Month: June 2009

Just as banks and credit-card companies routinely file lawsuits and press criminal charges against those who counterfeit money or use unauthorized credit cards, Microsoft has filed a lawsuit against three Canadians it accuses of the 21st-century equivalent: namely. “click fraud.” In the same way that cash — followed by checks and credit cards — were the currency that made capitalism function, the currency that drives value for giant Web businesses like Microsoft and Google is clicks.

According to Microsoft, its first-ever click fraud lawsuit was filed against a family from Vancouver — Eric Lam and Gordon Lam (who are believed to be brothers) and Melanie Suen (believed to be their mother) — because they engaged in repeated click-fraud attacks against online ads related to auto insurance and the multiplayer online game World of Warcraft. The company is asking for an injunction forcing the three to stop the behaviour, and is also asking the court to award it more than $750,000 in damages.

The crime itself isn’t nearly as straightforward as counterfeiting money or stealing credit cards. Click fraud involves rigging online advertising through the use of software scripts or other nefarious schemes such as “click farms,” and in a case like the one against the Lams, it involves jacking up the number of clicks on a competitor’s ads so that they have to pay more — since keyword-related search advertising such as that offered by Google and Microsoft is priced through an auction process. The more clicks, the more you pay for your ads.

Microsoft says in its suit that it had to pay some of its advertisers $1.5 million in ad credits in order to compensate them for the actions of the trio. The company is asking for an injunction as well as more than $750,000 in compensatory damages. Ironically, before it identified the Lams as the source of the click fraud, Microsoft says that it actually gave the family an advertising credit to compensate them for the click-fraud that was occurring.

“By engaging in a widespread scheme that generated invalid clicks on links to online ads that were displayed in response to search requests on Microsoft’s network, defendants disrupted the advertising campaigns of their competitors, obtained increased user traffic for their own ads at a much lower cost than they could have otherwise, and caused substantial damage to Microsoft,” the lawsuit alleges.

The software giant describes how it spent more than a year tracking the clicks on certain types of search-related keywords in markets such as auto insurance, and noticed that there were “a large number of exact match-type keywords being searched, and within a short period of time, the top sponsored site results were being clicked, which indicated that automated or ‘click farm-generated’ click fraud was occurring on the Microsoft network.” One of the difficult things about such a case is proving that the clicks were actually fraudulent, rather than just a coincidence.

Both Microsoft and Google (which has a dominant share of the market for online keyword-related advertising) have been on the other side of a click-fraud legal case in the past. In 2006, Google had to pay $90-million to settle a class-action suit launched by advertisers who claimed that they paid too much for their online advertising, while Microsoft has been sued for something very similar.

Dozens of venture capital firms have come and gone since the great Internet bubble of the late 1990s, but one relatively little-known firm has stuck around and continued to invest heavily in some of the Web’s leading technologies. It’s probably a lot easier to do this if you only have one investor to answer to, and In-Q-Tel Technologies has that in spades: it’s sole controlling shareholder is the U.S. government, in the form of the Central Intelligence Agency.

Created in 1999, In-Q-Tel is the venture capital unit of the federal spy agency, and was set up as a way for the CIA to stay in touch with “cutting-edge technology” that might be useful to its purpose as the U.S. government’s intelligence arm. According to the CIA site, the idea for such a venture came from Dr. Ruth David, a former CIA Deputy Director for Science and Technology. The agency’s rationale was that “as an information-based agency, the CIA must be at the cutting edge of information technology in order to maintain its competitive edge and provide its customers with intelligence that is both timely and relevant.”

As the CIA site notes, the agency has been involved in many leading technologies over the past few decades, including the U-2 and SR71 reconnaissance airplanes and Corona surveillance satellites — and, of course, the Internet itself was a spinoff of a research project developed by the Defense Advanced Research Projects Agency or DARPA. But the agency apparently realized that the pace of technology development was accelerating beyond its ability to keep up, and that investing in startups might be a way of keeping track of those new technologies, and possibly benefit from them as well.

As the CIA says itself: “One of the great leaps of faith the Agency took in this venture was to recognize, early on, that private sector businessmen were better equipped than it was to design the Corporation and create its work program.”

One of In-Q-Tel’s investments from several years ago has paid off in both senses: the company invested in a small geo-targeting and satellite-mapping company called Keyhole, which was bought by Google in 2004 and renamed Google Earth. Although Google did not say how much it paid for the company, In-Q-Tel sold more than 5,000 shares of Google following the deal and pocketed about $2.2-million. As of 2006, it had reportedly invested more than $130-million in about 90 businesses, including these ones.

The company invests in several broad areas, including: application software and analytics; bio-, nano- and chemical technologies; communications and infrastructure; digital identity and security; and embedded systems and power. Its investments include companies such as Asankya — which is working on a way of speeding up Internet traffic using a proprietary technology — and Decru, which makes highly secure data-storage products. The company has also invested in Attensity, which does advanced text analysis on large quantities of data, something the CIA no doubt does a fair bit of, and a company called Stratify that specializes in analyzing “unstructured data.”

All four of those investments have potential implications for the future of the Web, since both Asankya and Decru’s technologies are used in “cloud computing” infrastructure, and Attensity and Stratify’s products are useful for taking the existing Web and adding layers of meaning or understanding on top of it — along the lines of what Web creator Tim Berners-Lee has called the “semantic Web.”

Although not every investment the company has made has paid off, even formerly skeptical Silicon Valley investment watchers have grudgingly admitted that In-Q-Tel has done pretty well for itself, while one of its founders told the Washington Post as far back as 2005 that while he still saw the venture firm as an “unproved experiment, it was already “far more successful than I ever dreamed it would be.”