Internet-related fraud has become a significant revenue hole for advertisers and publishers.

It's especially eye-opening when you add up all the ways fraudsters are able to drain money from the digital ad ecosystem, which is what the New York City-based Interactive Advertising Bureau (IAB) just did in a report released this week.

The bottom line: Malvertising, fraudulent impressions and infringed content are costing the US digital ad industry $8.2 billion ... every single year.

This represents a significant bite out of overall revenues. In another IAB report on Internet advertising revenue, the trade association found that Internet ad revenues in the US reached $27.5 billion in the first half of 2015.

That $8.2 billion becomes just a little more horrifying when you realize that it doesn’t even include the digital advertising angst du jour, which is the growing deployment of mobile ad blockers.

The research was conducted for the IAB by EY, a London-based multinational professional services. Strategic advisory firm MediaLink collaborated with the IAB and EY to design the scope of the study.

3 Culprits

The new report focuses on 'non-human traffic,' which sucks up more than half of these lost revenues alone. The three main culprits are:

  1. Invalid Traffic: This costs the industry $4.6 billion alone. Some 70 percent of these costs are due to performance-based pricing models, such as cost-per-click (CPC) and 30 percent due to cost per month (CPM) based pricing models’ costs. Right now most, or 72 percent, of this seepage comes from the desktop, and 28 percent from mobile. But there are variations between those two channels. For example, CPM-based mobile video has a 12.1 percent invalid traffic rate while CPM-based display desktop has a rate of 6.6 percent.
  2. Infringed Content: Granted, losses in this area largely hurts the content producers, but it also has an affect on advertising as well, besides just contributing to overall lawlessness of the Internet. This category results in $2.4 billion of the annual losses, $2 billion of which can be traced to the $8 or so per month US consumers are willing to spend on stolen video programming, music and editorial content that is being illegally distributed on the web. The additional $456 million represents the loss of potential advertising dollars.
  3. Malvertising-Related Activities: Combating malware-related activities costs the industry $1.1 billion, with $781 million of those losses generated from ad blocking instigated due to security and malware concerns. The costs associated with investigating, remediating, and documenting direct incidents of malicious advertising total $204 million.

A Comprehensive Approach

The report concludes that a comprehensive approach is necessary to root out this corruption. Or put another way, fighting digital corruption one problem at a time will be ineffective.

As Sherrill Mane, senior vice president of analytics and measurement at the IAB, noted, the problem can only be solved through the collaborative efforts of marketers and agencies. "We have to start thinking big and holistically," she said.

The report gives the example of a consumer who visits an infringed content site containing malware. That malware subsequently infects the consumer's browser with a robot to drive invalid traffic.

"If the industry can eliminate the profits earned by serving ads next to infringed content, it can reduce the amount of money available to drive illegal activities in the supply chain," the report concludes.

"It also has the opportunity to disrupt the corruption life cycle related to invalid traffic."

Improving fundamental business practices is also critical, according to Nick Terlizzi, a partner at EY and a member of the firm's Media & Entertainment Advisory Services.

"Some basics include knowing your supply chain partners and investigating new potential relationships using address information, tax IDs and background checks," he said.

Bad, Bad Bots

Charlie MinesingerBut if you were to focus on one problem, let it be an industry-accepted standard for identifying the bad bots, said Charlie Minesinger, director of Solution Sales at Distil Networks, a San Francisco-based provider of bot detection and mitigation software.

Right now, he told CMSWire, "there is no agreed upon standard to certify that bots cannot access a certain website, that the only traffic on that site is legitimate human traffic, which is the grand vision of publishers when they talk about this problem." Once such standard is established, if that is possible, then a 'good guy' supply chain can be developed.

That, incidentally, is another conclusion from IAB's report. The untrustworthy digital ad supply chain needs to be replaced with a trustworthy one.

The report calls on the industry to work together under auspices of The Trustworthy Accountability Group (TAG) and other initiatives.

TAG CEO Mike Zaneis envisions such a supply chain as an "evergreen marketplace of trusted business partners will deliver billions of dollars of value to advertisers."

Unfortunately, the current ecosystem couldn’t be further from that ideal.

Paying for Certified Human Web Traffic

According to Distil Network's 2015 Bad Bot Landscape Report, 22.7 percent of all web traffic in 2014 was bad bots, and digital publishers led all other industries in bad bot traffic at 32 percent.

More recently, in a survey of 138 publishers and advertisers conducted by Distil and IAB and released in October, a majority of publishers (75 percent) and advertisers (59 percent) said they were either unable or unsure about how to decipher human versus non-human traffic.

In addition, many digital advertisers (40 percent) and publishers (48 percent) said they were unable to estimate the negative effects that bot traffic has on their web properties or the performance of online campaigns. They agree, however, that it is a major issue.

Advertisers seemed to be the most concerned about bot traffic. About 37 percent believe non-human traffic has a significant negative effect on their campaigns, compared to only 14 percent of the publishers who responded.

That is probably why many would be willing to pay if a site could establish it has 'certified human traffic.' According to the Distil-IAB survey from October, 37 percent of advertisers would pay at least an 11 percent premium for certified human traffic.

That is the finding that surprised Minesinger the most, especially as the range for that statistic went from 11 percent to 25 percent on the low end to a whopping 100 percent on the high-end.

"If we could solve that issue of certifying human traffic, I think everything else would fall into place," he said.

Title image by Ryan McGuire