1, once the final amount is determined. And the credits will be recorded as a reduction to revenue in periods in which they are redeemed. The settlement is supposed to cover any click fraud that has occurred on Google since 2002.

• At its Analyst Day, Google management had stated that click fraud was "not a material issue for the company." Math would seem to support this statement. Since 2002, Google has generated $11.2B in gross revenue & $7.3B in net revenue. So the $90MM settlement would amount to 0.8% & 1.2% of these sales. We will review our estimates when the full details of the settlement are disclosed. Timing is uncertain. Maintain Buy and $490 target price.

Related:
Google's Q4 conference call transcript

Source: The End of Google's Click Fraud Problem? (GOOG)