Search-based Internet marketing is a huge business. It makes search engines money; it makes Web sites hosting search-engine ad results money; and it makes advertisers money when someone finds them through a search. But it's not the old "Put my banner ad here" type of advertising -- it's a web of multi-step transactions. So to understand why click fraud is such a big problem -- it reportedly costs Google about $1 billion in lost revenue annually, and it can run a small-time advertiser out of business -- it's helpful to have a basic understanding of how this type of advertising works.
First, when an ad shows up with Google search results, it's because that advertiser has purchased the word or phrase you typed into the search box. So if you're looking for, say, a new computer, and you type "computer" into Google's search field, the ads that appear at the top and to the right of your search results are paying to be associated with the keyword "computer."
If you click on one of those company's ads, Google charges that company for the click. It's a cost-per-click (CPC) system, and some clicks cost more than others. Different keywords sell for different amounts based on their value. "Computer," for instance, is probably a high-value keyword. Lots of people are searching for it, and people who click on an ad associated with "computer" are probably considering a high-cost purchase. A "computer" advertiser could be paying Google, say, $40 per click, whereas a company that purchases the keyword "llama" might only pay 5 cents per click.
That's the basic setup. Things get a little bit more complicated when second-tier publishers enter the picture. The publisher of the ad is the actual Web site where the ad is showing up. Sometimes Google is the publisher; sometimes it's not. HowStuffWorks is a second-tier publisher. When you perform a search using the HowStuffWorks search engine, along with your HowStuffWorks results you also get a few "Sponsored Results" supplied by Google.
Google, its advertisers and its second-tier (or even third-tier) publishers make up Google's advertising network. If someone clicks on a Google-provided ad that shows up in the HowStuffWorks search results for "computer," Google pays HowStuffWorks for that click, and the advertiser pays Google for that click. Next, learn about the different types of click fraud.