ClickForensics, a click fraud auditing company, has released a report that says click fraud rates, the percentage of clicks on CPC ads resulting from fraudulent activity (either from publishers earning money from the ads, or from competitors trying to drain a company’s ad budget), has inched upward: 17.1% in Q4 2008, from 16.6% for the same quarter in 2007.

But wait—doesn’t Google already filter out bad clicks?  Google already has a three-pronged approach to identify and weed out clicks from dubious sources (click farms, botnets, competitors), and reflect the corrected traffic quality in the form of Google’s “smart pricing”. However, ClickForensics claims in its FAQ that Google only filters out 2-3% of clicks (substantially lower than what ClickForensics is claiming is fraudulent, but Google disputes their numbers), and Google itself integrated ClickForensics’ FACTr fraud documentation & reporting service in October 2008.

The deal recognizes that even a data giant like Google can’t always stay ahead of the fraudsters, and gathering useful data from auditing services and, likely, its competitors is a good idea. At the same time, the fact that CPC ad networks earn revenue from even fraudulent activity sets up a moral hazard that outside auditing and cooperation with their competitors can head off.

What’s causing the increase? ClickForensics says its the result of more ad dollars flowing into CPC, more competition among CPC advertisers, and the weak economy giving rise to click farms and other money-making scams. The solution? Information sharing among those affected. Most ad networks’ payment cycles are long enough to deter fly-by-night scammers, but since reporting is real-time and advertisers are charged on a much shorter cycle, more aggressive proactive fraud detection is a worthy goal to make.

We have just launched a suite of performance analytics to our YieldBuild publishers, which will give site owners impressive insight into the traffic and monetization patterns that are bringing in the money. Take a look at these 5 sample screenshots  (click on each to see a full-size version launch in a new window):

Although the tides are working against them, vertical ad networks continue to multiply. More sophisticated targeting offered by larger, general media sellers, constricting and consolidating ad spend on branding, and an overcrowded market might dishearten some hopefuls, but there are a couple of entrants I’ve read about this past few weeks that continue to sally forth to seek their fortunes.

• MTV’s Adify-like cluster of vertical ad networks, grouped under the moniker Tribes, launched a vertical ad network, Comedy Tribe, anchored by Viacom-owned ComedyCentral.com, but including the popular JibJab.com site (remember the 2004 election-year flash video?) among its cadre of comedy-oriented properties. Tribes was launched this past September with a parenting-oriented vertical ad network. The Comedy Tribe will compete with the National Lampoon Humor Network and Connected Ventures (CollegeHumor, Today’s Big Thing) to reach the 18-34 male demographic valued by advertisers.
• Also launched yesterday was Inflection Point Media, a vertical ad network targeted towards SMBs, hopes to capture some of the $5.3 billion online B2B advertising projected by eMarketer for 2009. Leveraging its pool of properties that attract 32 million monthly visitors, claims to have behavioral targeting technology that identifies potential prospects and serves relevant ads/offers to those most receptive to them. Because its hub is a collection of 60 business newspapers, IPM will compete against BusinessWeek and Business.com.

Two more are boasting growth and expansion in a purportedly tough market:

• SportSyndicator, an Adify-supported sports vertical ad network, recently opened an office here in San Francisco to support the 10 million US-based sports enthusiasts it reaches across 100+ sites. Climbing.com and BigLines.com are among its publishers, and North Face and Oakley are among its advertisers. It competes with Sportgenic, Yardbarker, CBS College Sports Media and SI.com
• Niche Gay Ad Network pulled away from its competitors (LogoOnline, PlanetOut/Gay.com and Regent Online) to surpass 1 million monthly uniques on properties exceeding 4 million uniques in December. The network partners with 73 smaller gay-oriented sites and blogs.

The success of vertical ad networks going forward will be their ability to fend off the big guys, who’ve gotten better at allowing advertisers to nail down a specific audience profile through which they can target spending. One of the chief challenges is building scale; most leverage one large publisher or a cluster of related publishers to deliver consistent volume. It remains to be seen, though, if ad agencies’ entries into the ad network space threatens to squeeze them out of play. It’s not hard to imagine agencies buying or even building their own vertical ad networks in order to retain the margin, while relying on something like AdSense to make up for any inventory shortfalls.

I was recently told that you are either an ad agency with an ad network, or an ad network with a creative-like agency.  It makes sense: the agencies want a piece of the spend they control, and ad networks want to attract more dollars by offering deeper integration.

I think there are a couple of questions to explore here.  First, is it a conflict of interest for agency holding companies like WPP to own an ad network like 24/7 Real Media, or is it a more efficient way to move dollars through the system that ultimately passes more money to publishers?

