NEW YORK (CNN/Money) -
A top Google official said that growing abuse of the company's lucrative sponsored ad-search model jeopardizes the popular Internet search engine's business.
"I think something has to be done about this really, really quickly, because I think, potentially, it threatens our business model," Google Chief Financial Officer George Reyes said Wednesday.
Reyes, speaking at an investor conference sponsored by Credit Suisse First Boston, was referring to an illegal practice known as "click fraud" that occurs when individuals click on ad links that appear next to search results in order to force advertisers to pay for the clicks.
In cost-per-click advertising, marketers pay a search engine, like Google, Yahoo! or FindWhat.com, when users click on links to the advertisers' Web sites. Google and others also generate revenue by posting sponsored ad links on other Web sites and splitting the fees generated by user clicks.
The paid-search model is now the fastest-growing form of Internet advertising, according to the Interactive Advertising Bureau.
But analysts, fraud experts and now Google (down $0.56 to $179.40, Research) are openly fretting about the rise of click fraud.
The main perpetrators appear to be competitors of advertisers and also scam sites set up for the sole purpose of hosting ad links provided by Google, through its AdSense unit, or Yahoo!, through its Overture service. Humans or specially designed software then click on those ad links in order to "steal" revenue from advertisers.
Estimates of how prevalent click fraud has become since it appeared four years ago are all over the map. Jessie Stricchiola, the president of Alchemist Media, estimated that as much as 20 percent of all clicks on paid search ads are shams.
In recent months, Google has become increasingly vocal about the problem. In regulatory filings leading up to its initial public offering this summer, the company has reported that it has regularly paid refunds related to fraudulent clicks.
"If we are unable to stop this fraudulent activity, these refunds may increase," Google said in one of the filings.
Is Google doing enough?
Google has reason to be nervous.
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Paid-search advertising generates about 98 percent of its revenues. Red-hot demand for cost-per-click advertising doubled Google revenues in the first three quarters of this year and paved the way for the company's blockbuster IPO in August.
Google's stock price, which closed Thursday at $179.40, is up 80 percent since its debut.
Reyes' comments Wednesday appeared to the starkest yet by any Google executive that click fraud is becoming a serious problem.
In fact, he called click fraud the "biggest threat" to the Internet economy. "There's a lot of bad guys out there that are trying to take advantage of this and it costs, I'm sure not just us, but eBay and Yahoo! and Amazon and the whole crowd, you know, tons of money."
He did not elaborate on what needs to be done to combat the scourge.
Government watchdogs, primarily focused on pursuing Internet scams that harm consumers, have only recently taken action.
In March, federal authorities arrested a California man for allegedly trying to blackmail Google into paying him money not to distribute software that he claimed would allow spammers to generate millions of dollars worth of fraudulent clicks.
For the most part, search engines have been self-policing. They all claim to have in-house fraud detection teams and top-of-the-line technology that can detect miscreants.
Google last month filed its first civil lawsuit against a Texas-based Internet company, Auctions Expert International, that it said defrauded Google and advertisers by systematically clicking on ads.
But Stricchiola, who helps companies with paid-search campaigns, said not all search engines have been as aggressive as they could be about combating click fraud.
And she singled out Google as an example.
"Google has been the most stubborn and the least willing to cooperate with advertisers" that complain about click fraud. She said the company is only now changing its tune because advertisers and recent media coverage have put pressure on the company to do more.
"This is Google playing politics," said Stricchiola, referring to Google's recent lawsuit and Reyes' comments.
Google did not immediately respond to a written request for comment.
At least one analyst sat up and took notice after Reyes spoke.
In a research note to investors Thursday, Mark Mahaney, an analyst with American Technology Research, said he had previously thought that click fraud was a bigger threat to second-tier search engines than to Google or Overture.
"It sounds like this may be a bigger problem than we had anticipated," he wrote.
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