The years of 2005-2007 saw a lot of activity in the mortgage refinance market, as we know, and a big part of that was the explosion of internet advertising in the US about it including the lead generation market. Here’s a clip from a NetRatings press release in January 2006 showing the top online display advertisers in the US:

Top 10 Advertisers by Estimated Spending

     Advertiser*          Total Estimated Spending     Impressions (000)
     _______________________________________________________________________
     Vonage Holdings Corp       $36,574,400              14,954,696
     _______________________________________________________________________
     Netflix, Inc.              $16,770,200               5,042,750
     _______________________________________________________________________
     United Online, Inc.        $13,588,500               3,383,704
     _______________________________________________________________________
     NexTag.com                 $12,557,100               3,517,763
     _______________________________________________________________________
     LowerMyBills.com, Inc.     $12,470,400               2,580,703
     _______________________________________________________________________
     BellSouth Corporation      $11,593,400               3,139,830
     _______________________________________________________________________
     Verizon Communications,
      Inc.                      $10,346,400               2,979,028
     _______________________________________________________________________
     InterActiveCorp             $9,261,900               2,307,974
     _______________________________________________________________________
     General Motors Corporation  $9,260,900               1,749,433
     _______________________________________________________________________
     Scottrade, Inc.             $8,655,200               1,866,586
     _______________________________________________________________________

Estimated spending reflects CPM-based advertising only, and excludes search-based advertising, paid fee services, performance-based campaigns, sponsorships, barters, partnership advertising, advertorials, promotions, email and direct response. Impressions reported exclude house ads, which are ads that run on an advertiser’s own or related Web property and co-branding relationships.

Numbers 4, 5 and 8 above were mortgage advertisers. NexTag (my former employer), LowerMybills and LendingTree (InterActiveCorp in the list above) were not spending as much as the amounts above, perhaps 40-70% of these numbers would be about right depending on the month – but even if we assume 50% of the $35 million here between these three providers, we’re looking at about $17 million or more in a single month (January 2006). That’s pretty amazing. What has changed since then? Well, some the big spenders in display today are Groupon and LivingSocial, and a raft of me-too competitors. Unfortunately, Nielsen’s AdRelevance is a severely broken product and they don’t put out these kinds of press releases as much any more because the data is just way too unreliable.

Mortgage refinance aggregators like LendingTree, LowerMyBills (“LMB”) and NexTag used to advertise the idea of “four offers from competing lenders” which was a nuance in that the lenders were competing with each other not on how good of an offer they could give the consumer, but really based on how much they would pay the intermediary for sending them the lead. As you can imagine, the vendors able to pay more money were the ones that were making more money and often this was via lower monthly cost sub-prime mortgage deals.

In a nutshell though, here are some interesting similarities between these two sets of online advertising programs as they have existed 4-5 years ago (mortgage) and today (and I would argue these were the first advertisers to use banner/display advertising at real scale include the biggest placements on the Web like MSN/Yahoo! front pages for direct response campaigns profitably):

1. Innovation mostly in marketing, not in product. LMB became known for its very innovative attention-grabbing ads like the “dancing cowboys” and others. LendingTree’s marketing innovation of selling a lead to four different buyers (later many moved this to five) and turning that into a positive marketing spin was powerful as well, and set the stage for lots of others to replicate their success.
2. Lead aggregation of less-sophisticated, often local-based entities. Obvious similarities here: the volume in mortgage came from from the big lenders but many of the customers of mortgage lead generation companies were local or superlocal brokers or small lenders that helped drive lead prices up; in almost all cases the lenders did not have the level of sophistication to do their own online search-, display- or affiliate marketing effectively. That is the extent to an even greater degree for the kinds of merchants using Livingsocial, Groupon and others.
3. Branded and unbranded players with differing distribution strategies. Groupon seems similar to LendingTree in having a brand and focusing on large-scale portal placement deals, having deeper pockets and being able to make bigger commitments, leaving LivingSocial and clones to fight over media placement dollars and having to innovate.
4. A less-intent driven “let me see if there’s something interesting” type of offer. While all the mortgage lead aggregators spent a lot of money on expressed-intent search marketing, they found real scale on the display advertising side because they were capitalizing on curious consumers exercising a low-cost option to “check and see if they could get a deal” by sharing their information online. It is a general offer almost anyone can respond to- with a low commitment level. Sharing your email address to get daily emails sent to you seems harmless enough.
5. Focus on short-term economics. The short-term economics of the market for the lenders were great – and because of the moral hazard and disconnect because they were not exposed to the downstream effects of less-qualified borrowers refinancing mortgages (the mortgages were packaged and sold off to investors) they didn’t care that these were unprofitable sales. The chickens eventually did come home to roost, though, and many of these mortgage lenders got put out of business. Similarly, many merchants in the recession of 2008-2011 have been enamored of the upfront checks they’re getting from the likes of Groupon et al, without having the luxury of thinking how these consumers’ future (un)profitability might negatively impact their businesses. Part of the reason for that is the difficulty in assessing the incrementality of new customers, and the impact of these deals on the existing business and customers, which is the next point.
6. Difficulty of analyzing the true customer servicing costs. This issue applies to both the very complex mortgage products, which typically came with all kinds of hard-to-value embedded derivatives for the end user and then by extension for the sellers and servicers who had to deal with thousands of such complex pieces, and also the deal-driven customers who are filling merchants at 50-90% off and in many cases generating cash but losses for the merchants. It is quite challenging to value unprofitable traffic – and participating merchants have expressed mixed feelings about whether they would do another deal (55% said they would not in a February MerchantCircle survey).

