Why Programmatic Advertising Fraud Exists

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In my last column, we covered what fraud is, the magnitude of the problem, and the many ways in which it takes shape. We are now going to discuss one of the biggest questions that arise around the topic of ad fraud: Why does it exist in the first place?

As with most big problems, a combination of factors contributes to an environment that makes the problem possible and persistent.

In the case of ad fraud, it’s a big problem for a number of reasons: the open nature of the programmatic advertising marketplace, the fact that ad fraud is technically not illegal, and lastly, misaligned incentives across the entire supply chain, leading to inertia and passive treatment of the problem.

The Downside Of Open Marketplaces

The programmatic advertising ecosystem is based on being open. This means that any advertiser or publisher should be free to participate in the marketplace.

It’s an extremely democratizing concept, but it also creates an opportunity for bad actors to join the party and pollute it with not only a lack of quality, but in some cases, outright deception. It’s the double-edged sword of open ecosystems.

Because the barrier of entry for new players is so low, anyone can sell and anyone can buy. This is a good thing for smaller advertisers, agencies and publishers — but it’s also beneficial for bad actors.

The alternative to open ecosystems, however, is closed platforms (e.g., Google, Facebook, LinkedIn, Twitter), also known as “walled gardens.” Closed platforms come with their own tradeoffs: decreased competition, and therefore innovation, leading to fewer choices for marketers, which is never a good thing.

Ad Fraud Is Not Illegal

One of the biggest reasons why fraud is so rampant is simply that it’s not technically illegal.

Unlike credit card fraud, nobody is going to jail for ad fraud, and it’s not exactly the sort of activity that elicits a crackdown from law enforcement, which means there is significantly less risk involved. And yet it’s extremely lucrative.

So, imagine a bad apple is weighing their options, and on one hand there is credit card fraud, which has modest rewards and very high risks, or ad fraud, which is very lucrative and very low-risk. It’s a no-brainer.

Something else to keep in mind is that the higher the payoffs, the higher the levels of fraud.

Case in point: video ads. As we saw in the ANA/WhiteOps fraud study, there is roughly twice as much fraud in video as there is in desktop display. This makes sense when you consider that video CPMs average at about $9, while traditional display is more in the $1 to $2 range.

Now, I’m not trying to encourage or endorse this kind of behavior; all I’m saying is that it’s easy money, which almost always results in people pushing the limits in a race to the bottom.

Lack Of Proper Incentives

“Despite the allure of programmatic advertising, it’s increasingly difficult to argue with the idea that it’s a dead end: it wouldn’t be the first technology (or company) that made sense on paper but failed because of the lack of proper incentives for those involved.” — Ben Thompson, tech analyst at Stratechery

While definitely a strong position from Mr. Thompson, I’m not sure I agree that programmatic is a dead end, but I do agree with the latter sentiment around incentives. What Thompson is referring to here is that in programmatic advertising, and ad tech in general, almost everyone makes their money on volume and transactions.

In other words, the age-old CPM pricing model rewards volume. And the business model for most vendors in the ad tech space is based on a percentage of the ad spend.

This applies almost across the board: agencies, DSPs, SSPs, you name it. They all use this as the predominant business model.

With regards to fraud, ad tech players, and even agencies, all make just as much revenue from fraudulent impressions as from legitimate impressions. As a result, there is no urgency on anyone’s part to push ahead and lead the fight against fraud.

Improper incentives lead to inertia. It’s only when advertisers and marketers start demanding action that vendors do anything.

But these poor incentives affect publishers, as well. The first major problem with the whole CPM foundation of practically all display advertising is that it incentivizes pageview-driven publishing practices: multi-page slideshows, auto-refresh ads, click-bait journalism, regurgitated reporting and so on.

These practices degrade the user experience of the web for everyone.

The incentive for volume also opens the doors to a tremendous amount of ad fraud, whether it’s non-human traffic or just low-cost human traffic that is arbitraged: CPM is what drives all of it.

Since CPM incentivizes and rewards scale, many publishers pursue scale by any means necessary, including questionable traffic acquisition, which deteriorates the quality of the ad tech ecosystem.

The Victims Of Ad Fraud

It’s pretty obvious that the advertisers and the marketers are the primary victims here. Everyone else benefits, in the short term, even if such benefits are ultimately short-lived.

But there is another victim that is only now being talked about more publicly, because of the whole ad-blocking debate: the internet user.

Internet users suffer from all of these improper incentives, mainly in the forms of poor user experience: slow-loading websites, click-bait journalism, excessive behavioral tracking, botnet and malware proliferation, and so on. And they’ve decided to take measures into their own hands.

Last but not least, an obvious observation: Ad fraud simply doesn’t perform for advertisers. So in reality, it’s detrimental to everyone’s business model over time, including agencies, ad tech companies, and even publishers, because media that doesn’t perform will inevitably lead to retention problems.

If matters don’t improve, the final victim of fraud will be the ad tech industry itself.

Who Is Responsible?

Now that we’ve covered what ad fraud is, the magnitude of the problem, the many forms in which it takes shape and what factors allow it to exist and persist, the next question we will tackle is an important one: responsibility.

Stay tuned for the next piece of this series on ad fraud, where we will cover the question of responsibility around ad fraud.


Opinions expressed in this article are those of the guest author and not necessarily Marketing Land. Staff authors are listed here.


About The Author

Ratko Vidakovic is the founder, author, and principal consultant at AdProfs, where he and his team advise a wide range of clients — marketers, publishers, tech companies, and investors — on the inner workings and best practices of advertising technology. He also publishes his insights on ad tech industry news in his weekly newsletter, This Week In Ad Tech.

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