Our management team has operated in the online search market since 1996, witnessing firsthand the evolution of online advertising. Specifically, over time, advertiser preference to a large degree has evolved from the impression-based or Cost Per Thousand (CPM) advertising model to the performance-based or Pay-Per-Click (PPC) model. This evolution has been triggered by a demand for increased returns on the dollars spent on advertising. People and entities advertising online desire users who will buy products and services to click on their ads. We understand that in the highly competitive world of online advertising, those companies delivering the right blend of quality traffic, at the right prices, will be the most successful.

For those who are new to advertising online, here are some basic elements of PPC advertising:

First and foremost, not all clicks are created equal. By that, we mean that every click on your advertisements will not convert, or lead to a sale. There are many reasons that user- generated clicks fail to convert to sales, including the following: (1) The user who clicks on your advertisement may be gathering information, but may not be ready to buy anything. (2) The user may find your product pricing or Web site performance lacking in some respect. (3) The user who clicks on your advertisement may do so by accident or may be looking for another product.

The reasons for a non-converting click are varied, and it can be difficult to determine a user's intent. It is important for you to understand, however, as per the preceding examples, that when clicks don't convert into transactions, it is not necessarily a function of low-quality traffic.

Secondly, our advertising service is highly automated. You sign up for an account with us, you select keywords that are relevant to your products, and you set the prices that you are willing to pay for each click on your advertisement. These advertisements are then put into our system and delivered across both our network of owned and operated Web sites and the Web sites of entities with whom we have partnered. This is all accomplished in a highly automated fashion. We do not deploy a large number of employees to pre-screen each advertiser, each advertisement or paid listing, each Web page where your advertisements appear, or research every click that a user makes on your advertisement. Our highly-automated system sends out thousands of constantly changing advertisements 24 hours a day, 7 days a week.

Why does this matter to you? The same technology we deploy that allows you to both create an advertisement and have that advertisement distributed across the Web in an extremely short time period can be vulnerable to activities that compromise traffic quality. We have established real-time automated monitoring of our traffic base that assists us in reviewing various quality measures, and we are continually working to optimize our monitoring processes. We also monitor these tools and processes, and watch for low-quality traffic that is not caught by our automated tools. Despite these traffic-quality monitoring efforts, there are those people, who we refer to as 'bad actors', who look for ways to circumvent our monitoring and controls. As you might suspect, these same bad actors look to exploit the controls in a variety of places online, and anyone who tells you that they have foolproof systems to combat them is not telling you the truth. The truth is that we are constantly working to limit the ability of bad actors to create low-quality clicks.

Lastly, 'click fraud' impacts the entire online advertising industry. This has existed as long as advertising online has existed. There are two primary methods of generating invalid, fraudulent clicks: manual clicking (by humans) and automated clicking (by software). A commonly discussed example of manual 'click fraud' is when a competitor clicks on advertisements in an effort to drain a marketing budget. A related example of automated 'click fraud' is where a competitor finds a way to create a software program that automatically clicks on the advertisement of a competitor. Each click under either scenario is clearly a low-quality click. There are other types of low-quality clicks that are sometimes categorized as "click fraud", such as search engine spiders. These low-quality clicks may be caused by link-checking software or search engine robots clicking on advertisements as they crawl Web pages and run their routines that are typically designed to improve the speed of search.

How do we combat these types of 'click fraud'? We use a variety of methods to identify fraudulent clicks, including looking for patterns in the originating computer, requested ad, browser type, timing, conversion and other factors. When we find clicks that appear to be fraudulent, we block them. We have systems and processes in place that allow us to consistently remove fraudulent traffic from our network. It is important for us to constantly look to improve those systems and processes, particularly as the bad actors evolve their methods of creating low-quality clicks. Still, you should be aware that these and other forms of 'click fraud' exist online and neither we, nor any of our competitors to our knowledge, offer any guarantees that our traffic is immune from low-quality clicks.

The Bottom Line

Today, we see at least three positive developments around the above-mentioned items. One, as more people and companies gain experience with online advertising, they gain a better understanding of the relevant issues, including the issue of low-quality clicks. Two, advertisers have ever-improving and more sophisticated tools at their disposal to determine the overall value of their pay-per-click campaigns, which means that advertisers are going to increasingly pay a price that is fair to them and reflective of the returns on their dollars spent with us. Three, our company and others in our industry are building better tools to identify and reduce low-quality traffic.

If we do not take actions to protect you and other advertisers from low-quality clicks, we fundamentally understand that you and others will vote with your checkbooks and choose not to spend money with us.

In our ongoing effort to increase the amount of business that we do with you, we will continue to look for ways to deliver you traffic that converts at or above your target return on advertising spend levels.