The mortgage refinance business is very different today, as we know, driven largely by a lot of macro factors. I don’t believe the local deal/merchant game will see the same degree of fall-out, because it’s more diverse and there is more depth and variety compared to the banks and brokers, but certainly there will be fall-out and consumer burn-out. The valuation and prospects of companies like Groupon are almost certainly overhyped, as these businesses are more about being marketing engines today than having truly innovative products… but they are still creating some meaningful new consumer value — which I believe is a lot different (for the most part) compared with the lead aggregators who were mostly just masterful at marketing.

I’m not going to let you run your adserving tags and rotate creatives on your end when I have a CPA campaign I’m running for you. I have to optimize the ad mix on my side. So don’t ask.  Happy to put whatever you want into our tags for you – campaign verification, pixels, Twizzlers…

A great saying in Afrikaans is “goedkoop koop, is duur koop“, or sometimes shortened to “goedkoop is duur koop” or similar. What it basically says is that buying cheap stuff, is expensive. For the online marketing folk among us, this has often turned out to be the case. If you are looking to buy cheap media, leads or customers, it is often an expensive and frustrating experience. Michael Arrington/Techcrunch’s attack on Offerpal Media and the immense revenue that is currently being generated by driving offers to advertisers that are at best of questionable value to consumers, of questionable quality to marketers and at worst, deceptive and fraudulent.

Niki Scevak had a great post some months ago on the “Impending Doom of Facebook Apps” that should be required reading for assessing this issue, which Techcrunch is continuing to pursue and rightly so.

I agree with Niki that a lot of this short-term revenue will and should be going away. Companies like Tatto Media getting taken to task and to court, and paying hundreds of thousands of dollars to Attornies General while continuing to running questionable mobile offers: it’s clear that this kind of fine is just a drop in the bucket to them. I’d heard from someone running the MyLuvCrush ads describe it as “crack cocaine”. Tatto has pumped a lot of that money into tradeshow booth dollars at Ad:Tech and other shows in an attempt to build a legit “behavioral marketing” business as discussed here (using Flash cookies, which are becoming a bit of a privacy third rail currently and as many companies are moving away from this technology for that reason as moving toward it). But I digress…

The quality of these kinds of leads is the same as what we saw a few years ago when the incentivized “free ipod” type of offers became prevalent — and especially for so-called “soft” or “semi-hard” offers (where there is no credit card hit which means the user is paying for an offer or as opposed to something like Netflix they can cancel before a trial period is up) like inquiries for an insurance or mortgage quote, these incentivized offers became a bad joke in the lead generation industry and caused a lot of issues for companies that bought, resold and tried to pretend these had the same quality as leads generated directly from display or search ads. Cheaper leads? Oh yes. But given that a lot of these “leads” ended up in call centers taking up someone’s time to call, they had a real cost that was a bit harder to assess directly but made them really expensive.

On the other hand – some companies don’t care since enough of the time they’re going to charge your credit card and make some money off of you. Take the example of the options for a game player in Farmville on Facebook to get more Farmcash. Lots of offers as options including the mentioned Blockbuster/Netflix ones. Or you could try this one:

A big asterisk next to the word free – uh oh? What does that mean? Well there’s nothing on this page with an asterisk, so let’s look at the next page. On the landing page it says “*Pay up to $9.95 (or $9.95 USD in Canada) for shipping & processing.” But wait, there’s more! Read on and it says:

ANY TWO of the three computer tutorial CD-ROMs are yours free without further obligation, PERIOD. Take 10 days to decide if you want to keep the complete set of CDs. After your 10-day free trial, if you decide to keep the complete Lesson Suite, we’ll conveniently bill your credit card just $189.95 USD . Simply follow the instructions in your package for your free camera. Or simply call Customer Care at 1-800-519-4110 if you decide to return any one of the discs. You will be charged nothing more, and get to keep two computer learning CD-ROMS! You can also return everything within 10 days and receive a full shipping & processing refund upon your request.

Ah so not so free eh? Well okay, so not everyone is a cheap date. Which means that people signing up for offers will tend to go for the easier to get out of, the simpler ones… and that’s the issue.

Ultimately, cheap leads and cheap media often turn out to be more expensive than companies think at first – and often it is because the path to true conversion is more convoluted, which for leads often happens off the web in a call center or during a longer cycle. And not just for the vendors – as we can see from this incident, a promising set of ideas (virtual currency, offers in exchange for money to developers) can be tainted by the stink of cheap, shitty leads that unsustainably and temporarily fuel an advertising micro-economy.