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Is Facebook’s Ad System a Bit Nefarious?

Advertisers may be paying for 'invalid clicks'


When it comes to online marketing, there’s no shortage of dubious activities. Even top companies like Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO) have had troubles.

Now Facebook (NASDAQ:FB) is coming under fire, as seen with a court case in California. The main issue: Has the social networking giant been charging its advertising customers for “invalid” clicks?

3 New IPOs Are on Deck This Week
3 New IPOs Are on Deck This Week

Keep in mind that this kind of activity isn’t necessarily bad. Some clicks do backfire because of bad server responses and code glitches

But for Facebook, the claim is that invalid clicks may amount to as much as 20% of the paid traffic. In fact, this may have been the case since 2009.

In fighting back, Facebook already has been able to win a ruling that prevents class-action status for the case. This will certainly make things more difficult for the plaintiffs (although the ruling has been appealed).

Yet the litigation does involve a huge amount of information, covering 200,000 documents and 16,000 emails. According to a great piece in Business Insider, some of the correspondence seems to show that Facebook was dragging its feet on preventing invalid clicks.

No doubt, the litigation is likely to drag on for quite awhile and will cost millions. But Facebook has the resources to push back. And in light of the company’s focus on monetization, it will need to find ways to minimize the legal exposure. After all, Facebook gets about $1 billion per quarter in advertising revenues. So if it has to make refunds, they could amount to as much as $800 million per year.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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