VIDEO-The Secret About Online Ad Traffic: One-Third Is Bogus -

March 23, 2014 6:47 p.m. ET

Digital marketing is experiencing growing pains as marketers confront rampant fraud. WSJ's Suzanne Vranica reports on Digits. Photo: AP

Billions of dollars are flowing into online advertising. But marketers also are confronting an uncomfortable reality: rampant fraud.

About 36% of all Web traffic is considered fake, the product of computers hijacked by viruses and programmed to visit sites, according to estimates cited recently by the Interactive Advertising Bureau trade group.

So-called bot traffic cheats advertisers because marketers typically pay for ads whenever they are loaded in response to users visiting Web pages—regardless of whether the users are actual people.

The fraudsters erect sites with phony traffic and collect payments from advertisers through the middlemen who aggregate space across many sites and resell the space for most Web publishers. The identities of the fraudsters are murky, and they often operate from far-flung places such as Eastern Europe, security experts say.

The widespread fraud isn't discouraging most marketers from increasing the portion of their ad budgets spent online. But it is prompting some to become more aggressive in monitoring how their money is spent. The Internet has become so central to consumers, that advertisers can't afford to stay away.

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Digital "is too important," says Roxanne Barretto, assistant vice president for U.S. digital marketing at L'Oréal SA, which recently uncovered evidence that an online ad purchase was affected by fraud and other problems. "Slowing down spend represents a missed opportunity to connect with our core audience."

Spending on digital advertising—which includes social media and mobile devices—is expected to rise nearly 17% to $50 billion in the U.S. this year. That would be about 28% of total U.S. ad spending. Just five years ago, digital accounted for 16%.

The big question is whether attitudes will change if signs of fraud increase. Many people in the ad business are worried. Ziff Davis Inc. Chief Executive Vivek Shah, the chairman of the Interactive Advertising Bureau, said at the group's annual conference last month that Internet advertising was facing a "crisis."

Several big advertisers—including L'Oréal, General Motors Co. GM -1.90%General Motors Co.U.S.: NYSE$34.47-0.67-1.90%March 25, 2014 2:38 pm Volume (Delayed 15m) : 18.48MP/E Ratio 8.84Market Cap $55.87 BillionDividend Yield N/ARev. per Employee $709,71203/25/14 Sens. Markey, Blumenthal Have ...03/25/14 The Daily Docket: LightSquared...03/25/14 Morning Links: As Useful as a ...More quote details and news »GMinYour ValueYour ChangeShort position and Verizon Communications Inc. VZ +0.57%Verizon Communications Inc.U.S.: NYSE$47.28+0.27+0.57%March 25, 2014 2:38 pm Volume (Delayed 15m) : 15.65MP/E Ratio 11.78Market Cap $194.62 BillionDividend Yield 4.49%Rev. per Employee $681,84403/23/14 The Secret About Online Ad Tra...03/21/14 AT&T Criticizes Netflix's 'Arr...03/20/14 Netflix Chief Says Broadband P...More quote details and news »VZinYour ValueYour ChangeShort position —have found that some of their online ad purchases were affected by fake traffic, people familiar with the situation say. Such examples threaten advertiser confidence in the effectiveness of digital compared with traditional media, such as television.

"When you bundle bots, clicks fraud, viewablity and the lack of transparency [in automated ad buying], the total digital-media value equation is being questioned and totally challenged," says Bob Liodice, chief executive of the Association of National Advertisers trade group. Advertisers are beginning to question if they should increase their digital ad budgets, he says.

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"The clients we work with would love to spend more money in digital," says Quentin George, a co-founder of ad-technology consulting firm Unbound. "But until we give them more control and transparency on how the money is being spent, they will continue to have questions and hold money back."

Given how much time consumers spend on mobile devices, social media and the Web, digital outlets should be drawing a much higher percentage of marketers' ad budgets, he says. Many factors affect the size of digital ad budgets, including, not just fraud, but difficulties in measuring audiences as well, executives say.

Many ad executives only now are coming to grips with the reality of fraud. Part of the problem is that estimates of online ad fraud are difficult to nail down. Ad-fraud detection firm White Ops last year reported that fraudsters had stolen some $6 billion in the U.S. alone.

