Depending on whom you ask, search marketing is either in a world of hurt or faring pretty well. While the mainstream media is quick to highlight the decline in online advertising, their focus is usually on display (banner) advertising and the plummeting CPM rates that publishers and ad networks can command. By almost all accounts, 2009 will be a difficult year for display advertising. But search advertising (CPC) continues to be a bright spot that will continue to shine for the foreseeable future.

Prior to Google’s and Yahoo’s earnings reports, the estimates for Q4 search spending were all over the map. An Efficient Frontier study concluded that search advertising spending had dropped by 8% in the most recent quarter. Another SEM firm, SearchIgnite, reported that search spending by retailers was up 12%. And yet another search marketing solution, Clickable, reported that Q4 search advertising spending saw “marginal search … spending increases” in the same quarter. So based on data from three leading solution providers, search advertising spending in Q4 either decreased, increased, or stayed about the same. Thanks, guys.

We now have earnings results from Google, Yahoo, and Microsoft and the picture from these Tier 1 search providers is pretty clear.

Results from Microsoft’s online and Yahoo’s search businesses were relatively flat, which isn’t all that bad in an economy where a 10% decline is often viewed as “good news.”  But Google’s results showed an 18% growth in paid clicks and revenue. That’s just stellar.  Since Google controls the large majority of the search market and 98+% of Google’s revenue comes from paid search, this means two things. One, Google is increasing market share. No news there. Two, the market as a whole is still growing at double-digit rates. That’s the real surprise and the truly good news.

Sure, we all have fond memories of the days when the CPC market was growing at 100% and new ad networks and business models were sprouting every week. Heck, that was only last year! But it’s important to remember that in a world where the unemployment rate in California exceeds 9% and even Google is cutting costs and laying off employees, the CPC market is still healthy and growing.

This week we released the Click Fraud Index® numbers for Q4 2008 and they showed a surprising uptick in the click fraud rate last quarter. I say surprising because the overall Index had been trending slightly down for almost a year.  But in bad times, fraudsters become more active. I think it’s healthy for an industry to pause from time-to-time to focus on the downside of business, to make sure proper controls are in place, that people get what they pay for. That’s the point of the Click Fraud Index. After all, no one was focused on Bernie Madoff when the market was going up, right?

Today we announced the Q4 2008 Click Fraud Index numbers (Industry Click Fraud Rate Higher Than Ever).  Click fraud traffic from botnets grew to 31.4 percent.  This seems to be just one byproduct of the economic downturn and increase in cybercrime (State of Internet Security).

Key findings from data reported for Q4 2008 include:

• The overall industry average click fraud rate grew to 17.1 percent for Q4 2008. That’s up from 16.0 percent in Q3 2008 and from the 16.6 percent rate reported for Q4 2007.
• The average click fraud rate of PPC advertisements appearing on search engine content networks, including Google AdSense and the Yahoo Publisher Network, was 28.2 percent. That’s up from the 27.1 percent rate reported for Q3 2008 and down slightly from the 28.3 percent rate reported for Q4 2007.
• Traffic from botnets was responsible for 31.4 percent of all click fraud traffic in Q4 2008. That’s up from the 27.6 percent rate reported for Q3 2008 and the 22.0 percent rate reported for Q4 2007.
• In Q4 2008, the greatest percentage of click fraud originating from countries outside the U.S. came from Canada (7.4 percent), Germany (3.0 percent) and China (2.3 percent).

The three biggest red flags that point to the economy having an impact on the growth of click fraud are:

• The Q4 click fraud rate jumped a percentage point when it was steady most of the year.
• We saw a higher than usual jump in the botnet rate (14 percent this quarter) and the botnet rate rose to its highest level ever at over 30 percent.
• We noticed a re-emergence of click farms when they had all but disappeared.

In over four years of reporting the Click Fraud Index, the overall industry click fraud average is at its highest threat yet.  With click farms and botnets on the rise, advertising campaigns are taking the hit.  It seems that the online advertising industry is feeling the pressure of the inconsistent economy in more ways than one.

Its no secret our county’s economy is slowing and times are getting tough.  While there is great optimism, there is an undercurrent of concern.  In anytime of economic downturn, one unwanted byproduct is that crime increases (Statistics point to increase in crime).  This unfortunately includes cyber crime and specifically, click fraud.

For almost three years now Click Forensics has been tracking click fraud.  While the overall rate somewhat stabilized during 2008, the number of advertisers affected and the dollars lost continue to rise.  As we face more sophisticated attacks in 2009, I wanted to highlight some recent advances in the battle and share some specific steps advertisers can do to ensure they get what they pay for.

Cooperation has been a theme for 2008.  Progress is being made on three fronts by leaders in the industry.  First, the Interactive Advertising Bureau (IAB) continues its work on defining guidelines for counting clicks.  Click Forensics continues to take an active role in this important effort and supports it as a good first step.  Secondly, leading search providers, including Google and Yahoo!, have enhanced their products with better tools to manage campaigns and announced traffic quality centers to provide additional resources to advertisers.

The third initiative has been the joint effort of Click Forensics and Yahoo! to build the FACTr process (Fully Automated Click Tracking Reconciliation).  For years, advertisers have been frustrated when they have found invalid activity in their pay per click campaigns.  Now there is a simple, automated process that connects advertisers to the ad providers.  The FACTr system was built by Yahoo! and Click Forensics and launched publicly in July of 2008.  By the fall, other ad providers including LookSmart, Miva and Google were added.

While progress continues, here are specific steps advertisers can take to protect their online investment.  First, advertisers should monitor campaign performance at the most granular level.  Click fraud attacks come in spikes of activity.  By watching campaign performance on a daily basis, advertisers can see anomalies and alert the ad provider quickly.  Looking for spikes in clicks, drops in conversion ratios, and higher than normal impression levels are all signs something may be out of line.

Secondly, now is a good time to double check campaign settings.  A large number of unwanted clicks come as a result of campaigns not being set up correctly.  Look at geo-target settings to ensure they match your campaign goals.  Review day part settings to ensure you have optimal ad delivery for delivering quality traffic.

Finally, avoid paying for clicks from low quality traffic sources.  By utilizing the site exclusion functionality made available by ad providers, you can block bad clicks from ever getting to your campaign.  Click Forensics has a process called, Intelligent Exclusion™ that identifies bad traffic sources and eliminates them from the campaign.  We see a 43.5% decline in the overall invalid rate for advertisers who use this process.  Keeping the money in your pocket is always better than having to go back and ask for a refund!

Like you, we are hopeful that the economy will make a quick recovery.  As it does, we will benefit.  In the meantime, it’s more important than ever that advertisers are on the lookout for threats to their ad budgets.  You can count on Click Forensics to continue to work on behalf of the entire industry to bring solutions to the marketplace to ensure advertisers get what they pay for.