Report: Fraudulent Web-Ad Clicks About 14 Percent of Total

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Swindlers have stepped up their effort to fleece millions of dollars from online advertisers who use lucrative marketing networks run by Google Inc. (GOOG) and Yahoo Inc. (YHOO), according to a quarterly report to be released Monday.

The sales referrals generated by clicks on the brief advertising links popularized by the two Internet powerhouses are a sham 14.1 percent of the time, based on information collected from 1,300 online marketers.

That's up from a click fraud rate of 13.7 percent three months ago, according to Click Forensics, a San Antonio-based consulting service that compiles the index.

The statistics jibe with other data asserting advertisers are paying a significant sum to Google, Yahoo and their partner Web sites for phantom shoppers even as more resources are devoted to thwarting scammers.

A recently released survey of 407 online advertisers by market research firm Outsell Inc. estimated click fraud cost advertisers $800 million last year.

Click fraud is a highly sensitive subject for Mountain View, Calif.-based Google and Sunnyvale, Calif.-based Yahoo because it raises doubts about the trustworthiness of the advertising model that drives their profits and stock prices.

Google, Yahoo and partner Web sites get paid each time someone clicks on advertising links usually displayed at the top and on the side of Web pages.

Advertisers pay the commission even when the click doesn't produce a sale — a system that inspired bilking schemes.

The motives for click fraud vary. Most often, Web site owners repeatedly click the ads on their own sites to generate money for themselves. In other cases, advertisers target the ads of their rivals to drain their marketing budgets.

As click fraud becomes more prevalent and attracts more media attention, advertisers are becoming more aggressive about demanding refunds and better protection, said Tom Cuthbert, Click Forensics' president.

"Advertisers aren't satisfied with the status quo," he said. "They don't want to keep losing sleep at night wondering how much money they are losing to click fraud."

Reflecting those concerns, about 900 advertisers have joined Click Forensics' anti-fraud network during the past three months.

Google and Yahoo are better at weeding out click fraud than smaller Web sites, but Click Forensics still concluded both companies are being hard hit.

About 12.8 percent of the clicks on ads served up by Google and Yahoo are deceptive, up from 12.1 percent three months ago.

Cuthbert said Google and Yahoo may be identifying some of those fraudulent clicks and removing fees from advertisers' bills. Both companies are tightlipped about how they monitor for click fraud, another factor that has frustrated some advertisers that want more transparency.

Google Chief Executive Eric Schmidt acknowledged click fraud remains an ongoing headache, but disputed the notion that the problem is becoming more prevalent.

"Smart people are trying to break the law, but we have even smarter people trying to prevent it," Schmidt said during an interview at a conference that concluded Sunday in Idaho.

Yahoo CEO Terry Semel declined to discuss the latest data on click fraud, saying he intended to address the issue Tuesday when the company is scheduled to release its second-quarter earnings.

"We will be very proactive about it," Semel said during the same Idaho conference.

Both Google and Yahoo have agreed to settle class-action lawsuits to limit their potential liability for past click fraud. If approved, the two settlements would address any click fraud that occurred amid more than $22 billion of ad spending.

A two-day court hearing on Google's offer to pay up to $90 million in refunds and attorney fees is scheduled to begin July 24 in an Arkansas court.

Yahoo's proposed settlement, which doesn't limit how much the company might pay, isn't scheduled to be reviewed in a Los Angeles federal court until late this year.