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March 01, 2006
Click-fraud & the public Internet companies
Two recent Internet conferences (Majestic’s and Jupiter’s) highlighted the growing problem of click-fraud. Speakers described how companies are hiring other people to click repeatedly on pay-per-click ads from their competitors. But nobody mentioned that the problem is far more acute with public companies. In fact, individuals can directly impact the financial results of public companies without it costing them a penny.
Owners of ASKJ, FWHT, GOOG, MAMA, SHOP and YHOO stand to gain, while owners of AMZN, ECST, and OSTK should be worried.
What makes this particularly interesting is that despite its name,
click-fraud is not illegal, and there’s practically nothing the victims
can do to stop it. Here’s how this will play out:
Companies wishing to trash their private competitors can hire another company to repeatedly click on pay-per-click (PPC) ads. The competitor’s advertising expenses rise, but there’s no parallel rise in sales and profits. While this is sleazy, it’s not illegal.
But now let’s say you own stock in a search engine company - Ask Jeeves (ASKJ), FindWhat (FWHT), Google (GOOG), Mama.com (MAMA), Yahoo (YHOO) or Shopping.com (SHOP). You can boost the profitability of the company by repeatedly clicking on ads on those companies’ home pages, and by encouraging your friends to do the same. Click-fraud is boosting GOOG’s and YHOO’s revenues, but individual investors probably play little role in this. The companies have such large revenue streams that the impact of individuals clicking on ads to boost revenues has little proportionate impact.
But that’s not true of Shopping.com (SHOP). SHOP is a far smaller company, so a grass-roots campaign by SHOP shareholders to click on ads would have a dramatic impact on its revenues. Given SHOP’s extremely high gross margins, the impact on profits - and thus the share price - could also be large.
Posted by dj at March 1, 2006 08:13 AM