Between a sinking stock, an embattled CEO and restless investors demanding that the company be dismantled, these are not great days for Internet pioneer Yahoo.
Now add one more headache: The company's ad business, which brought in $1.15 billion in the second quarter of 2015, is rife with ad fraud, multiple sources told CNBC.
Executives at several media companies and media advisory firms with direct dealings with Yahoo's ad business said the company's programmatic video ad platform generates mostly fraudulent ad traffic, and otherwise does not work as promised. The platform is largely powered by BrightRoll, which was acquired by Yahoo in November 2014.
One company that used Yahoo's programmatic video ad platform said it discovered 30 to 70 percent of its ads were not running in areas where Yahoo was claiming they were. Most of the problems were tied to the fact that although it was paying $20 CPMs (cost per thousand views) for pre-roll advertising (ads that appear before a video), its ads were appearing in videos inside banners, which should have only been one-tenth of the price.
Another source said that it found BrightRoll's traffic was mostly coming from data centers' IP addresses, suggesting most of the ad views were nonhuman and fraudulent.
A Yahoo spokesperson denied the claims, and in a statement to CNBC, the company said: "Yahoo has always taken the integrity of ad inventory and traffic quality very seriously. We are leading the industry forward by allowing independent viewability and fraud measurement across our ad platforms through well-known and accredited, third party measurement partners."
"[W]e are committed to delivering value and results for our advertisers. ... We have focused on integrating advanced data, targeting and measurement capabilities across our advertising technology, including BrightRoll, to provide control and transparency, while driving results for advertisers," Yahoo said.
To be fair, ad fraud is a widespread problem not limited to Yahoo. A report by Distil Networks in October claimed that advertising fraud would cost the industry about $18.5 billion a year. For perspective, the Interactive Advertising Bureau projected that U.S. digital ad revenue reached $27.5 billion during the first six months of 2015.
Ad fraud occurs when digital advertisements are not being seen by the viewers companies paid to get in front of. In addition to creating nonhuman "impressions" or page views through bot networks, other known ad fraud practices include placing 1 pixel-sized advertisements on trusted websites which are invisible to the human eye. Sometimes, advertisements don't appear on the media sites or places the paying company believes they are.