Fergie's Tech Blog

Click Fraud Claims Drive Lawsuits

Adam L. Penenberg writes in Wired News:

A few years ago, Diane Frerick and Kevin Steele, co-founders of Karaoke Star, a Phoenix-based karaoke equipment seller, were on their way to $3 million in annual revenue.

They owed much of their success to paid search advertising on Google and Yahoo Overture. By bidding anywhere from 40 cents to $3 for keywords revolving around karaoke (such as "karaoke player" or "karaoke song"), Frerick and Steele were able to generate $6,000 a day in sales from $2,000 in advertising, and were watching business grow at a brisk clip -- 35 percent a month compared with the year before. They dreamed of becoming the Home Depot of karaoke.

Then, in the summer of 2003, things came crashing down. Suddenly, the number of clicks on certain keywords jumped from 200 to 800, forcing Karaoke Star to burn through its advertising budget, but $2,000 in advertising yielded just $3,000 in sales. "Our orders went up thousands a day but our bills went up thousands a day," Frerick said. "The increased business cost more than it was worth."

Karaoke Star was a victim of click fraud, a web phenomenon that has been attracting increasing attention. In a way, it's like hordes of virtual ne'er-do-wells impersonating potential shoppers and generating a small fee every time they look at an advertisement. Over time, it can really add up. Karaoke Star estimates it lost close to $500,000 to click fraud. That led Frerick and Steele to plan legal action not just against the company they thought was trying to drive them out of business, but against Google and Overture. (Although all the parties have been served with papers stating Karaoke Star's intent to sue, the case has not yet been filed.)

posted by Fergie @ 8/18/2005 07:51:00 AM