For ad networks, I think the big question is if offering deep creative services scales, or does it raise the cost so high that it squeezes all of the margin from the sale?  My feeling is only a few ad networks will be able to offer the creative services, but it’s more likely sites with sales forces, like Pandora, will make it work as a business. Most other ad networks will be better served by looking for more efficient ways of bringing in ad dollars.

I had a minute to go through Google’s earnings and check out the TAC (Traffic Acquisition Cost).  The TAC decreased one point, which is a significant trend.  However, it may be decreasing because of growth in Google Owned and Operated businesses.

Here are some key stats from Barron’s Online.

• Google sites revenue rose 4% sequentially, and 22% year over year.
• Google network revenue was up 1% sequentially and 4% year over year.
• International revenue was 50% of total revenue, down from 51% in Q3, but up from 48% a year ago.
• Paid clicks increased 18% year over year, and 10% sequentially.
• TAC at 27% was down from 28% in Q3.
• Google had 20,222 employees at December 31, up just 99 from the previous month.
• At year-end, the company had $15.85 billion in cash.

One of the most interesting things is how much Google slowed its hiring—only 99 people for the quarter.  That number has historically grown at 13%.  Another area they seem to be pulling back on hard is capital expenses.  In Q4 of 2007 they spent nearly $700 million.  In Q4 of 2008, they spent $368 million.  They may be reaping the benefits of past investments, or the last two quarters are examples of how quick they can pull in the spending reins and a sign of future growth.

TechCrunch’s Erick Schonfeld reports on Microsoft’s dismal quarterly earnings report, with its Online Services division (including advertising) almost doubling its quarterly loss over Q4 2007 to $471 million. Microsoft says that advertising revenue grew at an anemic 7%, with search advertising higher, but these modest increases were not enough to offset ballooning expenses.

So where were there expenses? The development and early marketing of PubCenter, Microsoft’s answer to AdSense, has probably been running up red ink, but that’s to be expected. I’m thinking more about Microsoft’s bets on advertising on social networks. It inked a 3-year deal with Digg in July 2007, but the bigger bet was its advertising agreement (via a substantial investment) with Facebook. Facebook relies on MSFT as its exclusive advertising partner worldwide through 2011.

So why the loss? It’s possible, if not probable, that the deal guarantees Facebook revenue, and Microsoft is eating the loss. After all, Facebook is a social network, and social network users are unresponsive to online ads. Its own advertising platform turns out poor results; it’s not difficult to imagine that ads served by Microsoft wouldn’t perform any better.

Although Google seems to be the last place the newspaper industry should be looking for inspiration—it just recently shut down its print advertising service—the fact remains that the Internet advertising giant has nailed successfully an entirely new source of advertisers at the same time print is losing theirs. The continued growth of online advertising, even in the face of the recent slump, has drawn away traditional, big-media advertisers from newspapers, but there hasn’t been a concomitant cross-migration of “long-tail” AdWords-style advertisers to print. That is a problem for print, given the measurable performance of online advertising and continued, increasing time spent online; this is looking like a zero-sum game that the newspapers are losing.

But does it have to be? Jeff Jarvis, in a great article at Seeking Alpha, argues that newspapers are still well-equipped to survive the changing times; they simply need to adapt. In addition to looking at commerce (some have managed to be successful at this) and leveraging their unique information and readership into building new services (like real estate agency), there are a couple other intriguing ideas that print should consider, spearheaded by the Big G and other online advertising outfits:

• Form an ad network: Instead of relying on their own ad sales division, newspapers and newspaper networks should outsource ad sales to ad networks that can fill their inventory across all available newspaper inventory.  (Of course, the ad network typically shaves off a comfortable margin for itself, something the newspapers would probably not like to lose. They can form the ad network themselves, like the airline industry did with Orbitz.) This will allow them to sell inventory on metrics meaningful to advertisers—not just geo, but on demographic, vertical/topical bases as well. And it reduces advertiser friction and builds campaign scale.
• Create a new sales force: Maybe Google isn’t the place a small, local advertiser would think of turning to to start a campaign. Jarvis suggests a “citizens sales force,” the sales side of citizen journalism. He might have a point, since a lot of the print long-tail are not going to understand AdWords any better than those online long-tail advertisers that need services like ReachLocal, Yodle and OrangeSoda. He also suggests that local media can probably retool to sell inventory beyond their reach, if there were such a network in place that could serve them.

The Los Angeles Times announced recently that revenue from advertising on its online division covered the paychecks of its entire editorial division—online and offline. This is certainly heralding the value of online traffic, which newspapers have long thought cannibalized their print traffic with dubious financial return. The hidden story is that they’ve made a new advertising model work. Maybe it’s time they apply what they’ve learned online to revive their flagging print division.

For most AdSense publishers, Google doesn’t disclose how much of the AdWords revenue they keep and share.  One thing I always look for in Google’s earnings announcement is their TAC (traffic acquisition cost) as a percent of their advertising revenues.  If the TAC percentage falls, it generally means that Google is keeping more revenue.

