Google fails to allay fears over internet 'click fraud'

Google's decision to pay up to $90m (£52m) to settle a lawsuit over online advertising fraud has failed to quell fears the company's business could be undermined by spiralling "click fraud".

The search engine giant was accused of knowingly overcharging advertisers whose bills were inflated by bogus clicks on their online advertisements.

About 98 per cent of Google's revenues come from "pay per click" advertising, and there are fears click fraud has become so widespread it could hit confidence among the company's customers.

Click fraudsters either pay individuals or, increasingly, use automated programs hijacking personal computers, to generate bogus clicks. The problem is a key plank of the bear case against Google shares, which have fallen more than a quarter since their peak this year.

Google agreed to settle a lawsuit from Lane's Gifts & Collectibles, an Arkansas retailer, that claimed it was not doing enough to combat click fraud, a claim Google denies. The search engine usually gives advertisers 60 days to claim they have suffered from click fraud, but said yesterday it will offer credits to cover any valid claims going back to 2002.

It admitted it had no idea how many would apply, but said the cost of the deal would be capped at $90m.

Companies may use click fraud to jack up "pay per click" bills for rivals. Google also places links to its advertisers on affiliate websites and shares revenues with those affiliates, giving an incentive to inflate the number of clicks. And some computer programmers are having fun at Google's expense.

Estimates of the scale of click fraud vary wildly, from perhaps 5 per cent to 20 per cent of the $5bn pay-per-click market. Recent studies found one in three clicks could be bogus in some advertising campaigns. Google insists the problem is tiny, and that it has internal systems that spot and prevent billing for bogus clicks.

Google faces a second class action lawsuit from Click Defense, a firm promoting anti-fraud software, and analysts at Lehman Brothers warned yesterday the Lane's Gifts settlements may not head off other click fraud litigation against Google.