Today the Click Fraud Index for Q1 2009 was released, and the startling news would appear to be that the click fraud rate in Q1 dropped to 13.8% from over 17% a quarter ago.  But there are several plausible explanations for the sharp drop in click fraud.  The real news was in the types of fraud that were identified, and the likely targets of these new attacks.

So why the drop-off?  Several factors likely contributed.  First, the Q4 fraud rate was unusually high, the highest ever in the history of publishing the click fraud index.  Due to the huge amount of online spending during the holiday season and the eroding economic climate, there was a sort of “perfect storm” for fraudulent activity.  In Q1, by contrast, there was a drop-off in online ad spending — Google reported their first-ever quarterly revenue decline — and more importantly, a decrease in the average cost-per-click (the number of paid clicks still increased by 17%, even though total revenue was down).  Lower CPCs means less reward for fraudsters.

Maybe the most important contributor to the reduced click fraud rate, though, was the heightened awareness of bots, worms, and other forms of malware created by the Conficker reporting (anyone see “60 Minutes?”).  It would appear that the tier 1 ad providers and ad networks did a much better job of mitigating fraudulent activity in Q1 than in previous quarters.  We can only hope this is a trend that continues.

But the more interesting trend uncovered in the Q1 data were the new types of fraud and the new targets of click fraud.  The data showed several examples of malicious scripts (JavaScript) designed to perpetrate click fraud.  When a visitor lands on a site these scripts execute by opening a zero iframe or zero-pixel window and clicking on paid ads.  The site visitor never sees these hidden frames and never visits the advertiser’s site.  But the advertiser pays for the click, and the site owner reaps the commission for the paid click.  Because the clicks are generated by a real browser with a valid IP address on a real web site with no suspicious repeat clicking patterns, this type of fraud is very difficult to discover for the average advertiser or unsophisticated ad network.  (No, we can’t tell you how we find it, but we do.)

The bottom line is that the click fraud rate was down in Q1, but click fraud schemes continue to get more sophisticated.  As tier 1 ad networks and ad providers like Yahoo! and Google continue to increase their efforts and effectiveness, the fraudsters will migrate elsewhere.  Tier 2 ad networks must focus on traffic quality initiatives in order to protect their advertisers, and themselves.

A few weeks ago I spoke at the Search Engine Strategies conference in New York.  I was struck at the conference that people in our industry had their heads down.  I recognize the economy is tough and that jobs can be hard to find and keep.  But guess what… online advertising will win!  Like you, I have friends in traditional media.  Newspapers and print in general have been hammered.  Radio and outdoor is fading and television is showing signs of weakness.  The dollars are shifting to online and with good reason.

In my preparation for the presentation (which can be found here) I spoke to senior executives at digital agencies and leading online advertisers.  While the title of my presentation was, “Measurement Matters” the focus was change.  There is no doubt that the world of online advertising is at a crossroads.  According to a recent IBM survery, over 60% of all advertisers are cutting budgets… 80% of them are trimming more than 15% of the spending.  This urgency was clear in this quote from the report,

“Advertisers are aggressively shifting their spend to even more interactive, measurable formats, as providers struggle to move “beyond advertising” to new forms of communication that combine the ROI characteristics of direct marketing with the brand characteristics of traditional advertising.”

The tone I heard when speaking to advertisers and agencies was consistent… “Now more than ever, we need to be sure we get what we pay for.”  Jobs are on the line, performance is not optional and measurement matters.  Where can advertisers get better value and solid analytics for performance advertising?  Online of course!

I’ve identified five specific attitudes that need to be addressed to fully capitalize on the shifting dollars…

1. Stand on our strengths – Online advertising is measurable, has a growing reach and new and creative ways to deliver meaningful ad impressions to consumers.  These are meaningful strengths that need to be communicated.
2. Tout the targeting – Saying that television advertising can target is like saying you can tell what kind of fish are in the water from the boat.  Targeting (behavioral, demographic and geographic) are a strong suit of online advertising that is unmatched in traditional advertising.
3. Get creative with compensation – Advertisers need to (and will) hold agencies feet to the fire.  Agencies that embrace this and are open to new models of compensation, will win.
4. Measure, measure and measure – Performance standards, benchmarking and goals are critical for success.  The good news is that online holds that as a competitive advantage over traditional media.  More tools are available to help with this and insight into campaigns makes a major difference in success.
5. Look beyond the “Big Two” – Yahoo and Google hold a lot of the cards when it comes to online.  However, there is a growing community of quality ad networks and publishers that can deliver strong results.  I’ll talk more about how to find them in a future project.

My presentation included the chart below highlighting a SWOT (strengths, weaknesses, opportunities, threats) analysis I did on our space.

The current economic conditions create an opportunity for those of us in the digital world.  Now is not the time to complain… it is the time to aggressively promote the benefits that online holds over traditional media.

As our overall economy continues to struggle, it’s clear that buyers are in the enviable Catbird Seat.  Looking to buy a new car or a new house (and you’ve got financing set up)?  Then, you can pretty much name your price and terms.   Sellers will literally fall all over themselves to make you an offer you can’t refuse…

Sound familiar?

It should, because this is also playing out in the online media space right now.  While overall online media spend continues to grow (albeit tepidly), supply is so outstripping demand that many online media buyers and SEM marketers are able to flex their muscles and negotiate better and better terms.  This helps explain plummeting CPMs and, yes, even declining CPCs.

But, this newfound advantage is also reflecting itself in the types of sites and networks advertisers are choosing to buy.  Increasingly, we’re hearing from our advertising and agency clients that they are starting to get picky about buying media only on those sites and networks that have open, transparent policies.  For ad networks, that means more clarity on what type of sites they’re running an advertiser’s ads on.  For search and contextual CPC players, it means increased visibility into overall results and more flexibility within the bidding platform to allow advertisers to find and opt-out of poorly performing segments.  Net/net: it’s about advertisers wanting more assurances and tangible capabilities and reporting to ensure they only get the media they specifically want.

Ad networks and CPC networks take note: I don’t believe this fight to quality is a temporary occurrence.  Even after our economy turns around, restarting sustainable growth in online media will be predicated on stealing share from other forms of offline media.  These new entrants will demand the level of transparency they’ve received in the offline world as a precursor to online media migration.

For our advertiser customers we are introducing an new integration option called the Click Forensics Redirect Service (CFRS). It’s an alternative approach to sharing click stream data with us and will often simplify the initial on-boarding process for new customers.

Instead of uploading web server log files, which often requires help from the IT department, customers only need to update their campaign settings to use CFRS. This change will send their click stream data with all necessary data fields to our Click Forensics scoring service.

Here is a conceptual overview of how CFRS integrates with paid search campaigns:

CFRS operates as an interstitial redirect page. It injects itself between the paid click and the landing page, thereby observing all click stream data. To enable it, customers update their destination landing page URLs to use a new format that will transparently invoke CFRS. This change will not impact the experience of end users visiting paid search advertisements.

From the initial customer feedback, we have learned that CFRS was an elegant alternative to sharing web server log file data and eased the initial on-boarding process. If you have been contemplating to improve your search marketing budget by removing irrelevant keywords and invalid clicks, please make sure to learn more about our offerings for advertisers.