The guys over at Freakonomics keep coming up with really off the wall commentary that actually makes a lot of sense. Today, they posted on a bit of a scandal wherein 3 people(including one coke employee) were turned in by some of Pepsi’s executives for trying to sell Pepsi the recipe for one of Cokes new secret soft drinks. The folks at Pepsi claim that they turned the person in efforts to maintain “fair competition”. The guys at Freakonomics?
Let’s say that Pepsi knew Coke’s secret formula and could publish it so that anyone could make a drink that tasted just like Coke. That would be a lot like what happens to prescription drugs when they go off patent and generic drug companies come in. The impact would be that the price of real Coke would fall a lot (probably not all the way to the price of the generic Coke knockoffs). This would clearly be terrible for Coke. It would probably also be bad for Pepsi. With Coke now much cheaper, people would switch from Pepsi to Coke. Pepsi profits would likely fall.
They go on. But you get the idea. Loss of competition leads to price wars, which leads to lower profits, which leads to bad news for companies.
We in the blogosphere are so used to everything being fairly open. Anyone can create a blog and publish to it. Anyone can create the newest hit web 2.0 website. But what happens when we saturate the market? What happens when we can’t lower the price any more?
The world of PPC has had problems that seem to be very similar. Everyone is able to add some sort of PPC advertising on their website. Thus, the competition becomes fiercer as more and more “publishers” enter the market. In efforts to get a one up on their competition, some resort to less than honorable methods. Namely, Click Fraud.
As click fraud becomes more and more of a problem, more and more advertisers will pull some if not all of their money from the PPC market. Prices will drop. Earnings will drop. More and more publishers will stop using PPC advertising.
Eventually, the cycle will start all over again. As the earnings start to drop, publishers will have to find alternatives to make money like Text-Link-Ads. Those same people who were doing the click fraud will find ways to “cheat” the text link ads advertisers in some unforseen way. Prices will drop. Earnings will drop. More and more publishers will stop using text link ads.
At the moment, we are seeing a more dramatic peak in the PPC click fraud news, simply because it is a relatively new thing to the big scene. It’s been around for a while, but only recently has it come to the web 2.0 spotlight. As the cycle moves on, the spotlight will be less prevailant and the cycle will be less and less noticeable.
For those of you that don’t believe that, I leave you with one question to ponder.
Do you really believe that there is no amount of fraud and cheating that goes on in the physical world of advertisements?