One month ago, consumer products giant Procter & Gamble - one of the largest and most sophisticated advertisers in the world - launched a mini crisis in the online advertising space, when the company announced that it was scaling back its online advertising spend, stating that "digital ad spending was lower versus a high base period and due to current period choices to temporarily restrict spending in digital forums where our ads were not being placed according to our standards and specifications." The implications to this admission that online advertising was either being gamed by bots, or generally underperforming were significant, as it jeopardized the future revenue streams of two of the biggest companies in the world, Alphabet (aka Google) and Facebook, both almost entirely reliant on online advertising. How long before other anchor names decided to similarly cut back on their online ad spending?
So, one month later, in its first tacit admission that its ad network has few protections against "fake traffic" such as ever more sophisticated ad bots - and that P&G's criticism was spot on - the WSJ reports that Google will issue refunds to advertisers for ads bought through its platform that ran on sites with fake traffic "as the company develops a tool to give buyers more transparency about their purchases."
Hoping to avoid further spending cuts and outright contract losses - especially to arch rival Facebook, which has similarly admitted to having ad exposure problems on numerous occasions - in the past few weeks Google has informed hundreds of marketers and ad agency partners about the issue with invalid traffic, also known “ad fraud.” According to the WSJ, the ads were bought using the company’s DoubleClick Bid Manager.
Typically, advertisers use DoubleClick Bid Manager to target audiences across vast numbers of websites in seconds by connecting to dozens of online ad exchanges, marketplaces that connect buyers and publishers through real-time auctions.
The ad spending flows through to the exchanges. The problems arise when ads run on publisher sites with fraudulent traffic, such as those where clicks are generated by software programs known as “bots” instead of humans. This is an issue of growing to concern to marketers. It is difficult to recoup the money paid to those sites when the issue is discovered too late.
While in the past advertisers have received small credits from Google when they detect discrepancies, in this case, for some buyers, the fraud was larger than usual. However, since Google’s "increased" refund still amounts to only a small fraction of the total ad spending served to invalid traffic, some advertisers remain unsatisfied: "Google has offered to repay its “platform fee,” which ad buyers said typically ranges from about 7% to 10% of the total ad buy."
Scott Spencer, director of product management for Google, acknowledged that refunds have been paid, but he declined to provide a dollar figure for the amount being returned. Some ad buyers said the refund amounts range from “less money than you would spend on a sandwich” to hundreds of thousands of dollars.
“Today, we can’t disclose the information about third parties,” Mr. Spencer said. “So when we aren’t able to catch invalid traffic before it impacts our advertisers and we’re unable to refund their media spend, it hurts us, even if we’re not responsible.”
Google added the affected ad buyers in this instance were impacted by invalid traffic over the course of a few months this year, primarily in the second quarter. Part of that traffic affected video ads, which carry higher ad rates than typical display ads and are therefore an attractive target for fraudsters.
Of the billions of dollars flowing into online advertising each year, a percentage is inadvertently shown to sites with fake traffic, with fraudsters siphoning off advertisers’ money for themselves. And while the individual instances of ad fraud tend to be modest in amount, combined they add up quickly: some $6.5 billion in ad spending will be wasted this year to fraud, according to a report released in May by the Association of National Advertisers.
Unlike infamous clickfarms, typically found in some shady warehouse in India or Bangladesh, the methods used by fraudsters are highly sophisticated. Some infect unsuspecting consumers’ computers with malware to form a “botnet” that clicks on ads in the background.
And while ad fraud has long been a well-known, if unresolved, problem associated with online advertising, what makes Google's admission unique is that for years the company had claimed to have it largely under control.
The search giant has had teams dedicated to filtering out fraud before an advertiser makes a bid on an ad. Those teams can also prevent exchanges from being paid if an ad has already been bid on, but invalid traffic is quickly detected. The teams also work to discover historical instances of fraud, which is what happened in this particular case.
In other words, Google confirms that a substantial chunk of revenue that it, and others like it, pocketed over the years was never actually earned. It also may explain the recent shift in the mood of online advertisers, such as P&G, which failing to generate the desired IRR, decided to cut back on advertising altogether.
Needless to say, any blowback against online advertising which is rapidly eclipsing conventional advertising media such as print and TV, would have a staggering impact on the valuations and stock prices of some of the most valuable companies in the world, among which Google and Facebook to name a few. As such while Google's admission is commendable, the question is not just how endemic "ad fraud" has become but also how credible any new anti-bot initiatives could be. If, as Google admits, as much as 10% of recurring revenue is "fake", if only applies a generous forward multiple to this, the impact to shareholders would be dramatic. Of course, if the real "ad fraud" number is notably higher, then it could eventually lead to a crash among the ad-driven tech giant space, which as disclosed in the latest 13F reporting period, is where the bulk of the hedge fund money is invested. Which is also why preserving credibility is suddenly so critical to the like of Google, because if and when doubts emerge among investors about the company's otherwise opaque revenue practice, then what until recently has been Wall Street's darling sector will be abandoned in a hurry.
For more on this topic, please read: "It's the Biggest Scandal in Tech (and no one's talking about it)"