Mark Cuban has blog post entitled Why I think ClickFraud is far greater than imagined where he lays out some anecdotal reasons why he thinks the sky is falling for Pay-Per-Click (PPC) advertising due to click fraud. He writes

Now i have no idea how much money is being lost to click fraud. All i know is that when the black hat hackers see easy money, they take it. I also know that they are greedy and a jealous bunch. The more they see the more they take, so you can pretty well bet that the amount of click fraud is going up by the minute.

And no amount of IP repetition algorithms are going to stop them.

Again, this is all opinion. No investigative reporting going on. Yet.

I have no hard numbers on how much is being "lost" to click fraud but there are a number of reasons why I'm skeptical about how much attention people pay to scare mongering about click fraud and it's effects on companies like Google when 'the market corrects'.

Reason number one is that despite how much people may complain about PPC advertising, it works a lot better than the alternatives. Mark Cuban actually just wrote a blog post a few days ago entitled A quick letter to the Newspaper and Magazine Industries where he complains about how expensive traditional advertising is compared to the returns. If you were trying to drive traffic to your website and had a million dollars to spend would you spend it on newspaper ads, television ads or AdSense/Adwords ads? As long as the return on investment (ROI) for PPC ads is higher than other forms of advertising, I suspect advertisers will consider the money lost to click fraud as acceptable losses. This is no different from retail stores which have to accept a certain amount of loss from shop lifting and customer returns yet still remain profitable.

Another reason I'm skeptical about fear mongering around click fraud is that this isn't the first time technology has made it easy to subvert a market yet those markets still exist. My employer (Microsoft) has built one of the most profitable businesses in the world selling products that can be copied by anyone with a CD burner and a computer. In college, I don't think I knew many people who paid for their copies of Microsoft Office yet that business still manages to bring in billions of dollars in profit a year. Then there are other more recent markets like ring tones. This has emerged as a multi-billion dollar industry in the past few years even though it is quite possible for people to get ringtones for free on their cell phones without much hassle. And then there's the iTunes Music Store. 

I'd be unsurprised if there is a larger than commonly assumed amount of click fraud going on out there. No more surprised than I'd be to find out that software/music piracy rings exist, insurance fraud is about 15 %- 30% of insurance claims or that shoplifting costs retailers billions of dollars every year. I don't see people ringing the death knell of WalMart or Safeco because of these grim statistics. So the next time you see someone claiming that the sky is falling because of click fraud, remember that fraud exists in every aspect of human commerce and the Web isn't going to change that.