[Editor’s note: We’re bringing back blogger Kevin Laws for a second post, given that his one yesterday stirred the crowd. This time he writes about click-fraud.]

Recently, the Washington Post joined BusinessWeek and the New York Times in misreporting the problem of click-fraud. Each publication focuses on the hoards of clickers hired to perpetrate click-fraud and how it’s really damaging advertisers. Except it’s not really hurting advertisers.

BusinessWeek story even goes over the top, implying that Yahoo and Google are actually profiting from click-fraud, so have no incentive to stop it.

Click-fraud clearly exists. There really are people of evil intent hiring hoards of clickers to defraud Google and Yahoo’s ad networks. Google and Yahoo do take a cut for every click sent. However, all publications are misleading about the extent of click-fraud and about who it hurts.

BusinessWeek uses the example of Martin Fleischmann at MostChoice.com who spends $2M a year in cost-per-click (CPC) advertising and estimates he’s lost $100,000 in the last 3 1/2 years. Of course, BusinessWeek doesn’t do the math for you showing that’s just over 1% of his clicks, barely a rounding error.

This is not because click fraud is just 1% – it’s probably closer to 10% or so, from legitimate estimates I’ve seen. Martin isn’t losing 10% because he isn’t stupid. Using his MBA from finance-heavy Wharton, Martin is surely calculating the value each click brings him in terms of actual converted customers. He runs a mortgage site, and makes money only when he generates a legitimate lead for a mortgage company. If 100 clicks generate 1 lead worth $100, then each click is worth up to a dollar.

If click-fraud causes Martin to get 200 clicks, but still only one lead, then each click is only worth fifty cents. Martin adjusts his bid. He might lose a little money if he didn’t notice for a day or two (thus the $100K loss over many years). After all, what’s the difference between a “legitimate” prospect who doesn’t turn into a lead and somebody who never intended to in the first place?

After adjusting his payment, Martin still pays up to $100 and still gets $100 in revenues. Google and Yahoo still earn $100 in revenues for the clicks. So who is losing?

The real victims are the honest publishers. Every one of those honest clicks sent to Martin is now worth half as much because of the fraud. If you happen to carry Martin’s ad, you earned $1 for a click before, and now only get $0.50. Click-fraud doesn’t hurt advertisers – it hurts the people that carry Adsense.

Furthermore, the ad networks rely on publishers for the traffic they sell to people like Martin. If honest sites stop hosting Google Adsense, Google loses its network. Rather than profiting from it, Google and Yahoo are more motivated than anybody to solve this problem.

The ad networks are not innocent, however. Both Google and Yahoo are well aware of who really loses. They both have strong interests in not appearing to cheat honest publishers (and that would be a far larger class-action suit than the advertisers filed). It is far better to have a few disgruntled advertisers than to admit the real problem, so they are silent in the face of these reporting errors. Instead of correcting the logic, they are satisfied with merely pointing to their statistics on the smaller-than-perceived extent of click-fraud.

Click fraud is a problem, but it’s a problem for publishers, not advertisers, and Google and Yahoo are very motivated to solve it. Publishers are now the ones that should be evaluating alternatives to Adsense, not advertisers.