Click arbitrage is buying traffic on Google AdWords and redirecting it to websites loaded with contextual ads. Believe it or not, you can make tons of money doing this, since you buy traffic at a low CPC and sell it at higher CPCs one or more times.
I think it's always fascinating when something goes mainstream and everyone notices. Click arbitrage is driving HUGE dollar volume for Google. A single arbitrageur really isn't a big player in this game unless they are spending at least $1M / month on AdWords. And there are many arbitrageurs spending at that level. Just look at Google search results and click on some ads.
So why does Google care about this? What's the problem? For the search cognesceti, the problem is that the search results and the AdWords ads are now littered with middlemen. You click an ad, and you go to another page of ads. For the user, this may be annoying, or it may be helpful. Certainly some people find it annoying.
An interesting way of looking at it is that the contextual ad systems like AdSense allow anyone to be Goto.com. You outsource the ad results to AdSense or some equivalent and you buy traffic from Google... Everything is bought and paid for.
So now Google is going to crack down by checking that the landing page for an AdWords ad is not just full of AdSense type ads. Of course, Dave Naylor and others think that the sophisticated arbs will find a way around this.
If they really wanted to kill click arbitrage, Google would simply ask their customer service people to report it in all of their big accounts. Google could tell who was doing it by looking at the spend momentum - i.e. growth in spending. Another way to catch it quickly would be to reward feedback - get people to report it.
But I don't think Google can really afford to stop it completely. It's too much money.