Few marketers say they plan to cut back on digital advertising. Instead advertisers are getting more aggressive in monitoring what they are getting and in demanding reimbursement if fraud is uncovered.

Verizon Wireless and L'Oréal, among others, in recent months demanded free ad space to make good on ad spending that was inflated by fraud, executives say.

Marketers also are making deals in which they pay only on concrete evidence that consumers signed up for their products or services.

And advertisers are turning to online-ad auditing firms to check for fraudulent traffic.

Telemetry's investigation of Verizon's ad purchases found more than $1 million in fraud, people familiar with the matter say. Verizon has asked major ad exchanges and ad networks for free ads to make up for the fraud, the people say.

Verizon is the eighth-largest advertiser in the U.S., spending $1.2 billion on ads last year, according to research firm Kantar Media.

"We do use many different methods to ensure fraud does not occur, not only to ensure our dollars are well-spent, but to ensure our messages are reaching the right customers," a Verizon spokeswoman says.

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L'Oréal, which uses Telemetry and other firms, says it found that some of its digital ad placements purchased through exchanges and in some cases directly from Web publishers were seen by bots. It also discovered other issues, such as ads being seen by people that don't live in the U.S.—that is, beyond the ads' intended target.

(Not all bots are used for fraud. Google Inc., GOOG +0.39%Google Inc. Cl AU.S.: Nasdaq$1162.49+4.56+0.39%March 25, 2014 2:38 pm Volume (Delayed 15m) : 1.89MP/E Ratio 31.82Market Cap $389.12 BillionDividend Yield N/ARev. per Employee $1,250,73003/25/14 HEARD ON THE STREET: Luxottica...03/25/14 EBay Reiterates Opposition to ...03/25/14 Shocking New Survey Reveals Ev...More quote details and news »GOOGinYour ValueYour ChangeShort position for example, uses bots to find information on the Internet.)

Verizon and L'Oréal have reworded their media contracts to ensure that the companies are protected from online-ad scams, such as video ads that play without volume, and pitfalls such as bot traffic.

"In partnership with our agency, DigitasLBi, we put those types of mandates into our contracts so [publishers and exchanges] are held accountable," says L'Oréal's Ms. Barretto. The cosmetics company says such contract language has allowed L'Oréal to get free ad space as reimbursement for fraud and other problems.

Advertisers hope that demanding make-good ads will pressure ad exchanges and ad networks to ensure that their inventories are properly vetted. Marketers also keep lists of sites that have fraudulent traffic and ask that when the free ads are given, they be placed on high-quality sites, which have low fraud rates.

GM recently hired White Ops to audit some of the auto maker's online ad purchases, people familiar with the matter say. GM found evidence that some of its ads were served to bots, one of the people says.

"We're aware of the concerns within the industry about ad fraud and are working to address those concerns as they pertain to our business," a GM spokeswoman says.

Coca-Cola Co. KO +0.55%Coca-Cola Co.U.S.: NYSE$38.61+0.21+0.55%March 25, 2014 2:38 pm Volume (Delayed 15m) : 11.46MP/E Ratio 20.02Market Cap $169.19 BillionDividend Yield 3.16%Rev. per Employee $357,54203/23/14 The Secret About Online Ad Tra...03/18/14 CME to Challenge LME With Alum...03/09/14 In the Digital Age, Companies ...More quote details and news »KOinYour ValueYour ChangeShort position is about to enlist White Ops to conduct a test of the beverage maker's U.S. ad purchases and is trying to determine how it can do so in other markets, a person familiar with the matter says.

Lenovo Group Ltd. 0992.HK -1.79%Lenovo Group Ltd.Hong Kong$8.23-0.15-1.79%March 25, 2014 4:01 pm Volume : 31.92MP/E Ratio 14.00Market Cap $87.19 BillionDividend Yield 1.46%Rev. per Employee $8,233,85003/20/14 Lenovo Buys Patents From Unwir...03/18/14 Heard on the Street: Hong Kong...03/18/14 Lenovo to Seek Acquisitions fo...More quote details and news »0992.HKinYour ValueYour ChangeShort position also is talking to ad-technology outfits about conducting a test. "Ultimately, this is about waste reduction," says Gary Milner, director of global digital marketing for the computer maker.

—Mike Shields contributed to this article.

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Write to Suzanne Vranica at