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It's really a simple problem to solve and I don't understand how they miss it...Simply ignore any suspect/bad links. Only count good links.
I can't help thinking of the thousands of SMB /small organization / hobby sites whose owners don't have a clue what Webmaster Tools is, more less who's linking to them or how to find out.
Instead of dealing with this in a way that would make the SERPs better for everyone, they serve up less than the best results because of these compromises. The solution doesn't seem that difficult. In WMT, ask which domains are allowed to serve images for your site. If a domain isn't listed, it's not an authorized image link. Ignore links from bad sites, period. They don't count, they just disappear from the link graph. That would put an end to link buying, and negative SEO.
Yeah, but it took them two years to implement it. I railed about it here (as did others) in 2005,...
... but it wasn't until 2007 that AdSense finally gave publishers the allowed domains option.
Likely the site using bad links could never recover unless it stripped many links and clearly started using identifiably good links.
It makes me wonder if the algo is so dependent on the identification of "bad links" that changing how it deals with them would be like pulling the crucial card out from under a house of cards.
i think google doesn't mind if a few good pages get buried because of this, because there are so many other ones to take their place. users dont miss them, because they never even saw them. its only the smaller and mid-sized sites that are affected. its never the big ones, so users dont cotton on to the fact that they are missing
Google just has no incentive to algo perfect. It's done fine for their profits being half-ass all these years.