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Merchants Lack Technical Skill To Spot Online Ad Fraud

Enforcement requires fact-intensive technical investigation -- examining HTML code and packet logs to uncover infractions, talents many companies can't maintain, a report suggests.

Online marketers lack the technical sophistication to tell when they're being robbed, according to a research study released this week.

In a his report on cost-per-action advertising fraud, spyware researcher, attorney, and Harvard assistant professor Benjamin Edelman finds that online advertising fraud can happen without sophisticated spyware, even to cost-per-action advertisers.

Cost-per-action (CPA) advertising, in which advertisers pay for actions like online purchases rather than clicks, is widely seen as being less susceptible to fraud than cost-per-click (CPC) advertising. But Edelman, who recently documented other instances of online advertising fraud, cites three specific cases where CPA advertising's presumed fraud-resistance is overstated.

One reason that CPA fraud occurs, he said, is that online marketers tend to lack the technical skills to identify online advertising fraud.

"Enforcement requires fact-intensive technical investigation -- examining HTML code and packet logs to uncover infractions," Edelman said in his report. "The required skills have little overlap with the relationship-building and communication that otherwise drive affiliate marketing."

CPA advertisers typically pay affiliates a commission when a customer browses an affiliate's Web site, clicks on a Web link with an embedded affiliate code, and then purchases a product that corresponds to that code.

But through a technique called "cookie-stuffing," unscrupulous affiliates can manipulate merchants' affiliate-tracking systems to get credit for purchases they had nothing to do with. In effect, the affiliates get paid for hacking the system.

Cookie stuffing has been a problem for years, and Edelman said it's still going on.

In August, eBay filed a lawsuit against Digital Point Solutions and others alleging cookie-stuffing fraud. Edelman, in a phone interview, suggested that given the high-priced lawyers eBay hired to litigate the case, the company may have lost some serious money.

In one of the examples Edelman cites in his report, the banner ads from a company called Allebrands invisibly load affiliate links. When users view banner ads on third-party Web pages, "the affiliate can drop its cookies and obtain a commission on purchases users make from the targeted merchants," he explains.

If merchant obliviousness is one facet of the problem, willful blindness on the part of affiliate networks is another.

"For some merchants and networks, mixed incentives further hinder efforts to prevent these fraudulent practices," Edelman's report said. "In the short run, affiliate networks and merchants' in-house affiliate marketing staff stand to lose from rigorous enforcement -- reducing their commissionable base, reducing the size of their marketing programs, and distracting their attention from activities that more directly increase their respective short-run compensation."

In a phone interview, Edelman said that CPA fraud should be fixable from a technical perspective, more so than click fraud, where the issue is user intent.

To address the problem, he recommends that merchants analyze their statistics more thoroughly, provide an easy way to report fraud, consider a bounty for identifying affiliate fraud, and conduct tests designed to detect scams.

But he cautioned that the deteriorating economy could spur more ad-related fraud. It was following the collapse of the first dot-com bubble that companies like Claria/Gator thrived, he said. "Fraud pays disproportionally in tough times," he added. "In good times, you can make money the old-fashioned way."

"It's amazing what a house of cards the whole advertising infrastructure is built on," Edelman said.

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