Yesterday, there was a piece in the Wall Street Journal  that depicted two stories on search revenues.  Efficient Frontier, a paid search management firm, pegged U.S. search revenues down 8% in Q4 in 2008 over the final quarter of 2007.  Other analysts are projecting double-digit search revenue growth in the 4th quarter for Google, specifically, and eMarketer, looking at the current year, has projected double-digit growth for 2009 at 14.9%.

If Efficient Frontier is right and search ad dollars are shinking, it’s highly likely that contextual ads will shrink as well.  Compound the shrinking ad spend with Google keeping a bigger share of its ad revenue and this could be a significant reduction in earnings for publishers.

If the TAC holds, and revenue growth is up, the decrease in earnings some publishers are seeing is more likely caused by the industry they cover.  For example, if your site focuses on financial, autos, or real estate segments, these areas have been hit particularly hard in the economic downturn we’ve all been experiencing, and that’s been particularly true for advertising in them (also mentioned by Platform-A’s Mike Peralta).

So, we’ll be watching Google’s earnings this Thursday for these two key indicators.

SEO Book’s Aaron Wall (and fellow Oakland denizen) and I had an interview, which we posted on his blog yesterday. Here’s an excerpt:

Steve Ballmer mentioned how advertisers + search volume build off each other to create a higher yield. Do you see online advertising becoming a natural monopoly market?

I don’t, because although economies of scale have an important part to play in establishing the pecking order among firms, there are other ways in which an ad network can successfully compete.

Google certainly benefited from being an early, aggressive mover in the space, and it is clearly the dominant player, but there is still substantial opportunity that is being capitalized on by other networks. Smaller ad networks fighting Google with a more generalized approach can still offer lower pricing, because heavy bidding with Google and limited high-quality inventory means that Google can’t necessarily always provide the best value proposition to advertisers, so they offload to other networks. But there will always be other ad networks that either nail a specific vertical market well enough to be an attractive option for both niche advertisers and publishers, and smaller ad networks will also continue to innovate, creating engagement and pricing (payment) models that work better for some advertisers and publishers.

Google as a network can’t do all these things – the market is just too big and too complex. But there is a way for Google to be the dominating player in the market by owning the marketplace, by opening up its platform to other advertisers, as it has done. Google doesn’t derive any direct benefit by doing so, but one predominant ad delivery platform creates the liquidity in the market that makes Google’s economies of scale matter.

Read the full interview here»

In-text advertising involves serving up a small window with either an ad, related content, or related links (or a combination of these) when a Web page visitor mouses over a specially-hyperlinked word on a page. While normal hyperlinks might be blue with a single underline, for example, an in-text advertising link can be green with a double-underline.

Matching and the selection of in-text hyperlinked words is typically done by the in-text advertising network. The publisher simply embeds a snippet of code into the page, and the network serves up the hyperlinking and pop-up window code through Ajax.

Here are four current in-text ad networks:

• Kontera: Kontera’s ContentLinks product for publishers boasts high CTRs and allows publishers to earn incremental revenue on their existing inventory (we’ve been using it on HubPages for about 6 months, and have seen the revenue it earns clearly exceeds what it cannibalizes from other advertising on the page). It also allows a high degree of publisher control, allowing competitive and keyword filtering, control over the number of ads per page, the look of the pop-up window, etc.
• Snap: Snap’s SnapShots are a way for publishers to serve up related content (from Wikipedia, Flickr, and other trusted sources), but there are two ways a publisher can benefit additionally: through Snap Shares (getting impression shares for their site or favorite charities) or through the Gold Publishers program, restricted to larger English-language sites (250,000+ monthly  PVs) with predominantly U.S. traffic, and in certain verticals (Automotive, Business and Finance, Computing and Technology, Health, and Travel).
• Miva: Miva’s Inline Ads serve up pay-per-click (PPC) ads directly upon a user’s hover over the hyperlinked keywords. Similar to its competitors, it allows competitor blocking, and it also allows publishers to bypass its contextual matching keyword discovery functionality and directly select the keywords used to trigger ads.
• Vibrant Media: Vibrant offers two in-text advertising options: In-Text Ads and InterestADs. Both require at least 500,000 monthly vertical page views, in a long list of available categories (including health, business, computing and travel). In-Text Ads work similarly to its competitors, serving up advertising or advertising-supported content in a pop-up window; InterestADs integrate in-text hyperlinked keywords (with a box around them) with traditionally-placed standard IAB ad units

How do in-text ads perform? With the current state of the ad market, I wouldn’t dare hazard a guess on CPMs. However, Vibrant Media’s CEO Douglas Stevenson, in a December 2007 article stated 3% to 10% scroll over and click on in-text ads, depending on the category.